Viceroy Research’s Fraser Perring.
Christopher Goodney/BloombergActivist investor Fraser Perring can appear as opaque as the companies he takes aim at.
He says that 2020 was an excellent year for his firm, Viceroy Research—“it has been better than every single year combined”—but he won’t offer a ballpark amount of the money the hedge fund made.
He eschews inviting reporters to his home office; Barron’s interviewed him on a bench in a square in Peterborough, a town about an hour and a half from Perring’s home office in central England.
Perring’s wariness comes amid concerns that he has had for his own safety after his biggest victory as an activist investor unspooling one of modern Europe’s largest corporate blowups—last summer’s spectacular collapse of German payments processing company Wirecard (ticker: WCAGY).
The company’s demise came after Perring and other short sellers, who take bearish bets on stock prices in anticipation they will fall, faced considerable blowback for years from Wirecard and from German regulators who began an investigation into the doubting investors at the prodding of the company, according to news reports.
He was ultimately vindicated on Wirecard after it filed for insolvency in June 2020, making a name for Perring that he feeds off today.
Even in the best of times for short sellers, when stock returns are lackluster, the job of betting against companies is arduous work, sparking slugfests between investors and the companies they target.
But the relentless bull market in stocks has turned short selling into a Mount Everest-like challenge that is even harder to scale in Europe.
Yet short selling is drawing renewed attention. A Goldman Sachs index of the most-shorted stocks has risen roughly 140% since the Wirecard announcement.
Perring says he is now working on an alleged fraud in Germany that is 3½ times as large as Wirecard, which at its peak was a $28 billion company, but refuses to divulge details. He says he hopes to unveil the target this fall.
His playbook is similar to other short sellers, but differs in some important ways.
Perring likes to focus on target companies whose practices or accounting have not been questioned. He says he also stays clear of stocks that have high levels of short interest, which reflects the numbers of shares that have been sold short. Short sellers are always at risk of getting whipsawed when investors cover their short positions by buying stocks.
“With low short interest, you don’t have a herd wanting to cover,” Perring explains.
He scours the globe for telltale signs of fraud—“there always has to be an element of too good to be true”—and a widespread perception in the market that the company is a highflier.
Germany remains a favorite hunting ground for Perring. “They are the only place in the world where they keep very good records even if they are a fraud,” he says.
Three months after Wirecard’s collapse, Perring’s Viceroy Research published a report on German asset leasing company Grenke (GLJ. Germany) entitled “Grenke—for Your Fraud Financing Needs.” The report alleged “blatant accounting fraud” and singled out the company’s banking division as a “conduit for proceeds of crime and money laundering.”
Viceroy Research, in a series of allegations, pointed to Grenke’s habitual practice of buying underperforming franchisee businesses and failing to disclose these transactions were conducted with related parties as a sign of a “fraudulent scheme” designed “to either hide fake cash or siphon off millions of euros to undisclosed related parties, or both.”
Among the red flags Viceroy spotted was “the hoarding of excessive amounts of cash on Grenke’s balance sheet” even as the company frequently tapped capital markets, the September 2020 report said.
Buttressing its claim that Grenke Bank was a funnel for money laundering, it faulted the company’s banking division for receiving money from unregulated trading platforms, for instance, which Viceroy said represented the kind of breach that could result in the suspension or loss of the bank’s license.
Grenke fired back, saying soon after the Viceroy report was published that the report “contains allegations which Grenke strongly rejects.”
Earlier this year, an interim report on a special audit of Grenke by the accounting firm Mazars, which was commissioned by German regulators, supported Perring’s findings of shoddy accounting involving the undisclosed related-party transactions, saying that the franchise companies should have been consolidated in the company’s accounts as soon as they were set up, and found “several deficiencies” at Grenke’s banking division.
While the audit didn’t support Perring’s claims of money laundering or find evidence of fraud, it sharply criticized Grenke Bank’s money-laundering prevention protocols. The bank’s anti-money-laundering procedures were “not fully compliant with legal rules,” Mazars found, according to a summary of the audit results on Grenke’s website.
At its annual general meeting last month, Grenke’s supervisory board chairman noted that the accounting firm KPMG had signed off on 2020 annual accounts; he pointed to the addition to the board of a chief risk officer as part of measures that will enable the “company to better meet the increased regulatory requirements for internal control systems.”
Perring likes to describe his brand of short selling as “common sense short selling,” meaning that if there isn’t a logical reason for a stock to go up, he thinks it is an attractive target.
The pandemic has revealed a welter of opportunities for Perring—companies whose businesses have been felled by lockdowns and Covid restrictions yet continue to prosper on paper.
A hurricane a few years ago served a similar purpose, he says.
Acting on a tip from a friend, Perring noticed that the business of MiMedx Group (MDXG), a Marietta, Ga.-based biomedical company, continued to chug along even during a hurricane, which had led to a string of nonessential surgeries being canceled.
“It was another archetype or red flag,” he says.
Perring accused MiMedx of inflating sales by channel stuffing, or deliberately sending more products through the distribution pipeline than can be used. Viceroy Research, drawing on a 2016 whistleblower lawsuit and documents that it received from other former employees, found that MiMedx facilitated the channel stuffing by exhorting its sales managers, typically in the final days of the quarter, to book large orders for products that weren’t requested by customers.
He likens MiMedx’s sales growth during the hurricane to Wirecard’s performance during the pandemic last year. “Even if you were in payments, you had a down dip” in 2020, he notes. “The same happens with hurricanes. When there is a big hurricane, all surgeries are canceled unless really essential like heart or whatever.”
A flurry of lawsuits ensued between MiMedx and Perring, with each side claiming defamation. The two sides settled earlier this year. Terms weren’t disclosed.
In 2019, the company agreed to pay $1.5 million to settle a Securities and Exchange Commission lawsuit that accused it of defrauding investors from 2013 to 2017. MiMedx didn’t admit or deny wrongdoing.
A spokesman for MiMedx said the company doesn’t comment on closed legal matters, adding that the company’s “senior leadership team and board of directors are entirely new since 2019, and we remain focused on improving patient health outcomes and developing meaningful medicines.”
Sometimes an eye-popping transaction can put a company squarely in Perring’s eyeshot. A few years ago, South African retailer Steinhoff International Holdings (SNH.South Africa) caught Perring’s attention after it decided to acquire Mattress Firm for more than double its closing stock price the day before the acquisition.
“The only reason you would do that is that you are an idiot or you are trying to float something on your books,” Perring says.
In 2019, Steinhoff said an internal inquiry had found that a small group of former executives had engaged in transactions over several years that resulted in “substantially inflating” the company’s profits and asset values. Describing the past 17 months as “by far the most challenging in the history” of the company, Steinhoff’s chief executive told shareholders in May 2019 that management had developed a plan to address all shortcomings and ensure improved standards of corporate governance.
The accounting missteps at the South African company affected investors across the globe, from pension funds in its home country to some of Wall Street’s biggest banks.
Perring’s December 2017 report on Steinhoff also set off a critical appraisal of short sellers and of Perring in particular.
Written by research firm Intellidex, the review on Perring was commissioned by Business Leadership South Africa, an independent association whose members include the leaders of some of South Africa’s biggest companies, some of which have been targets of Perring and others.
The report said that Perring may just be a public megaphone for more-powerful hedge funds that don’t want to be directly linked to negative research for a variety of reasons, including legal and regulatory risks, yet profit from the market reaction that ensues after research is published.
“We find that Viceroy is a relative newcomer in an ecosystem of several other short sellers and hedge funds which are more established and have tighter regulatory constraints,” the Intellidex report said. “In our view, the value Viceroy adds to this ecosystem is to generate publicity on companies, and to effectively in-source legal risk from others cautious of being seen to publicly disparage companies.” Intellidex said it could not “definitely determine how Viceroy monetizes its work.”
Perring says that for a very large project, Viceroy may approach other hedge funds to see if they are interested in its research.
The hedge funds could review the research and Viceroy would be paid based on the profit—or the loss—of the trade.
“We don’t want to know how they trade,” Perring says, because Viceroy does not want to be viewed as acting jointly with the hedge funds. Alternatively, the hedge funds could buy the research for a fixed fee, he says.
Europe has regulatory hurdles for short sellers that are more burdensome than in the U.S., and that may play into Perring’s favor. His public persona can give hedge funds the cover they need to operate below the radar, some say.
Perring freely acknowledges that Viceroy Research works with other hedge funds. Viceroy gets sent “10, 20 odd ideas a week,” which his firm may develop, he says. Of course, “some of them aren’t within our wheelhouse, too technical…. And, yeah, we do cherry-pick, in a way. But who doesn’t in terms of their work?”
In Europe, funds are required to disclose a short position to the regulator when it exceeds 0.2% of a company’s market capitalization and then publicly when it is greater than 0.5%, says Matthew Earl, managing partner at ShadowFall Capital & Research, a London-based hedge fund. Viceroy typically stays below these thresholds.
“If you cover your position immediately after the publication of your research, the regulator is likely to take a dim view,” Earl explains.
Earl says he first met Perring, a former social worker, in 2016, when he was introduced to him by a mutual acquaintance. The two teamed up on Wirecard through an entity called Zatarra Research & Investigations, but are no longer partners.
Perring rejects the idea that he or the hedge funds and family offices he collaborates with have short-term goals. The pay formula in place with funds underscores this idea, he says.
“Say we published on the first of a month and that month had 30 days in it—if they covered, we would be paid on the first of the next month, yeah, and not once have we been paid that,” he says. Viceroy is allowed to audit the collaborating hedge fund’s results on a trade, he says. “We don’t do short-termism.”
Still, skepticism of Perring’s prolific output of in-depth research persists.
“I have been in financial markets for 20 years,” says Earl, who started as an economist at Royal Bank of Scotland. “In terms of my knowing what it takes to produce high-quality short research, it is inconceivable that someone with a background in social work with a couple of mid-20-something colleagues can produce that kind of research on a regular basis.”
Perring says he is well aware of such accusations. The idea that his firm doesn’t produce the research it publishes and promotes is “patently untrue,” he says.
The kind of research he is engaged in is expensive. The Wirecard project alone totaled 2.3 million euros, including legal costs, he says. “Every single company we come to we have to build up a new network,” he says.
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