How to get away with pooping and scooping

In general, the whole point of manipulating the market is to do so surreptitiously to fool investors into buying a share more expensively than they would otherwise, or selling a share cheaper than they would otherwise. To do that, you have to be secretive about it, otherwise, the scam is not going to work.

There is one form of market manipulation that takes the exact opposite approach: hyper-publicity on the back of a short or long bet. Always susceptible to an off-colour meme, traders have developed a pair of phrases to describe this kind of action: “poop and scoop”, or  “pump and dump”.

The problem with both is that the difference between making a sensible call on a stock you really believe in, and making a tactical call on a stock you don’t fully believe in is a tricky distinction. Fortunately, we have a great example in SA that illustrates the difference.

In 2018, a hedge fund called Viceroy published a “report” on Capitec Bank. It made a whole series of allegations that fell into that grey area where, at a push, they could be true, but on balance, were not.

One claim was that Capitec had a pervasive practice of rescheduling the loans of its delinquent clients through the issuance of new loans to those clients. It’s possible the bank did do that, or does do that, but the practice was not pervasive now or then. Another claim suggested that because Capitec was, in their view, a predatory lender, it was likely it would be found guilty in a class-action lawsuit. It never happened. And so on. Lots of pooping.

The SA market didn’t really know what to make of the report. But it so happened that a previous report by the same group, published just six months previously, had made the allegation that Steinhoff was using off-balance-sheet entities to inflate its earnings; an allegation that turned out to be substantially true.

So, with discretion being the better part of valour and all that, the market really thumped Capitec’s share price, and by 10 in the morning, Capitec’s share price was down 23% and had lost about R10-billion in value. The authors of the report did subsequently acknowledge that they had a big short bet on Capitec. But that in itself doesn’t prove much; if you believe a company is a bit dodgy, then it would make sense to short the stock. But doing so can also imply that the entity has an incentive to indulge in a little pooping.

Anyway, the SA market ultimately thought the report was inaccurate, assisted no doubt by a quick declaration by the Reserve Bank governor, Lesetja Kganyago, that the bank was, in their view, solvent, well-capitalised, and had adequate liquidity. “The bank meets all prudential requirements,” the declaration said. In fact, Kganyago described the research house as a “hit squad”, a quote Viceroy is evidently very proud of, because it is still featured prominently on its website to this day.

It is, in fact, prohibited to tell porky pies about a company. According to the Financial Sector Regulation Act, it’s illegal to make a  misleading or deceptive statement about a company “in respect of any material fact and which the person knows, or ought reasonably to know, is false, misleading or deceptive”. And other stuff.

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As it happens, a company called Oasis traded in line with Viceroy’s advice and scooped R82-million, of which Viceroy itself got about R10-million as a fee. But after commissioning a report by independent analysts, the Financial Sector Conduct Authority (FSCA) slapped a R50-million fine on Viceroy.

However, it turns out that the Financial Services Tribunal set aside the fine on Monday based on a very simple problem: the accused were not domiciled in South Africa and therefore the FSCA has no jurisdiction over them.

Now, this to me is just completely nuts, but it’s a lot less nutty than you might think, reading the judgment. The legislation does require “service” — the authority must formally hand over the charges to the person(s) concerned. But the case law on this is mixed and in a Competition Tribunal case, the objection was considered satisfied when the subject of the legal action was a foreign bank.

There is a minority judgment, which I think can be summarised in the following term: “Get real, dudes.” We live in a world in which information is shunted around the planet in double-quick time. To exclude liability because the poopers are not actually in SA is unreal to the extent of being perverse.

The tribunal’s main judgment does make the point that you could test its finding by asking: If the situation were reversed and a finding was made against a local company by a foreign court, would a SA court recognise that finding? The current legal precedent is that it would not.

On the other hand, the minority judgment makes the point that the effects of the pooping were felt locally, so where the poopers operate from is really not the issue.

“A requirement of physical service on the defendant while in South Africa is, in my view, unduly restricted and onerous and runs the risk of defeating the objects of the act,” the minority judgment found.

Or, to put it another way, to get around the act, just take care not to do your pooping in SA. That seems nuts to me, and to be honest, I find it characteristic of SA’s jurisprudence; there is much more attention paid to some legal minutiae or some vague rights issue than there is on giving wrongdoers a snotklap upside the head.

As for the objection that SA courts would not have recognised a foreign finding, well you know, maybe we should. Poopers should not be able to escape wrongdoing by positioning themselves out of legal firing range.

Market manipulators want to poop and scoop, but surely we as the investing public want to scoop the poopers? DM/BM