JSE probes Capitec directors’ share trading

The second time in three months that the bank cofounder’s hedging strategy has made the news.
Image: Moneyweb

The JSE is examining trading in Capitec shares by two directors just days before the company issued a profit warning, “to determine whether there are any issues of regulatory concern”.

But, JSE director of market regulation Shaun Davies told Moneyweb the transactions may not have impacted trading on the bourse as they were off-market transactions.

Davies’ response prompted Shane Watkins, chief investment officer of All Weather Capital, to suggest the JSE is opening up a “pandora’s box” of opportunity: “Are they suggesting you can use insider information as long as you’re not trading on the stock exchange?”

Watkins said that as a listed company it doesn’t matter whether the trading was on or off the market.

Sequence of events

According to a Sens announcement issued by Capitec on Monday, an entity controlled by Michiel le Roux completed a hedging transaction on May 28 involving 1.25 million of Le Roux’ Capitec shares at a deemed value of R1.1 billion. Hours earlier it had issued a Sens announcement relating to a similar type of hedging transaction undertaken by a company linked to Chris Otto and involving 200 000 Capitec shares. Otto, who like Le Roux, is a long-serving member of the Capitec board, completed his transaction on May 27.

On May 29, hours before its annual general meeting, the board warned shareholders: “There is a reasonable degree of certainty that Capitec’s headline earnings per share and earnings per share will decline by more than 20%, or more than 509c and 510c respectively.”

On Tuesday Capitec’s chief financial officer Andre du Plessis told Moneyweb that Le Roux had obtained clearance for the transaction on May 4, more than three weeks before the profit statement was issued.

Capitec released its annual results for the year ended February on April 14 and informed the market of what it knew about the expected impact of the pandemic at that stage, said Du Plessis. The board was given no further information between then and May 4 when Le Roux obtained clearance. It was well after May 4 that management became reasonably certain that a trading update was required, said Du Plessis. “The forecast that led to the trading update was shared with the board on May 22.”

Du Plessis explained that Le Roux had signed the agreement on May 4 and the counterparty began to trade in small volumes. “They concluded the trades on May 28 upon which Michiel (Le Roux) was in a position to publish the required information relating to the transaction on Sens.”

Du Plessis told Moneyweb that the circumstances around Otto’s trading were similar.

Poor reflection

However Watkins was not persuaded by Du Plessis’ explanation, saying: “The authority given to an insider to trade doesn’t hold in perpetuity, otherwise directors could merely get a blanket approval at the beginning of the year.” He said that when the circumstances changed at Capitec – prompting the need for a profit warning – the approval should have been rescinded.

“Even if Capitec can demonstrate what it did was legal, it reflects poorly on the company,” said Watkins.

This is the second time within three months that Le Roux’ hedging strategy has made the headlines. In March Capitec issued a statement, without mentioning Le Roux, explaining why R49 billion had been wiped off the bank’s market value in a matter of hours. “Banks that are counterparties to collar transactions are inclined to sell the underlying share when contracted limits are breached,” said Capitec following a 39% tumble in the share price to just above R550.

Le Roux, who co-founded the bank in 2001, holds an indirect 13.3 million Capitec shares – making him the largest shareholder after PSG unbundles the bulk of its holding. A combined 3.75 million of his shares are tied up in collars, which were put in place in recent years to provide security for bank loans.

Read:
PSG Group to offload 28.11% stake in Capitec to shareholders
How will PSG fix its ‘Capitec problem’?

On Tuesday the share price closed 3.74% higher on the day at R903.83.

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With respect, the JSE is not the regulator it once was e.g. determining who major shareholders are via SENS announcements is nearly impossible i.e. when a shareholder crosses the 5% threshold, it must be announced via sens. So many companies not doing this. Also was Markus Jooste not convicted of insider trading e.g. sent a message to friends to sell Steinhoff shares. Wonder what the market abuse department does all day.

Jooste was not “convicted’ of insider trading – not even charged – nothing. Media bias is misleading
NPA must act, but my skeptical view is Jooste knows too much and his ‘prosecution’ could only bring out the worms – – – maybe Wiese and others would rather ignore, settle litigation whilst Jooste is still in hiding and then nobody gets the real story.

Dr Dre, the process and onus rests on the shareholders to file the required notice with both the TRP and the company when it crosses the 5% thresholds. Do you honestly think there is someone sitting watching this at every listed co? When you receive a 121 notice from shareholder you release your SENS.

This is a joke, right? The JSE doesn’t care.

Ann,
Any diligent director – more so those high-up names you mention – should have known about the warnings to come.
How could they NOT know, and how could that NOT influence their decisions?
But, I doubt much will come of this – Skelmbosch A-listers believe they are more equal than others

Shane should know all about inside trading from his peregrine days. No ethics!

JSE, asleep at the wheel again. For Capitec and all the other banks the big stuff is a few months down the road still.

JSE wake up – no one will invest in a market where a few have an unfair advantage. The players are becoming so brazen about it because (as usual in SA) there are no consequences for their actions. So damaging in so many ways!!

Who wants to hold JSE listed equity anyway – have you recently bought anything on the Harare Stock Exchange?

While not alleging insider trading (as this will be determined based on the facts), respectfully, it is incredible that the JSE rep appears to be ok with the transaction because it was ‘off market’, and might demonstrate a worrying lack of awareness. For several reasons:

1. Complex options are inevitably off market (the counterparty would presumably need to go on market to hedge)
2. Options are often a way of gaining leverage to a long/short position and in fact one of the things the SEC does in the US is scan option activities.
3. The ‘loser’ is even more readily identifiable (than for normal buys and sells of stocks) as options are a zero sum game. (I would be surprised if the loser did not complain directly.
4. The insider is potentially benefiting irrespective of whether it is on or off market unfairly. This should be the key question.

Indeed the company’s own response to the share price weakness references point (1) above. Even though the director’s transaction was off market there was a market effect as counterparties did on market trades to hedge their resulting exposure.

The FMA also allows two insiders who have the same information to deal. IE: if they both know what they are getting in to there is no issue. It would seem unlikely in this case as they have not raised this as a defense but as the trade was off market it is possible that the counter-party on the hedge was aware of the information and still agreed to enter the trade regardless. If so one would assume there were some fairly hefty fees involved…

That is interesting but seems problematic. How would the FMA know that the parties had exactly the same info and equal ability to assess. If it goes wrong for one party it opens up a potential legal quagmire. It would alos create the possibility of different market pools. High info pools and low info pools. Also there might be external transaction impact e.g., if there are hedging activities of tangentially involved parties e.g., the different investors facilitator/counterparties.

End of comments.

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