Whitney Tilson’s email to investors discussing Wirecard scandal puts spotlight on auditor Ernst & Young; Wirecard shows life at hedge funds can be agony; who’s going to be the next Wirecard?; two obvious frauds.
Wirecard Scandal Puts Spotlight on Auditor Ernst & Young
1) The implosion of German payments processor Wirecard (WDI.DE) offers so many lessons... One is how conflicted and/or incompetent auditors can be, as this Wall Street Journal story highlights: Wirecard Scandal Puts Spotlight on Auditor Ernst & Young. Excerpt:
Alluvial Fund performance update for the month ended May 2021. Q1 2021 hedge fund letters, conferences and more Dear Partners and Colleagues, Alluvial Fund, LP returned 5.4% in May, compared to 0.2% for the Russell 2000 and 1.0% for the MSCI World Small+MicroCap . . . SORRY! This content is exclusively for paying members. SIGN UP Read More
Ernst & Young GmbH, auditor to insolvent German fintech company Wirecard (WDI.DE), had questions related to unorthodox arrangements under which the company's cash was held in bank accounts it didn't control as far back as 2016, according to emails seen by the Wall Street Journal.
The auditor subsequently signed off on three years of Wirecard's financial results with those arrangements in place.
Now $2 billion that was held in those accounts has disappeared. Wirecard says the money probably doesn't exist. On Friday, a German shareholder association filed a criminal complaint to the prosecutors' office in Munich, where Wirecard is based, accusing EY auditors of missing the alleged fraud.
Wirecard Shows Life at Hedge Funds Can be Agony
2) Another lesson is how hard it is to be a short seller. Even if you're ultimately proven 100% correct in your analysis, you can suffer years of pain... Wirecard Shows Life at Hedge Funds Can be Agony.
Who's going to be the next Wirecard?
Now that Wirecard has been proven once and for all to be a massive fraud and is rapidly dying away into oblivion, many of us – and you, we're sure – have been thinking about where the next big corporate scandal might come from.
Mirabaud Securities, the equity research house whose analyst Neil Campling stood out for being the only person to put a price target of zero on the German payments processor, have been thinking about this too.
They've come up with 20 warning signs that they are looking out for in trying to determine the next "Big Disaster." They are as follows:
- Massively promotional CEO who actively looks for publicity and spends a lot of time courting Wall Street/investors etc and is very media savvy
- Huge CEO/Senior Management compensation package NOT tied to cash flow or Earnings but just to Sales and/or the stock price, creating the possibility of egregious wealth creation if the stock goes up a lot. Huge pledging of collateral by the CEO in return for margin loans to fund a billionaire lifestyle
Two Obvious Frauds
4) With Wirecard's recent meltdown, maybe investors will start paying more attention to smart short sellers...
Speaking of which, Nate Anderson of Hindenburg Research has gone public with his work on two obvious Chinese frauds that trade on the Nasdaq Capital Market:
- On June 10th, Wins Finance, a China-based small business lender, mysteriously spiked 758% on 151x its previous day's volume on absolutely no news whatsoever. The company disavowed involvement in the mystery surge in a press release.
- The timing looks suspicious. The day before, on June 9th, Chinese courts rendered an RMB 350 million asset freeze on assets of Wins' operating subsidiary. The same operating entity in China has two enforcement orders against it since November 2019. We think Wins is likely functionally insolvent.
- Wins' parent, which owns 67.7% of Wins' equity, has already been formally declared insolvent. A provisional liquidator was appointed to the parent company in February, and its equity (which was listed in Hong Kong) has been suspended from trading.
b) Here's Anderson's Twitter thread on Ideanomics (IDEX). Excerpt:
We are short $IDEX and believe it is heading near its March lows of $0.30 if it somehow avoids a regulatory halt that could see its shares go lower.
$IDEX has a history of changing biz models and pumping – then dumping – each new endeavor. Its move into EVs will be no different.
Since 2015, $IDEX has had 6 CEOs, 6 CFOs, four different company names, and has had 10 board members leave.
We think $IDEX is an egregious & obvious fraud and investors need to look no further than the company's June 9 press release.
And here's his follow-up report: Ideanomics Walks Back 1m Sq Ft Claims Today; Our Visit To IDEX's 'MEG' Facility Shows Zero Company Presence.