Germany’s financial watchdog BaFin gave the European Securities and Markets Authority selective and incomplete information when making its case for the ban on shorting Wirecard shares, documents seen by the Financial Times show.
In February 2019 the EU’s finance watchdog backed BaFin’s move to ban short-selling in a single stock, arguing that wild swings in Wirecard shares after the FT reported accounting manipulation at the payments processor posed “a serious threat to market confidence in Germany” and that a ban was proportionate to the threat to the country’s financial markets.
However, the eight-page “notification of intent” that BaFin shared with Esma’s board of supervisors a day ahead of the announcement omitted Bundesbank opposition to the short-selling ban and gave the impression that Wirecard’s record was spotless.
“BaFin presented the facts to Esma in a highly distorted way,” Danyal Bayaz, an MP for the Greens, told the FT, adding that the regulator’s “biased arguments” probably tricked Esma into approving the short-selling ban.
Wirecard collapsed into insolvency last summer after disclosing that €1.9bn of corporate cash never existed. In the year leading to its insolvency, Wirecard raised €1.4bn of fresh debt which prosecutors think is largely “lost”.
Investors and creditors took the short-selling ban, and a criminal complaint by BaFin against two FT journalists who reported whistleblower allegations against Wirecard, as a vote of confidence for the controversial German company. The investigation against the reporters was only dropped months after Wirecard’s insolvency.
Documents seen by the FT show that BaFin told Esma that the selling pressure on Wirecard stocks could destabilise the wider German stock market. “In the current situation, the risk is that this uncertainty regarding a fair price determination could extend to other issuers, including to DAX-issuers or financial institutions,” the watchdog stated twice in its briefing.
BaFin argued that a clause in EU law designed to protect “banks and other financial institutions deemed important to the global financial system” from speculative attacks could be applied.
However, BaFin did not disclose that the Bundesbank had not found any evidence of danger to financial stability or wider market confidence. Germany’s central bank had informed BaFin two days ahead of the Esma briefing that it had not uncovered any spillover from Wirecard on other stocks and did not share BaFin’s point of view, documents seen by the FT reveal.
The Bundesbank argued that even if a manipulative “short attack” against Wirecard had been imminent, targeted steps against the manipulators were “preferable” to a blanket short-selling ban.
BaFin had justified the short-selling ban to the Bundesbank by highlighting a criminal investigation into an alleged attempt to blackmail Wirecard by financial journalists.
In its communication with Esma, BaFin pointed to an ongoing probe by Munich prosecutors into alleged market manipulation. “In this context, it was stated that there is no investigation against Wirecard AG,” BaFin wrote, adding that Wirecard was “aware” of allegations that whistleblowers had raised over accounting fraud in Singapore and “hired a law firm to investigate them thoroughly”.
However, the German watchdog did not disclose to Esma that it was itself investigating potential market manipulations by the Munich-based Wirecard — information that it shared with Germany’s finance minister Olaf Scholz in mid-February 2019, according to Mr Scholz.
Last year, Esma lambasted BaFin for its “deficient” handling of the Wirecard scandal. BaFin president Felix Hufeld and his deputy Elisabeth Roegele, who headed the watchdog’s securities department, were pushed out last week.
Paris-based Esma declined to answer specific questions about the information that was shared by BaFin ahead of the short-selling ban.
“The authority took its decision based on the material provided by BaFin in support of their proposed short-selling restriction,” a spokesperson told the FT.
Documents seen by the FT last month showed that BaFin’s evidence for a short attack against Wirecard in February 2019 was extremely thin. A lawyer working for Wirecard had told Munich prosecutors that “one or several” employees of Bloomberg had called his client in a blackmail attempt. They purportedly asked for a payment of €6m, threatening to otherwise “take up an offer from the FT” and to publish negative stories about Wirecard.
Prosecutors did not take the information seriously enough to open a criminal investigation into the allegations, chief prosecutor Hildegard Bäumler-Hösl told MPs in Berlin last month.
A Bloomberg spokesperson told the FT there was no evidence that the alleged events ever happened, saying “the suggestion would be laughable if it weren’t so offensive”. A spokesperson for the FT said Wirecard’s allegations that any of its journalists colluded with short-sellers or reporters elsewhere were “completely false” and had been refuted.
Ms Bäumler-Hösl told MPs last month that the prosecutor passed the information on to BaFin without evaluating its credibility.
Mr Hufeld has said that based on similar information, he would again impose a short-selling ban.
“BaFin wanted to impose the short-selling ban at any cost,” said Florian Toncar, an MP for the liberal Free Democrats, accusing BaFin of “exaggerating” the information from Munich prosecutors and giving “selective information” to Esma. “The short-selling ban deceived the markets more than all short-sellers of this world combined,” he said.
BaFin told the FT that it did not share the view that its briefing to Esma was selective and incomplete. “We informed Esma about all reasons that at the time suggested for us that market confidence was threatened,” a spokesperson said.