Rob Rose Editor: Financial Mail

From the hysteria over the anonymous three-man outfit that is Viceroy Research, you’d think it was the one responsible for duping Steinhoff’s 49,000 individual investors. A few weeks ago, Viceroy catapulted from being a nobody into a starring role in the Steinhoff implosion, after it published an astute 37-page report red-flagging apparent fraud at the furniture retailer, as well as the secret deals to enrich CEO Markus Jooste.

Insiders told the Financial Mail that Viceroy’s work on the secret companies in Europe that helped Steinhoff "inflate earnings" was "more or less accurate".

Predictably, the twitterati went bos. Some claimed Viceroy had caused Steinhoff’s share price to tank based on "pure speculation". Others claimed Viceroy should be "investigated" for "market manipulation".

They forget, however, that the Viceroy report only emerged after Steinhoff had admitted to "accounting irregularities" and Jooste had quit "with immediate effect", which is what really sparked a 61% stock slide.

Viceroy’s critics have two gripes. First, they argue that because the company took a "short position" on Steinhoff’s stock and profited from the plunge, this "agenda" means its message is without substance — a spurious argument. Second, they complain that Viceroy should be forced to come out of the shadows and ditch its anonymity — a more valid complaint.

(Subsequent to this story being published, Viceroy revealed that it is run by 44-year old British citizen John Fraser Perring, with the assistance of two 23-year old Australian-based analysts Gabriel Bernarde and Aidan Lau. To some extent, Perring didn't have much of a choice, since his team had already been tracked down by a few journalists.)

A short position is simply betting that a firm’s share price will fall. You borrow shares in a company from a bank, promising to give that stock back later. You then immediately sell those shares at a price of say, R100, expecting the price to fall to, say, R80, at which point you can buy the stock back more cheaply to return it to the bank. So you make R20/share in profit.

But suggesting that Viceroy’s short selling is inherently dubious and "market manipulation" is codswallop. A 2015 New Yorker article, "In praise of short sellers", says shorting stocks can "keep the market honest".

The first recorded short position apparently related to the Dutch East India Company (DEIC) — the firm that brought Jan van Riebeeck to the Cape — back in 1609. That year, a group of Dutch businessmen formed a secret club called the Groote Compagnie to short the shares of the DEIC, believing the imminent creation of a French rival would hurt it.

They were right. The DEIC’s stock fell 12% in a year, and the Groote Compagnie profited. But other investors complained so much that the Amsterdam exchange passed rules in 1610 banning short selling.

Regulators don’t like it, but short selling is good for the market. A 2004 Yale study said "critics often view short sales as immoral — the exploitation of others’ misfortune and an exacerbating factor in periods of market crisis". But the researchers found evidence that "restricting short sales reduces market efficiency".

The Viceroy report only emerged after Steinhoff had admitted to ‘accounting irregularities’ and Jooste had quit, which is what really sparked the stock slide

It’s a well-recognised strategy, too. Hedge fund activist Bill Ackman, for example, took a US$1bn bet in 2013 against Herbalife, dubbing it a "pyramid scheme".

However, Viceroy’s critics have a point when it comes to the company’s anonymity — it uses only a gmail address and an untraceable website.

This does not, of course, nullify its message. But South Africans love to reframe the debate to focus on the messenger rather than the message itself.

The valid concern is, as one analyst puts it, "if Viceroy has lied or misrepresented anything in any of its reports — a strategy known as ‘short and distort’. In the short term, the market does not know, and sells the share price off and Viceroy makes money".

Of course, in the long term, the stock will correct. But as the analyst puts it: "Who do the regulators go after? Who do investors and shareholders go after?"

So why does Viceroy insist on staying anonymous?

In December, the company told the Financial Mail that "we do so because we don’t really get many nice things said to us ... there have been issues in the past where short sellers are targeted".

Certainly, short sellers can attract heaps of abuse from investors, who don’t enjoy feeling like fools or losing plenty when their investments sink.

And Viceroy is already under fire from MiMedx, the California-based medical firm that filed a lawsuit against it in October, claiming it used "short and distort" tactics to "fraudulently manipulate the market".

Some say Viceroy did the same with Steinhoff. But a glance at the timing shows they’re wrong. While Viceroy was right to drop its cloak of invisibility, let’s be clear: if Steinhoff’s stock tanked, it was because of what Jooste and his merry men did — not because of an anonymous research house that released information after the share price had already started falling.

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