Cautionary tales of contravening the Financial Markets Act

In September the Financial Sector Conduct Authority (FSCA) issued an enforcement action order against Viceroy Research Partnership in terms of which it imposed a penalty of R50m for Viceroy’s contravention of section 81(1) of the Financial Markets Act. This matter arose from the publication of a 2018 report entitled “Capitec — A Wolf in Sheep’s Clothing”, in which Viceroy made allegations over the way business was conducted at Capitec, including claims of reckless lending practices and material misstatements.

This widely reported order by the FSCA has placed increased scrutiny on many market researchers, analysts and short-sellers. There are lessons to be learnt from it, as well as from other orders made in relation to contraventions of this section of the act, especially in respect of the conduct of the board of directors and executive management of a company.

Section 81 of the act prohibits the publication of any statements, information, promises and even forecasts (in respect of securities traded in a regulated market) which a person knows, or ought to reasonably know, are false, misleading or deceptive. In this matter Capitec disputed the report issued by Viceroy and informed Viceroy of the inaccuracies in it.

Viceroy received a penalty for contravening both sections 81(1) and (2) because once it was brought to its attention that the information it intended to publish was false, and Viceroy failed to correct it. The FSCA explained that the severity of the penalty issued against Viceroy was based on, among other things, its failure to make submissions to the FSCA, the significant decline in Capitec’s share price, the need to deter such conduct, the financial gain earned by Viceroy as a result of the share price movement, and the importance of Capitec to the SA financial system and financial stability. 

Section 81 of the Financial Markets Act is not only of importance to market researchers and analysts but also applies to a company and its board. If the claims made by Viceroy had in fact been true, that would have had implications for Capitec and its board. The bank would then have been the subject of an investigation by the FSCA to the extent that its financial results may have been false, misleading or deceptive.

In the past the FSCA has issued fines for the publication of false and misleading information by listed companies. For example, in August 2020 the FSCA issued an order against Tongaat Hulett in relation to multiple significant misrepresentations contained in its 2017 and 2018 financial results. The misrepresentations were subsequently cured through a restatement of Tongaat Hulett’s annual financial statements for the relevant periods. However, the misrepresentations were found to have been in breach of section 81, and the FSCA found that investors suffered losses as a result.

Similarly, during September 2019 the FSCA concluded its investigation into the accounting irregularities of Steinhoff Holdings and found that Steinhoff had published false, misleading and deceptive statements in its annual financial statements. Steinhoff subsequently restated its results dating back to the 2015 financial year. 

In both the Tongaat and Steinhoff orders the FSCA made the decision to remit a substantial proportion of the penalties. The initial penalties were R1.5bn in the case of Steinhoff and R118.34m in the case of Tongaat Hulett. After considering factors in mitigation of these initial penalties Steinhoff’s fine was reduced to R53m and the penalty against Tongaat to R20m. 

Notably, the board of Tongaat co-operated with the FSCA and undertook to put in place measures to avoid the reoccurrence of such contraventions. The FSCA also considered the fact that Tongaat was under severe financial strain as a result of its debt levels, and the potential job losses that would materialise if it succumbed to these pressures. The FSCA agreed to a remission of the initial fine to avoid penalising innocent shareholders. Similar factors were cited by the FSCA when reducing the initial fine against Steinhoff. 

That said, the FSCA has taken a firm stance in respect of contraventions of section 81 of the Financial Markets Act and therefore a significant penalty is likely to follow such contraventions in future.

However, to the extent that a company is co-operative and the board takes steps to remedy any misrepresentations, there is room for the FSCA to display leniency on the severity of the penalty. Viceroy was not on the receiving end of such leniency, and it is noteworthy that the FSCA highlighted its failure to co-operate. Viceroy has disputed this claim, stating that it met with and provided detailed responses to the FSCA and therefore intends appealing the FSCA order.

• Bulose is a corporate lawyer focused on mergers & acquisitions, corporate restructurings and general commercial matters, and Gyarmati a senior associate in the corporate and commercial practice, both at CMS SA.