Wirecard – and Germany's hypocritical ban on shorting stocks

The German market regulator has taken the highly unusual step of defending a single company from short-sellers. Matthew Partridge reports.


Wirecard: no bears allowed

Earlier this week, Germany's financial regulator, BaFin, took "the unprecedented step" of banning short sales (that allow investors to profit from a falling share price) of shares in payment-processing specialist Wirecard, claiming that these pose "a serious threat to market trust in Germany", reports Bloomberg. The move comes as prosecutors in Munich investigate a Financial Times journalist as part of a wider probe into "market manipulation". The FT has published a series of articles "alleging fraud at the payment company's Singapore unit", which Wirecard has denied. In the past few weeks, however, the shares have lost nearly half their value.

This is hardly Wirecard's first brush with controversy, says German public broadcaster Deutsche Welle. It has been a "perennial target for speculative short-sellers who have questioned its accounting methods and rapid international expansion". There were major "short-selling attacks" in 2008 and 2014, while the German small-shareholders' association, SdK, once accused the firm of "false accounting". In all, over its 20-year history the company "has been accused of money laundering, corruption and facilitating illegal gambling, although no charges have been brought to date". Analysts have also repeatedly questioned its "very complicated" business model.

A ban based on dubious logic?

BaFin's move is "unusual", says Handelsblatt's Andrew Bulkeley. While it banned short-selling of 11 financial firms during the credit crisis, "this is the first time it has halted trading for a single company". On the other hand, it is not hard to understand the logic. Wirecard is "a rare German unicorn" (the term for a hugely successful tech start-up) and "the first to make it onto the blue-chip DAX index". Investors may be reassured to note that "board membersJan Marsalek and Alexander von Knoop bought €220,000 worth" of shares this month.

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The ban is nothing more than sheer hypocrisy, says the FT. Activist short-sellers are frequently criticised as having "a business model that depends on talking down the prospects of target companies". But they make markets more efficient by "stress-testing bosses and business models". And let's remember that policymakers and watchdogs "rarely object to the positive bias of most brokers". If BaFin really wants to protect financial stability in Germany, then it would be far more logical to ban the shorting of a big lender such as Deutsche Bank, which is genuinely central to the country's economy. Overall, it's "best to let markets rip".

"Like many such prohibitions," the ban treats the symptoms "rather than the cause of the payment group's misery," says Liam Proud on Reuters. Wirecard needs to address its fundamental problem explaining how "its opaque Asian business is performing in organic' terms, or without the benefit of acquisitions". And note that the company's own report into the allegations raised by the FT "has yet to be released". With key "long-term shareholders" heading for the exits, it seems that "BaFin's credit is of little real value".

Britain's ten most-hated shares

Swipe to scroll horizontally
CompanySectorShort interest on 20 Feb (%)Short interest on 23 Jan (%)
Ultra ElectronicsDefence12.5812.18
Arrow Global GroupFinancial Services11.9712.45
Marks & SpencerGeneral Retailers10.9311.37
DebenhamsGeneral Retailers10.4210.63
Anglo AmericanMining9.5NEW ENTRY
AASupport Services9.189.27
PearsonPublishing8.99NEW ENTRY
Metro BankFinancial Services8.23NEW ENTRY
Pets at HomePet Retailers7.848.76

These are the UK's ten most unpopular firms, based on the percentage of stock being shorted (the "short interest"). Short-sellers aim to profit from falling prices, so it helps to see what they're betting against. The list can also highlight stocks that may bounce on unexpected good news when short-sellers are forced out of their positions (or banned by overzealous regulators see above).

Miner Anglo American makes a reappearance after dipping out last month; speculators seem unconvinced by educational publisher Pearson's sale of its US textbook business; and Metro Bank's woes continue.

City talk

With Rakesh Kapoor due to step down as Reckitt Benckiser's CEO by the end of 2019, the conglomerate is heading for a "time-delayed breakup", says the Financial Times made much easier by the decision to split the group into two units: one dealing with minor ailments and the other with products "supposed to stop customers getting ill in the first place". Yet the latest full-year figures show that the firm still "turns sales into profits at a rate that leaves rivals in the dust". A rise in the share price means its market valuation is within "spitting distance" of the expected combined value of the two individual business.

Danone's latest results show it "inching towards its 2020 revenue growth target", notes Dasha Afanasieva for Reuters. Yet growth has come from hiking prices, which hurts sales volumes, and its "lowly" operating margins and huge valuation discount to rival Nestl will have activist investors "sharpening their claws". To appease the activists, Danone may need to buy "faster-growing brands, as Unilever did in acquiring Tazo tea from Starbucks or Horlicks from GlaxoSmithKline".

It was always going to be a hard sell to persuade shareholders in ailing outsourcer Interserve to accept a debt-for-equity swap that would leave them with just 2.5% ownership, says The Guardian's Nils Pratley. Now, it looks like those opposed to the deal "may be only a couple of co-travellers short of a blocking stake". One option is "a pre-pack administration to force through its proposals, this time with shareholders getting nothing". Yet with rebel share- holders insisting that the group "can service interest payments on £800m of gross debts, at least for a while", this threat may not work. The board "needs a plan B, just in case".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri