Germany bans Wirecard short sales in unprecedented move

Bloomberg

Germany’s financial regulator took the unprecedented step of banning short sales of Wirecard AG shares for two months, saying recent price volatility risks undermining the broader stock market. The shares surged.
Investors globally are prohibited with immediate effect 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 BaFin prohibited naked short sales on 11 financial firms.
Wirecard shares have whipsawed over the last month after a series of reports in the Financial Times alleging fraud at the payment company’s Singapore unit. Wirecard has denied wrongdoing. At the same time, investors have increased their bets that the stock will fall and short interest is currently at the highest since mid-2017.
BaFin’s order comes after Munich prosecutors started their own probe into possible market manipulation. German newspaper Frankfurter Allgemeine Zeitung reported last week that the prosecutors have information indicating a short seller had prior knowledge of when the FT planned to publish news about Wirecard in its online edition.
A spokeswoman for the FT said that the short seller mentioned in FAZ article “will not have been informed by any FT journalist or staff.” The FAZ didn’t identify the source of its information. In a new report on Monday, FAZ said Munich prosecutors have opened a probe into an unidentified FT journalist on suspicion of violating securities trading rules.
A spokeswoman for the prosecutors’ office said they have expanded the probe into Wirecard trading after receiving additional information from the company. She said she could not immediately comment on Monday’s FAZ report. The FT could not immediately be reached for comment.
The developments on the stock market pose “a serious threat to market trust in Germany,” BaFin said in an order published on its website on Monday. The regulator is also investigating whether trading in Wirecard shares has been manipulated. Not everyone is convinced by BaFin’s reasoning. 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.
“I’m not a fan of too much regulation; 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.”
For its part, Wirecard said it welcomes all attempts to clear up the matter quickly. The company was the target of short sellers in 2008 and 2016, and has repeatedly rejected allegations of accounting irregularities. Wirecard climbed as much as 14 percent in Frankfurt trading, the most since February 4. The shares have fallen 15 percent this year.
Short sales have created market convulsions in Germany in the past. In 2008, Volkswagen surged fivefold 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.
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.
According to data from IHS Markit, 15.9 million Wirecard shares were out on loan as
of February 14, representing about 14 percent of the company’s free float. BaFin said it made an exception in the ban announced on Monday for market-making activities.