The Lessons From The Implosion Of Wirecard AG

Whitney Tilson’s email to investors discussing Wirecard AG (ETR:WDI) demonstrates the critical role played by activist short sellers; how Germany’s SEC dismissed a decade of warnings about Wirecard; Germany’s long, lonely campaign: battling Wirecard’s short sellers; step 3 of cultivating mentors.

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Q2 2020 hedge fund letters, conferences and more

Wirecard AG Demonstrates The Critical Role Played By Activist Short Sellers

1) I don't want to beat a dead horse, but there are so many important lessons that we can – and must – learn from the implosion of German payments processor Wirecard AG (WDI.DE).

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I'd like to start by sharing a four-page essay written by my friend Gabriel Grego of Quintessential Capital Management, which he's given me permission to share: Wirecard Demonstrates the Critical Role Played by Activist Short Sellers. Excerpt:

As we uncovered more and more evidence of enormous fraud, we believed that the end was near for the crooked company. (Keep in mind that this was in 2016.)

How wrong we were! We never could have imagined that this house of cards would continue to grow for four more years, destroying more capital and harming more investors in the process.

To our surprise, Wirecard AG's stock price began to recover, aided by the company's vigorous denials of wrongdoing and by the sizeable, leveraged stock purchases by CEO Markus Braun. The German financial press and sell-side analysts covering the stock also came to the company's defense, apparently without investigating any of the allegations contained in the Zatarra report or McCrum's FT articles.

The most disturbing event occurred when an anonymous report with the ominous title "R.I.P. Zatarra" appeared on Twitter in late 2016. The document turned out to contain mostly fabricated allegations against Zatarra and other Wirecard AG critics and included clandestine photographs of the two Zatarra authors as well as the contents of hacked private emails between them and others with whom they'd communicated.

While the report contained no evidence that the Zatarra researchers had done anything wrong and was largely comprised of innuendo and almost laughably unrealistic conspiracy theories, it was nevertheless unsettling. (I made a small appearance in the document, though I was described as "Gabe" and inaccurately portrayed as being in charge of "media relations.")

I was clear that Wirecard AG would stop at nothing to attack its critics, including hiring thugs to surveil them and hack their email accounts. The message was clear: we are watching you and can get close enough to take your picture. This warning proved to be only the beginning – for some time thereafter, there were reports of Wirecard conducting surveillance, breaking and entering homes, stealing tech equipment, and engaging in hacking campaigns against its critics (I was on the receiving end of a couple of these attempts).

Though I was concerned by Wirecard AG's intimidation efforts, they didn't deter me from continuing my research into the company's fraudulent activities.

What did deter me, however, was when Germany's financial market regulator, known as BaFin, stepped in to protect Wirecard AG from its critics. It was clear from a Reuters article in February 2017, Germany's BaFin asks prosecutors to investigate Wirecard share movements, that the German financial watchdogs, rather than investigating the company, were instead "going to investigate possible market manipulation" by critics like Zatarra.

I knew from my experience in exposing other frauds in various markets around the world that regulators play a critical role in validating a short seller's evidence. Conversely, if regulators are determined to protect a company and go after its critics, it's a bad business decision and legally very risky to attempt to fight the regulators, no matter how strong the evidence is.

So we backed off our active work on Wirecard AG and moved on to other things (though we continued disseminating information to other critics). Sadly, my judgement turned out to be correct, as my friends at Zatarra suffered from persistent legal and regulatory harassment and eventually were fined by German regulators – before being 100% vindicated.

History is always the final judge, and it won't be kind to Wirecard AG or those responsible for perpetuating the fraud. The story ended as we expected – it just took four years longer than we thought.

How Germany's SEC Dismissed A Decade Of Warnings About Wirecard

2) For more on what happened, here's a Wall Street Journal article: How Germany's SEC Dismissed a Decade of Warnings About Wirecard.

BaFin also decided against assuming direct oversight of Wirecard, which could have increased its ability to probe the company.

Germany's long, lonely campaign: Battling Wirecard's short sellers

3) And here's a Reuters article: Germany's long, lonely campaign: Battling Wirecard's short sellers.