SPIEGEL, 20 February 2019
Ugly English translation
Clever speculators, drastic price drops and a company that has grown up with the payment transactions of porn sites: the Wirecard case has film-ready ingredients. But what is really behind it?
Down 25 percent in one day and up another 15 percent on another – what is currently happening with the Wirecard share price is extremely unusual for a group in the top German stock exchange league.
However, the background to the price movements is even more unusual: reports of alleged falsifications of the balance sheet, short sales of speculators who benefit from falling share prices, and investigations by the public prosecutor into possible market manipulation. The case is confusing and exciting at the same time. Here are the answers to the most important questions
What is Wirecard’s business model?
Wirecard technically processes payments that customers order by credit card, PayPal or other internet-based or mobile payment methods such as Apple Pay. Wirecard partners include Visacard, Mastercard, Alipay, Apple Pay and Google. Customers include large, but also countless small companies, to whom Wirecard sells technical solutions for electronic payment processing. The profit margins in payment processing are usually extremely small. However, there are industries, such as gaming and porn sites on the Internet, for which payment processors can charge higher margins due to the higher risk of fraud. Among other things, Wirecard grew up with this business, but its share of total sales has meanwhile fallen sharply.
What is the case about that currently dominates the headlines?
At the end of January, the Financial Times (“FT”), citing a whistleblower, reported that there were internal fraud allegations against Wirecard in Singapore. It is about possible falsification of balance sheets – Wirecard denies the allegations. After the “FT” report, the Wirecard course crashed by around 25 percent, and it became apparent that there were noticeable price movements even before the “FT” article became known.
In the following weeks, the stock price continued to fluctuate violently, also because the “FT” published two other incriminating articles. The Munich public prosecutor’s office is investigating unknown and the “FT” journalist for possible market manipulation, supported by the financial regulator BaFin. BaFin also prohibited so-called short sales of Wirecard shares for two months on Monday. At the same time, investors in the USA are suing Wirecard, accusing the company and top management of misinformation.
What is it about the allegations against Wirecard?
In the past there were several types of allegations against Wirecard: On the one hand, the company was said to also process payments for illegal business, such as online gambling that is prohibited in the USA. On the other hand, critics have repeatedly criticized Wirecard for balancing the balance sheets. The company has always rejected both allegations.
At the end of January, the Financial Times reported that whistleblowers are making serious allegations against a manager of the Wirecard subsidiary in Singapore. This manager had instructed employees how they could generate bogus sales through circular bookings. The Singapore law firm Rajah & Tann investigated the events and found in an interim report serious suspicions of balance sheet fraud and fraud. Wirecard denied that an internal investigation had shown that there was nothing wrong with the allegations. Rajah & Tann said the final report is still pending, so far there has been no evidence of criminal behavior by Wirecard employees.
What are short sales?
Short sales are a legal way to speculate on a share price falling. An investor borrows the relevant shares, for example from a large equity fund, for a fee for a certain period. Then he sells the borrowed shares and may thus be able to push the share price down – but only if he sells really large volumes “empty”, ie without owning them. If the price actually falls, the short seller can buy shares at the lower price and return them to the lender. The price difference minus the fee is taken in as profit. Short sales are used by speculators as an instrument to bet on falling prices of certain stocks. If it is used in connection with inside information that is not yet public, it is illegal.
What is the prosecutor investigating?
The prosecutor is investigating unknown and the Financial Times journalist who wrote the incriminating reports about Wirecard. The allegation is market manipulation.
Market manipulation could exist, for example, if the “FT” had deliberately spread the wrong information – which it denies.
It could also be that the “FT” reported correctly, but knew that the informant or a third party who knew about the publication of the “FT” report had previously bet on a falling share price.
Thirdly, it is also quite possible that the FT did not know the self-interest of its information provider or that it was deceived about its motives.
The public prosecutor is now investigating these questions. In 2016, a research service called “Zatarra” had previously filed allegations against Wirecard. The Munich public prosecutor has applied to the Munich District Court for one of the editors of “Zatarra”, the British Fraser Perring. If Perring does not accept the penalty order, legal proceedings are likely.
Why is BaFin taking such tough measures as a short sale ban?
BaFin issued a general decision on Monday, which now prohibits “creating new net short positions in Wirecard AG shares or increasing existing net short positions”, as the supervisory authority announced. To put it simply, it justifies this with concerns about financial market stability.
BaFin can take such a measure based on the EU Short Selling Regulation if adverse events or developments have occurred that pose a serious threat to financial stability or market confidence in Germany. From BaFin’s point of view, this was recently the case because of the short sale attacks against Wirecard. In the past few days, “massive uncertainties in the financial markets were noticeable”, which was triggered by the price development of the Wirecard share. Due to the massive increase in short sales of Wirecard shares, there was “uncertainty in the market” with regard to the appropriate pricing for Wirecard shares. There is a risk that this will expand to general market uncertainty.
It is the first time that BaFin has issued such a short sale ban with regard to a single company. After the financial crisis in 2008, when bank stocks were under massive pressure, BaFin temporarily prohibited short sales against a number of financial groups. At that time, the financial system was also in danger of collapsing.
The measure with a view to Wirecard is controversial. Short sales also have a certain benefit: they can stop and correct price exaggerations. When many investors are betting on rising prices, it can sometimes be good if there are pessimists on the market who are against it.
If the allegations against Wirecard prove to be true, the intervention by the supervisory authority could look like an unjustified protective measure in favor of the company. The measure is also tricky because company founder Markus Braun himself is the largest Wirecard shareholder with around seven percent of the shares – and thus benefits from BaFin’s protective campaign. After the announcement of the short sale ban, the share price shot up 15 percent on Monday.
It is also questionable whether a price loss of up to 50 percent of a single share jeopardizes the stability of the entire stock market. Especially since Wirecard is one of the smallest and least weighted companies within the Dax.
Who has benefited from the violent price movements so far?
It is known that the hedge funds Odey Asset Management and Slate Path Capital have made short sales against Wirecard on a large scale. Most recently, they had shorted 0.65 percent (Odey) and 1.5 percent (Slate Path Capital) of Wirecard shares.
Such positions only have to be reported in the Federal Gazette above a threshold of 0.5 percent of the outstanding shares. However, BaFin apparently has knowledge that there are also numerous short positions below this threshold.
Ultimately, whether the short sellers benefit depends on the price at which they sold short and the price at which they later cancel the bet, i.e. buy back the shares that were initially borrowed and sold. After earlier attacks on short sales, such as in 2016, the Wirecard rate had recovered so strongly after a few months that many a short seller might have lost the bet.
Wirecard board members Jan Marsalek and Alexander von Knoop, for example, who had bought up shares after the recent price slide, could benefit from a renewed price increase.