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  3. Wirecard: German regulators failed to heed red flags by short sellers
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Wirecard: German regulators failed to heed red flags by short sellers
04 November 2020 Paris
Reporter: Drew Nicol

Image: TTstudio/adobe.stock.com
German financial market regulators were “negligent” in acknowledging and reacting to accusations of Wirecard’s illegal activities by the media and short sellers in the years leading up to the former Dax 30 member’s demise, according to an investigation by the EU’s markets watchdog.

An inquiry was instigated by the European Commission following Wirecard’s collapse in June and spearheaded by the European Securities and Markets Authority (ESMA) to assess the roles of BaFin and the Financial Reporting Enforcement Panel’s (FREP) in allowing rampant corruption and fraud to take place in Germany and worldwide.

The results of the fast-tracked peer review into these events identify “a number of deficiencies, inefficiencies and legal and procedural impediments” related to BaFin’s oversight of the payment processing giant.

Highlights from the investigation include the revelation that some members of BaFin’s Market Abuse Regulation team traded in Wirecard shares and derivatives between 2018 and the first half of 2020.

The German regulator argues that this related to “only a very small proportion of staff with insider trading information” and that it had mechanisms in place to ensure there were no conflicts of interest.

BaFin and FREP were also found to have failed to respond to years of repeated warnings by short sellers and the media that Wirecard was not as it seemed.

ESMA notes that as far back as 2005 Wirecard has been dogged by accusations of various types of money laundering, fraud and a lack of transparency in its business model.

In its review, the authority further concludes that FREP “did not pick up signals” from these reports as an impetus to examine Wirecard between 2016 and 2018, “despite specific risks on Wirecard reporting which were left unaddressed”.

ESMA adds that FREP should have been “more thorough in examining whistleblowers and media allegations”.

Although in a different position compared to FREP in the German two-tier system, BaFin also did not request that FREP examine Wirecard reporting during that period.

When Wirecard was examined in mid-2018, the German market overseers failed to use the opportunity to investigate some of the concerns flagged by the media regarding inconsistencies in the firm’s financial reporting.

This was in part due to a breakdown in communication between the two bodies and a lack of clarity on where their respective remits began and ended.

Of the report, ESMA chair Steven Maijoor says: “The Wirecard case has once again highlighted that high-quality financial reporting is essential for maintaining investor trust in capital markets, and the need to have consistent and effective enforcement of that reporting across the EU."

The review focused solely on the sphere of financial reporting and excluded an inquiry into the role BaFin and ESMA played in instigating a two-month short selling ban on Wirecard shares from February 2019 to protect Wirecard from what was described as a conspiracy between the media and hedge funds to bring down the firm shortly after it was admitted into Germany’s most prestigious index.

The ban has been widely criticised for representing a misuse of the Short Selling Regulation which is meant to help stabilise markets during extreme volatility, not protect individual firms accused of wrongdoing.

In the past, the European Commission did not rule out further inquiries into what now appears to be two regulators barring market participants from expressing legitimate scepticism of a firm’s fundamentals.

Following the publication of today’s report, the commission says: “We must recall that under EU legislation, the role of national competent authorities in overseeing the activities of market players and business companies is very clear.

“It is for the national competent authority to carry out the daily supervision of listed companies.

“We will carefully assess the implications of the Wirecard case for the regulation and supervision of EU capital markets, and act to improve the EU’s regulatory framework where necessary.”
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