Germany’s financial watchdog BaFin in early 2019 brushed aside objections raised by Bundesbank against its controversial two-month ban on shorting Wirecard shares.
In the run-up to the draconian intervention that was imposed in February 2019, Germany’s central bank told BaFin that the move could not be justified on the grounds that short selling undermined financial stability, according to an internal Bundesbank memo seen by the Financial Times, and first reported in Handelsblatt.
BaFin justified the move arguing that there was a need to safeguard “market integrity in Germany and [ . . . ] trust in fair and efficient price determination”. It was the first time in German stock market history that BaFin banned trading of a single share.
The ban was followed by BaFin’s decision in April to file criminal complaints against several short sellers and against two Financial Times journalists who reported about alleged accounting manipulations at Wirecard.
Taken together, many investors saw those actions as a signal by the regulator that the allegations against the high-flying German payments group were unmerited.
This interpretation was shared by Germany’s accounting watchdog FREP, which was asked by BaFin in early 2019 to investigate Wirecard’s accounting.
FREP saw the short selling ban as “an indication that BaFin had information pointing to the non-veracity of the allegations against Wirecard”, according to a report by the European Securities and Markets Authority into the scandal.
Esma itself supported the short selling ban against Wirecard shares in February 2019.
Wirecard collapsed into insolvency this year in one of Europe’s biggest postwar accounting frauds after revealing that €1.9bn of corporate cash did not exist.
In early 2019, Financial Times’ reports about an internal Wirecard investigation into alleged accounting fraud in Singapore triggered a 40 per cent collapse in the company’s share price within weeks alongside a marked rise in short selling positions.
When BaFin on February 18 announced its short selling ban, Elisabeth Roegele, executive director of BaFin’s securities supervision unit, called the decision “appropriate, necessary and suitable”. She argued that Wirecard needed to be protected from “the threat brought by ‘short-attacks’” and that “market confidence” was at stake.
However, in the run-up to the decision, BaFin was informed twice by Bundesbank that the wild swings of the Wirecard share price did not pose any threat to financial stability.
This assessment was based on a number of quantitative analyses by Bundesbank staff who concluded that the sharp decline in Wirecard’s shares did not have spillover effects on other stocks. “There was no evidence pointing towards risks for financial stability,” according to the Bundesbank memo.
The central bank initially informed the regulator informally about its view. Later, Bundesbank vice-president Claudia Buch repeated the arguments in a phone call with Ms Roegele, according to the memo. The central bank was subsequently told by BaFin that the ban was considered against the backdrop of an ongoing criminal investigation by public prosecutors into potential market manipulation.
“BaFin overrode Bundesbank’s professional concern with its eyes open and rushed through the short selling ban to protect the Wirecard stock,” Florian Toncar, a MP for the liberal Free Democrats, told the Financial Times. He added that in effect a “government agency gave a helping hand to the fraudsters at Wirecard” who were able to raise more than €2bn in additional funds between February 2019 and June 2020.
Mr Toncar said that it will have to be investigated if “Mr Roegele took this decision on her own” or if it was co-ordinated with the finance ministry.
Fabio De Masi, a lawmaker with leftwing Die Linke party, pointed out that BaFin’s move in spite of the Bundesbank concerns “smacks of price management” in favour of the Wirecard stock.
BaFin told the Financial Times that Bundesbank just had a mandate to look at financial stability but not at risks to market confidence and stressed it shared the central bank’s view that the latter was not at risk. “There was no dissent,” the regulator said, adding that risks to market confidence were the sole justification for the short selling ban.
BaFin president Felix Hufeld in recent months repeatedly defended the short selling ban, pointing out that based on similar information, he would take the same decision today.
The Bundesbank declined to comment.