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High Court Empowers Regulator to penalize Viceroy for Damaging Capitec Report
In a significant ruling, the High Court has granted the Financial Sector Conduct Authority (FSCA) the authority to pursue action against viceroy, effectively enabling the regulator to hold the investigative firm accountable for its controversial report on Capitec Bank. This decision overturns a previous stance that had shielded Viceroy from South African regulatory scrutiny.The judgment underscored the critical role of robust regulation, stating, “The importance of proper regulation is borne out by the facts in casu. The misinformation that was widely distributed and publicised in SA by the respondents had a disastrous affect on one of SA’s prominent financial institutions.” The court further emphasized that excusing respondents from liability simply due to their absence from South Africa would be contrary to the interests of justice. the prospect of a R50 million administrative penalty was highlighted as a welcome development, particularly given the nation’s challenging economic climate and a strained public purse.
The Viceroy report, ominously titled “Capitec: A Wolf in Sheep’s Clothing,” sent shockwaves through the financial markets upon its release in January 2018. Outgoing capitec CEO Gerrie Fourie described the report’s impact as the most arduous period in his 25 years with the bank. The report urged the then-Minister of Finance, Malusi Gigaba, to place Capitec under curatorship, levelling accusations of “refinancing delinquencies” and other malpractices. viceroy claimed to possess legal documentation indicating that Capitec had advised and sanctioned loans to customers who were already delinquent, with the express purpose of repaying existing debts.
However, these allegations were swiftly refuted by the South African Reserve Bank, which confirmed Capitec’s solvency, strong capitalisation, adequate liquidity, and compliance with all prudential requirements.On the day of the report’s publication, Capitec’s share price plummeted by over 20% to an intraday low, erasing more than R24 billion from its market capitalization. While the stock partially recovered, it ultimately closed the day down by 3%.
It emerged that Viceroy had shared the report with a hedge fund prior to its public release.This pre-publication access allowed the hedge fund to profit an estimated R82 million by shorting Capitec securities. Viceroy had a profit-sharing agreement with the hedge fund, receiving 12.5% of the net profits generated from these short positions.
In his submission, Janse van nieuwenhuizen argued that the objectives of financial market regulation far outweigh the procedural necessity of personally serving documents on foreign litigants to establish jurisdiction. He stated, “If one has regard to the purpose and object of the regulation of financial markets, its importance far outweighs the necessity to serve any documents that initiate the enforcement of financial regulation on a peregrinus [a foreign litigant that is not domiciled within the jurisdiction of the court] personally to find jurisdiction.” Van Nieuwenhuizen further suggested that the evolution of common law in this area would bolster the effective regulation of global financial activities.
Capitec has since demonstrably moved past the Viceroy episode, attracting over six million new clients and experiencing a remarkable 300% surge in its share price over the last five years.
