When Short Sellers Become Whistleblowers: the Case of Wirecard

They say that sharks can smell blood in the water up to a mile away.* Short sellers can exhibit similar olfactory aptitude in relation to overpriced stocks.

When the bleeding happens to be fraud and corporate misdeeds; ‘shorters’ can form a rare symbiotic relationship with journalists and regulators to bring down their prey.

Shorting, to put it simply, is a financial term for speculation on the decline of stock prices. Some say it’s wrong to profit from negative movements in stock price, and sometimes that’s true. Particularly, for example, when you’re advising your clients to buy a stock while you’re simultaneously shorting it.

Whatever your position, shorts can cause quite a lot of volatility in share prices, particularly when large hedge funds place the shorts and the public finds out. The flipside is that proponents claim it corrects the stock price, meaning that overvalued stocks become closer to their ‘true value’, thus rationalising the market.

The Case of Wirecard

Wirecard was the darling of a struggling German tech industry. Despite numerous warnings as to its shady financial reporting by investors and money laundering accusations by shorters; investors remained relatively enamoured with the high profile fintech.

The rumours and complaints made against Wirecard were viewed in Frankfurt as an “’attack’ invented, or at least co-sponsored, by shady Anglo-Saxon speculators and ‘locusts’” and the German regulator, BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) refused to act on consistent Financial Times reporting of the issues at Wirecard. The tensions between London hedge funds and Wirecard became so hostile that a massive private spying operation was undertaken in 2019 in London against those seen to be speaking out against the company, including Financial Times journalists.

This all came to a resounding climax last week when Wirecard admitted to ‘losing’ £1.9 Billion after EY audited it’s 2019 financial records. The company’s share price tumbled a staggering 61.28% to €39.90 per share. For reference, Wirecard joined Germany’s blue-chip Dax 30 share index two years ago. At the time, it was valued at €24bn, but following the latest share price crash this has fallen to just €4bn. The CEO and largest shareholder, Markus Braun, has now stepped down.

Chris Hohn, a leading shorter and one of the best hedge fund managers of all time said: “Why is the German banking regulator not removing the licence of Wirecard Bank, and why is the German financial services regulator not removing its licence to operate as a payment processor?” Mr Hohn’s hedge fund The Children’s Investment Fund has sold short 1.5 per cent of Wirecard stock.

Stepping into this sticky situation is James Freis, who has just been promoted to interim chief executive officer a day after joining Wirecard as chief compliance officer. He now faces immediate threats of investor lawsuits and regulatory intervention.

My takeaway from all this: although shorting is looked down upon (especially in continental Europe) in many cases, investors taking short positions are the first indicator of financial fraud. They act like an alternative whistle-blower, when the market, and the regulator, refuse to see what is right in front of them.