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The Ominous Anonymity of Viceroy Research

Author: Jason Snyman
Date: 2018-01-18
Viceroy has the South African market in cold sweat. Who are these anonymous researchers and what is their motivation?

*UPDATE* On the same day as publishing this article, Moneyweb, after extensive investigation, revealed the identity of the individuals behind Viceroy Research. Viceroy is headed by one John Fraser Perring, and accompanied by two Australian youngsters.

Viceroy – the word that’s terrorizing South African markets. It's wreaking havoc among traders. It sends shivers down the spines of investors. Who is Viceroy Research? After dismantling the 90 000-employee strong Steinhoff, who is next on the list? How do we begin to understand the Viceroy effect? Where did they come from? Their website, hosted by WordPress, describes them only as ‘a group of individuals who see the world differently.’ Simple as that. And yet, when they suddenly popped up out of nowhere with a damning report on Steinhoff International Holdings NV, they almost immediately shot to fame. The research report in question casts a glaring spotlight upon Steinhoff’s accounting irregularities, exposing what Viceroy calls Steinhoff’s Ponzi scheme. According to Business Day, Viceroy is a short seller itself. It takes a financial position in its research. Viceroy has stated that its readers should assume it has a position on the stock. Short sellers, of course, made an absolute killing on the fall of Steinhoff. At the end of 2017, the research company released the following tweet, in which they promised to expose yet another South African name:

Viceroy will be flying out the gates in 2018, and we won't be slowing down. We are working on European, South African, and US names for Q1 2018, while continuing to expose $MDXG lies. #staywoke — Viceroy (@viceroyresearch) December 29, 2017 

As expected, it set the rumour mill from ‘spin’ to ‘fly right off the handle and kill somebody.’ Stocks in Africa’s largest generics drugmaker, Aspen, as well as the biggest real estate investment trusts plummeted this week. As speculation reaches fever-pitch on which companies have been overvalued and which might be the target of the next report, South African property stocks fell harder than it has in the last two years. Over $3 Billion wiped in just four days. This has prompted South African regulators to scrutinize trades. To determine whether or not a formal probe may be necessary. We took a look at what happened with the Steinhoff report, as well as the latest stock rumours giving traders sleepless nights.

Who Is Viceroy?

Speaking to Business Day and Bloomberg recently, Viceroy agreed to answer a few of their questions. Allegedly, via a Gmail account. Nothing nefarious about that at all. We have summarized their discourse into an easily-digestible narrative. Viceroy is an independent research group based in New York, United States. The company is comprised of three nameless staff members, but also makes use of consultants where needed. Their focus, they say, is to research entities in which they have found signs of accounting irregularities and potential fraud. The staff members prefer to remain anonymous. They do this due to the fact that there is a lot of emotional investment in the stock markets. Short sellers are often targeted in ways that go beyond the realm of legality. It’s a matter of security, and they prefer the research to do all the talking. Also, because people have allegedly said some very mean things to them in the past. On the plus side, they don’t have a problem with anybody criticising them or calling them out on inaccurate research. Regarding Steinhoff, they did not contact the company prior to releasing the incriminatory report. Viceroy has said that they do not typically reach out to businesses, in order to avoid getting barrelled with shareholder abuse. As they say, you can’t call investor hot lines and ask tough questions. What alerted them to Steinhoff? The fact that the business was growing rapidly through an aggressive acquisition stage, the oddity in there being no real value added to the shareholders in transactions conducted via equity raises, as well as a number of other factors. The Q&A with Business Day is certainly worth a read. 

Viceroy And Aspen

Aspen’s share price began to free fall last week amidst rumours in the market that Viceroy has pegged them for scrutiny. Aspen lost almost 10% of its value by midday on Tuesday. According to Moneyweb sources, Aspen has a lot in common with Steinhoff, including constant problems and investigations by regulators throughout the world. The pharmaceutical company also has large amounts of debt and accounts which are a little too murky for the investors’ liking. Viceroy, however, has refused to confirm whether the upcoming report will be focused on Aspen or not. In response to the rumours, Aspen issued the following statement:

“Aspen has become aware that there is market speculation regarding a possible report into Aspen being undertaken by Viceroy Research, a research group which published an exposé on Steinhoff recently.
Shareholders are advised that it has had no contact with Viceroy Research and, as such, is unable to confirm that this speculation is correct. Aspen furthermore advises that it is not aware of any information of a price sensitive nature that requires communication to shareholders and that trading in the current financial year has been consistent with the prospects communicated to shareholders in the 2017 financial year results announcement as published on SENS on 14 September 2017.”

Back in June of 2017, the Competition Commission launched three investigations into Aspen Pharmacare and Equity Pharma for suspected abuse of dominance and excessive pricing in the provision of specific cancer medications in South Africa. In October, however, the Commission dropped its investigation into both companies. 

Allegations Against Viceroy

Viceroy has since been blamed for driving down the price of Aspen’s shares, as well as those of several real estate investment trusts. These include Resilient Reit, Nepi Rockcastle, Fortress Reit A and B. In response, Aspen CEO, Stephen Saad, has called for an inquiry into market manipulation. The JSE is ‘reviewing trading activity and will refer any concerns to the Financial Services Board for its consideration.’ According to the Financial Markets Act, the FSB is to investigate cases of insider trading, price manipulation and false reporting. This engagement with the JSE, then, will determine if any case should be looked into. In response to the allegations that Viceroy is behind the market manipulation, the research company issued the following response:

“Viceroy encourage [sic] people not to speculate on the identity of any companies we are researching & we advise caution in trading on gossip. Viceroy complies with the laws and have not released research or discussed our focus prior to publication. We will not provide any further details on our focus as, without our full report, this may constitute market manipulation. Frankly, the speculation of widespread fraud on the JSE is reflective of a system where regulators are struggling with a lack of funding, allowing bad people to abuse the system, the people and the government. We are most willing to assist regulators in this regard where we can.” 

Conclusion; Viceroy – Victims Or Villains?

With South African regulators investigating the rumours surrounding Viceroy, and subsequent share movements, the company has welcomed any investigation into impropriety. They have, as seen above, encouraged people not to speculate on the identity of the companies they are researching. They have also refused to answer questions about it. It stands to reason that they made a ton of money out of shorting Steinhoff, but the company has refused to disclose the figure. There’s nothing wrong with that, really, but the concern here is that Viceroy may be using public relations to generate volatility. So, did they set up short positions in Aspen or any of the property stocks before the rumours began? They’ve essentially dodged the question and said:

“We do not set up positions to benefit off rumours, our positions are both long and short and are based on our research.”

Their work is based on thorough research, publicly auditable, and they see the naming of the company – which would be baseless without their report – to be unprofessional and constituting actual market manipulation. Viceroy has also stated that it is not a marketing machine, but a small team of professionals. In response to questions about their use of seemingly unprofessional tools, such as WordPress and Gmail, they have stated that they use the most efficient tools possible to convey their message securely. This gives them more time to focus on their core work: investigative research. Their ethos, they say, is protecting consumers, investors and integrity by making sure all the facts are known. Only time will tell whose side they’re really on.

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