Short-sellers are reaping more than financial rewards from a multi-billion euro accounting fraud at German payments processing firm Wirecard.
Among other measures to defend the now-stricken firm, German financial regulator BaFin temporarily banned shorting its shares in 2019. Now the short-sellers have taken the moral high ground – despite Europe’s recent Covid-19 shorting bans – as Wirecard’s downfall has left former chief executive Markus Braun subject to a criminal investigation.
Markus Braun, Wirecard
Fraser Perring is one of the short-sellers who did most to publicize doubts about Wirecard’s accounting, initially sparking a sharp selloff in Wirecard shares in 2016, following disclosures by Zatarra Research and Investigations.
Perring now feels not just vindicated, but angry about BaFin’s market-manipulation complaints that were made against him in connection with Wirecard. He says that this was settled out of court this spring, for a “relatively small” sum.
A former social worker in the English midlands, Perring is perhaps the ideal character for an activist short-seller. He naturally distrusts the capitalist establishment and relishes taking down its members.
His passion and air of amateurism sometimes makes him sound like a conspiracy theorist – he talks of freemasonry and the like – and attracts, at least, accusations of recklessness.
Yet Wirecard is Perring’s second big victory, after his report on Steinhoff International Holdings – then under Viceroy Research – heralded a collapse in the South African retail group’s shares, in another multi-billion euro accounting scandal in 2017.
Euromoney first spoke to Perring after his Steinhoff victory, when he had moved onto Capitec, a South African retail lender. Capitec’s shares lost almost a quarter of their value after a critical Viceroy report.
The bank’s share price recovered rapidly, and today it trades at a multiple of its book value. However, as with Wirecard, the attack raised wider moral and regulatory issues.
Nicolas Veron, Bruegul
In the Wirecard affair, until this year, the German authorities stood by a company that had become something of a national champion.
As such, Nicolas Veron, senior fellow at Brussels thinktank Bruegul, says it’s “hard not to see the parallels” between Wirecard and Europe’s prudential and anti-money laundering supervisory failures in banking.
Wirecard, after all, was one of Europe’s biggest fintech companies and a source of national pride – not least because so many of its critics were British.
The basic problem, according to Veron, is the perverse incentives created by keeping national supervision within a multinational market.
This is the first time Europe’s regulatory dysfunction has blown up in what was primarily a fintech company, rather than a traditional bank. It was an accident waiting to happen, and not just because many fintech investors have relied too much on hype, and too little on understanding business models and profit generation.
European states are vying to be fintech hubs today, just as they fought to be international financial centres before 2008. It’s why the European Parliament’s finance committee set up a fintech working group last year, according to Stasys Jakeliunas, who heads the group.
As a parliamentarian in Lithuania, which is also vying to be a fintech hub, Jakeliunas raised national security concerns – repeatedly quashed – about his country’s 2018 decision to award an EU banking licence to Revolut, a neobank that the UK also claims as its own.
Asked what he’s going to do after the Wirecard affair, Perring says, only half-jokingly, that he’s “going to take it back to Germany, in true British fashion”.
He says he’s planning new legal action over his treatment in Germany and an assault on another German corporate: “I’m not going to stop until they change and apologise.” He is speaking on the same day he says he’s had a call with Fabio de Masi, vice chairman of Die Linke’s Bundestag group and member of the finance committee.
BaFin’s actions have appeared to be protectionist before. Its approach of fixing rather than punishing money-laundering failures has only exacerbated suspicions about lax controls at Deutsche Bank, for example.
But this is not just a German issue. Perring, in fact, also complains about the UK Financial Conduct Authority’s inaction over Wirecard, whose local subsidiary is an important supplier to UK fintechs.
More generally, he adds that there’s a “gaping hole” between banks and soft-touch e-money licences in the UK. He thinks the FCA has handed out far more of the latter than it can handle.
Meanwhile, there’s some scepticism about the European Commission’s request for the European Securities and Markets Authority to investigate Germany’s supervision of Wirecard’s reporting. Although this could lead to formal breach-of-EU-law proceedings against BaFin, Esma’s board is composed of the national regulators, including BaFin, which would need to approve such a ruling.
Last year, the European Banking Authority’s board (also composed of national supervisors) overruled its own secretariat on whether or not the Danish financial supervisor had breached union law in its handling of the €200 billion Danske Bank money-laundering scandal.
The Wirecard affair is nevertheless giving more backing to those, like Veron, who argue there should be a single supervisor for listed firms’ financial reporting.
This fits a pattern, after the 2008 and eurozone banking crises pushed prudential supervision of banks from national central banks to the ECB, and after the Danske affair has put in motion the creation of a single supervisor for banks’ money-laundering controls.
Whether or not a newly empowered Esma would be enough to stop wider European and global regulatory competition in fintech, however, is another question: especially after Brexit.