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FSCA versus Viceroy – Round number 0ne

FSCA versus Viceroy – Round number 0ne

The FSCA publicly announced its enforcement order against Viceroy on 8 September, but it told journalists that it had informed Viceroy of its decision the previous week, which meant the clock had already started ticking for Viceroy to pay the R50 million fine within 30 days.

Viceroy, which is based in Delaware in the US, is not regulated in this country, its directors are not South African, and it has no assets in South Africa, so what will the regulator do if Viceroy ignores the enforcement order? The FSCA said there were options it could explore, including approaching foreign courts or regulators.

Some of the media commentary on the FSCA’s decision seems to imply that the regulator has now adopted a get-tough stance on people who publish “misleading information”, particularly if such information is designed to talk up, or down, the performance of a financial instrument. During the media roundtable on 8 September, the FSCA team was repeatedly questioned about the implications of the decision. Would the FSCA now start going after other people or entities? What about those who promoted Steinhoff’s shares for years? How will it deal with those who punt or trash cryptocurrencies or a particular cryptocurrency?

There was concern, too, that this ruling could be used as a stick to silence those who expose fraudulent schemes. It’s not uncommon for the proponents of such schemes to claim that their detractors have ulterior motives or don’t understand how the scheme works. The FSCA would not be nailed down on the specifics of who it would or would not go after. And it was not against short-selling, per se, but this must be conducted “professionally” and “with integrity” – and the same applied to long sellers.

During the roundtable, the FSCA highlighted four key aspects of its enforcement decision:

First, the regulator is adamant that Viceroy’s criticisms of Capitec are plain wrong and completely without merit. And more than that, Viceroy should have known they were wrong. (Viceroy continues to dispute this vehemently.) This attachment outlines what the FSCA says Viceroy got wrong about Capitec.

There are two aspects to section 81 of the Financial Markets Act (FMA). There is the publication of a statement that is false, misleading or deceptive in respect of any material fact, or the omission of a material fact that renders a statement false, misleading or deceptive. Sub-section (2) requires someone who becomes aware that they have transgressed sub-section (1) to publish a full and frank correction without delay.

It is the latter aspect that particularly seems to have irked the FSCA. Viceroy not only refused to retract its criticisms of Capitec but continued with what the FSCA called its “campaign”.

Third, that Viceroy had a direct financial benefit from the decline in Capitec’s share price, through a profit-sharing arrangement with a client (not named) who had taken a short position on the bank’s shares. “We take a very dim view of this business model and approach,” said FSCA commissioner Unathi Kamlana.

Fourth, that Capitec is a systemically important financial institution, and its statements had the potential to trigger a run on the bank and lead to its failure.

Only four section 81 orders

Whether the Viceroy decision signals a new get-tough approach to enforcing section 81 of the FMA remains to be seen. It is noteworthy that a search of the regulator’s enforcement orders going back to 2006 reveals only four instances in which the regulator has issued an order because of the contravention of section 81. Two of these were relatively minor:

  • Comair (May 2014) published a SENS announcement that two directors had bought shares, whereas they had, in fact, sold shares. The announcement was a bona fide mistake, and Comair issued a correction. The fine was R70 000.
  • Cargill (September 2017). The food corporation issued communications about maize imports that “it should have known were possibly deception and/or misleading”. The FSB found there had not been an intention to deceive. The penalty was R362 000.

Then we come to Tongaat Hulett and Steinhoff. In August last year, the FSCA initially fined Tongaat R118 340 000 for mispresenting its financial performance over six years prior to March 2017. Tongaat applied for the penalty to be remitted completely or reduced to R3 552 000, citing its precarious financial position. In an attempt to cut costs, it had shed 10 000 jobs, and any further pressure (read: the penalty) would result in further job cuts. The FSCA reduced the penalty to R20 million. In addition to the reasons cited by Tongaat, the FSCA said it did not want “to further penalise innocent shareholders”.

Steinhoff was initially slapped with a penalty of R1.5 billion in September 2019. But the FSCA agreed to reduce this to R53m, “to avoid penalising innocent shareholders” and because it believed the fraud had been perpetuated by the company’s former officers.

So, the FSCA is not disinclined to be merciful when it comes to fines. But for Viceroy to get any leeway, it will have to admit that it was wrong, at least in part – which, based on its statements following the order, seems highly remote.

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