CURB­ING THE BIG SHORT

SA’S au­thor­i­ties are propos­ing new rules to in­tro­duce greater trans­parency into the short-sell­ing mar­ket. It’s a wel­come move

Financial Mail - - EDITOR’S NOTE - @ro­brose_za [email protected] by Rob Rose

It’s com­mend­able that rather than cave in to the hys­ter­i­cal howls of be­sieged CEOS, the au­thor­i­ties seem to be lean­ing to­wards us­ing a light touch in reg­u­lat­ing short sell­ers like the of­ten re­viled Viceroy. Short sell­ers, for the unini­ti­ated, are traders who bet on a share price fall­ing. It’s the in­verse of what many peo­ple con­sider con­ven­tional in­vest­ment, where you take a “long” po­si­tion on a share, ex­pect­ing a price to rise.

Though short sell­ing has been around for decades, it hasn’t made head­lines in SA un­til re­cently. Un­til Stein­hoff hap­pened in De­cem­ber 2017, and a day later a lit­tle-known re­search out­fit called Viceroy pub­lished a with­er­ing re­port on much of the fraud.

Viceroy fol­lowed it up too. In Jan­uary, it pub­lished a re­port on bank­ing group Capitec, and its stock price promptly plunged 25% within a week. Capitec growled with in­dig­na­tion, de­mand­ing all man­ner of in­ves­ti­ga­tions and, pre­sum­ably, pub­lic hang­ings of any­one who dared sug­gest its busi­ness model was preda­tory.

Last week, Viceroy pub­lished a re­port into Nepi Rock­cas­tle, a prop­erty com­pany that grew out of the Re­silient sta­ble started by ex-banker Des de Beer.

“We be­lieve Nepi’s in­vestors are largely in the dark re­gard­ing the true na­ture and per­for­mance of the com­pany’s op­er­a­tions,” said Viceroy. For ex­am­ple, Viceroy ex­tracted com­pany fil­ings in Ro­ma­nia, con­clud­ing it was mak­ing losses of more than €40m there, rather than the €284m profit it re­ported to in­vestors. And Nepi’s price tanked 14%.

Nepi’s CEO, Alex Mo­rar, then held an hour-long con­fer­ence call where he fumed that what Viceroy did was akin to “shout­ing ‘bomb’ af­ter board­ing a plane”.

“They ac­cuse our man­age­ment of ly­ing. I ac­cuse them of ma­nip­u­lat­ing in­for­ma­tion for their own ben­e­fit,” he said. Mo­rar urged the Fi­nan­cial Sec­tor Con­duct Authority (FSCA) to in­ter­vene be­cause of the “ma­te­rial havoc they have caused in the mar­ket”.

Mo­rar said he con­sulted lawyers about po­ten­tially su­ing Viceroy. “I find their ap­proach in­ten­tion­ally de­struc­tive for their own gain and they’re hid­ing be­hind anonymity and a page-long dis­claimer.”

He wasn’t alone. Le­setja Kganyago, the Re­serve Bank gover­nor, was then quoted by Bloomberg as de­scrib­ing Viceroy as a “hit squad”.

But for­tu­nately the FSCA has no plans to do any­thing ridicu­lous such as “ban­ning” short sell­ers. It re­leased a dis­cus­sion pa­per three weeks ago that con­cluded that a new “short-sale re­port­ing and dis­clo­sure regime be adopted”. But this should be done in a way that recog­nises how short sell­ing “con­trib­utes to ef­fi­cient price dis­cov­ery, in­creases mar­ket liq­uid­ity and fa­cil­i­tates hedg­ing and risk man­age­ment”.

The FSCA ad­mits that short sell­ing “can be used abu­sively to cre­ate mis­lead­ing sig­nals about the real sup­ply, or the cor­rect val­u­a­tion of a se­cu­rity”.

This is true: “short-and-dis­tort cam­paigns”, in which bla­tantly false in­for­ma­tion is re­leased specif­i­cally to trig­ger a stock fall, should be erad­i­cated.

But the en­tire prac­tice of short sell­ing shouldn’t be sac­ri­ficed along the way.

The FSCA is now propos­ing a sys­tem in which short­sale trans­ac­tions “must be re­ported to the ex­change” by the bro­ker, and also that “short po­si­tions above an ini­tial thresh­old must be re­ported to the FSCA”. The ex­change, such as the JSE, would then “pub­licly dis­close the to­tal num­ber of se­cu­ri­ties that have been short sold” on its web­site ev­ery day.

This, the reg­u­la­tor be­lieves, will im­prove trans­parency, re­veal­ing who has a short po­si­tion on a stock through an early-warn­ing sys­tem. “This will al­low the FSCA to mon­i­tor the sit­u­a­tion, and can alert the FSCA to po­ten­tially abu­sive be­hav­iour,” it says.

It’s sim­i­lar (but not iden­ti­cal) to reg­u­la­tions used in coun­tries such as the US, Aus­tralia, Canada, Sin­ga­pore and Ja­pan. Over­all, it seems an em­i­nently sen­si­ble ap­proach, pri­ori­tis­ing trans­parency and ef­fi­ciency.

Of course, such a pro­posal would fall short of the more puni­tive mea­sures that some CEOS would want.

But com­pany ex­ec­u­tives have never been fans of short sell­ing.

As Marc Co­hodes, a leg­endary Us-based short seller who has rooted out fraud­u­lent com­pa­nies for the past 37 years, puts it: “Com­pa­nies hate you, share­hold­ers hate you … I con­stantly get death threats, threats against my son, threats against my fam­ily.”

As Co­hodes sees it, the way that com­pa­nies re­spond to short sell­ers is an in­di­ca­tor in it­self of whether in­vestors should be wor­ried. “Any com­pany with a man­age­ment team that fo­cuses on, men­tions, is both­ered by, or at­tempts to squeeze short sell­ers, is al­most def­i­nitely a short,” he says.

‘They ac­cuse our man­age­ment of ly­ing. I ac­cuse them of ma­nip­u­lat­ing in­for­ma­tion’

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