Wirecard 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; World's Most Wanted Man; Step 3 of cultivating mentors
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 (WDI.DE).
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'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 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 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'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 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 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 or those responsible for perpetuating the fraud. The story ended as we expected – it just took four years longer than we thought.
2) For more on what happened, here's a Wall Street Journal article: How Germany's SEC Dismissed a Decade of Warnings About Wirecard. Excerpt:
Germany's top financial supervisor received detailed warnings about deceptive financial practices at Wirecard AG starting in 2008 but repeatedly declined to investigate the allegations, turning instead against the accusers.
Over more than a decade, investors, U.S. authorities, journalists, and people close to the company warned of possible fraudulent accounting or money laundering, practices that are now at the heart of a criminal investigation into the disgraced fintech giant.
But as the red flags piled up, Germany's equivalent of the U.S. Securities and Exchange Commission played down the allegations, kicked the ball to other agencies and delayed examining the company's accounts, according to previously unpublished documents, people familiar with the situation, and the agency itself.
Documents show the Federal Financial Supervisory Authority, or BaFin, saw Wirecard's former CEO, now under criminal investigation, as more trustworthy than his critics because he bought a large chunk of shares in the company at a key moment.
BaFin also decided against assuming direct oversight of Wirecard, which could have increased its ability to probe the company.
3) And here's a Reuters article: Germany's long, lonely campaign: Battling Wirecard's short sellers. Excerpt:
German authorities pressed on for four years investigating investors who bet against Wirecard AG's shares, even after a U.K. regulator concluded that their evidence against the short sellers was "not sufficient," according to documents and people familiar with the matter.
With encouragement from Wirecard's lawyers and despite red flags about the company, financial markets watchdog Bafin and Bavarian state prosecutors in Munich moved swiftly against short sellers after a February 2016 research report alleged fraud and money-laundering at Wirecard, according to confidential documents related to the probe.
The documents, which include hundreds of pages of investigative reports, correspondence and other memos, have not been previously reported. While it is known that German authorities investigated skeptical investors who raised questions about the company behind one of the biggest corporate frauds in German history, the documents provide new details about the speed and tenacity with which they pursued detractors and the extent of their faith in management.
4) Here's another angle on Wirecard's nefarious associations: World's Most Wanted Man Jan Marsalek Located in Belarus; Data Points to Russian Intel Links. Excerpt:
It can safely be assumed that Jan Marsalek is currently one of the most hunted-for persons on earth. The company he oversaw operationally, Germany's Wirecard, collapsed overnight last month after auditors brought attention to a nearly 2 billion Euro gaping hole in its balance sheet. The hole was the result of the recognition that cash of the same amount – which was thought to be sitting in third-party trustee bank accounts in the East Asia – a coding and processing hub for Wirecard – was in fact not there. The 40-year-old Austrian citizen Jan Marsalek, COO of Wirecard since 2010, was in charge of the company's Asian operations.
On 18 June 2020 the management team – including Jan Marsalek was fired. He told his colleagues that he was going to the Philippines to chase and find the missing billions, in order to prove his innocence. Later that day he went missing as well. While airline bookings and immigration records showed he had made his way to Manila on the 23 June and left onward to China, an investigation by the Philippine's authorities found that that the trip had been a red herring, and immigration records had been forged on his behalf. Since then, Jan Marsalek has been wanted by German and Austrian authorities on charges of fraud and embezzlement.
Bellingcat, in collaboration with its investigative partners Der Spiegel and the Insider, have now established the location to which Marsalek fled just hours after his sacking – the capital of the Belarus, Minsk. In addition, Russian immigration records and data kept by Russia's FSB suggest that Russia's security service had a long-standing interest in Marsalek, who used a number of different passports – including a third-country diplomatic passport – to visit Russia dozens of times in the last 15 years. At least on one occasion – in 2017 – Russia's security services are likely to have had a lengthy interaction with Marsalek in Moscow.
5) Continuing my series on how to cultivate mentors, here are my thoughts on the third step: the initial contact.
Most importantly, be succinct – the initial contact is usually less than a minute in person or two to three paragraphs in an e-mail. Your goal is to make a good first impression so that when you follow up (of course, get their card), they'll remember you and be inclined to agree to a meeting, take your call, or respond to your e-mail.
Flatter them – who doesn't love this? – but don't be too obsequious (and it must be genuine). If there's an opportunity, ask thoughtful questions and get them talking.
Don't be nervous (even if you are) – you must project an air of confidence that you are an interesting person who is going to be valuable to them in many, many ways over time (and then, of course, deliver on this promise!).
See if you can figure out a way that you can add value to them (e.g., offer to send them information about a stock they own or a great new stock idea you have that's likely to be in their sweet spot – if not during the initial contact, then soon thereafter).
Tips to getting through to a busy person
If you have any connection at all, use it. Ideally try to meet in person – go to an event where they'll be attending, such as a conference or charity event (set up a Google alert so you can keep abreast of where they might be speaking).
If that's not possible, send an e-mail (I generally advise not calling unless someone introduced you and they're expecting it).
Prepare to be persistent – but no stalking! – and don't get discouraged by rejection. The job of an assistant is to make you go away – don't take it personally. Find out their name, be polite and gracious, and suck up to them. They're the gateway to your potential mentor.
Don't remind the assistant or the person you're trying to reach that you've called or e-mailed in the past. They probably won't remember and laying on a guilt trip is unlikely to help you.
Once you get a response, follow-up quickly.
Examples of compelling initial contacts
Here's a great example of the initial e-mail Gabriel Grego sent me five years ago:
Dear Whitney,
I attended your Value Investing Congress a couple of years ago in NYC. I am running a long/short equity hedge fund with offices in NYC and Tel Aviv, where I am currently based.
I have noticed you've recently opened a long position on SodaStream. We are about to complete quite a thorough short thesis on the stock and I was wondering if you would consider exchanging ideas? Being based in Israel we have good access to the company and have performed thorough due diligence.
Looking forward to hearing from you.
Best regards,
Gabriel
In the first sentence, Gabriel tells me that he's a paying customer of my conference business. In the second, that he's a fellow long/short hedge-fund manager. Check, check.
Then he offers to share information about a company whose stock I own, which is based in Israel. He has an office there, so it gives me reason to believe that his information might be particularly insightful and valuable.
Naturally, I responded immediately... and we've since developed a strong professional and personal relationship.
I'll continue tomorrow with another example of an even more compelling initial contact.
Best regards,
Whitney