Germany bans new Wirecard short sales in unprecedented move

-A +A

FRANKFURT/BERLIN (Feb 18): Germany’s financial regulator took the unprecedented step of temporarily banning short sales of Wirecard AG shares, following reports of suspicious accounting practices, while prosecutors in Munich expanded their investigation to include a Financial Times journalist.

Investors globally are immediately prohibited from taking new short positions or increasing existing ones through April 18, according to watchdog BaFin. That’s the first time it has banned short-selling on a single stock and harks back to the financial crisis, when the regulator prohibited naked short sales on 11 financial firms.

The short-selling ban was coordinated with Munich prosecutors, who have already launched a probe over potential market manipulation in Wirecard shares. In a statement Monday, the prosecutor said it was investigating a complaint by an investor against an FT journalist.

The authority also said it had a statement from an investor who said he had obtained information over a pending FT story about Wirecard prior to publication. The FT denied sharing plans about its reporting and said any claims that its staff are involved in market manipulation in relation to Wirecard are “baseless and false”, a spokeswoman said in a statement.

Share Surge

Wirecard shares, which rose as much as 14% on Monday, have whipsawed over the last month, after a series of FT reports alleging fraud at the payment company’s Singapore unit. Even though Wirecard repeatedly denied wrongdoing, investors have increased their bets that the stock will fall. Short interest is currently at about 14%, the highest level since mid-2017, according to data from IHS Markit.

BaFin justified its Wirecard ban by saying the developments pose “a serious threat to market trust in Germany”, the regulator said in an order published on its website. The ban is separate to an ongoing market-manipulation probe, which is proceeding “in all directions” and not focused on specific individuals, BaFin said Monday in an email to Bloomberg.

Not everyone is convinced by BaFin’s rationale for the short-selling ban. The wider market isn’t at risk as a result of the Wirecard share swings, said Guillermo Hernandez Sampere, head of trading at German asset manager MPPM EK.

‘Last Bullet’

“Markets should always have the possibility to decide where and how to invest,” Sampere said. “Such a step should be the last bullet and only temporary until more facts become visible.”

British hedge fund titan Crispin Odey, who has bet that Wirecard shares will fall further, says BaFin has opened the door to potential lawsuits.

For its part, Wirecard said it welcomes all attempts to clear up the matter quickly. The company, which was the target of short sellers in 2008 and 2016, has repeatedly rejected allegations of accounting irregularities. The stock was up 12% at 112.35 euros as of 1:46 p.m. in Frankfurt, paring losses since the first report was published to about 33%.

Short sellers borrow a stock and then sell it in anticipation that it will fall and they can buy back the shares at a lower price to pocket the profit. Proponents of short-selling say it’s a tool that helps set the true value of a stock. Yet the practice also creates selling pressure, which may depress a stock, if there is a sustained bout of short-selling.

Short sales have created market convulsions in Germany in the past. In 2008, Volkswagen surged five-fold over two days to briefly become the world’s most valuable company. The jump was caused by a squeeze on short sellers, following the surprise announcement by Porsche Automobile Holding SE that it controlled more stock than expected in the midst of a takeover battle.

Wirecard got its start two decades ago, processing payments for gambling and pornography websites. It has since morphed into a leading developer of software and systems for online payments and fraud protection used across the internet and dealt with similar claims in the past.