It was the 6th King of Babylon, Hammurabi, back in 1772 BC who declared: “The first duty of government is to protect the powerless from the powerful
The Wirecard Book via John
Dan McCrum - the Financial Times journalist - has released a blockbuster finance book - the story of Wirecard.
The book is called Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth.
Wirecard is - I think - the biggest fraud by dollar value and scale ever conducted in Europe.
Whatever: just buy the book. It is really good fun. I do not agree with all of Dan's perspectives - or even some of the analysis - but it is a great story about bad accounting, worse sell side analysts and completely awful regulators.
It is also a story of Libyan and Austrian secret agents, guys who run night clubs, pornographers and fraud. Oh, and guys who turn up in Syria with the very best body armour money can buy only to be told by the cool heads that that body armour marks them as a high-value target and the snipers would shoot them dead so they better leave it behind.
Dan also tells a story about how he looked - for work - at several thousand porn sites - and how he even spent some of the Financial Times money using a credit card to buy porn.
And yes - this was a perfectly legitimate work activity. Not like when the SEC did it.
It is above all a story about how surprising (and often nasty) the world is.
Some background
I once thought of Wirecard as a simple fraud. This was about 2009-2013. What I saw was a payments processor with three red flags:
a. it was a reverse merger into a totally bullshit EASDAQ listed company.
b. It did "high risk" payments in the Philippines and other places, and
c. The accounts did not quite make sense.
I did one check - described below - and found that the acquisitions did not make sense.
After a two-year tussle, Viceroy Research’s Gabriel Bernarde opens up about how the corporate regulator came to his home as it cracked down on activist investors.
Emily Pallet opened the door of her Richmond townhouse, ready for an early walk. Instead, she found six police officers – with bulletproof vests, guns and battering rams – preparing to force their way into her home.
It was 6am on August 5, 2021. Inside, her fiancé, Gabriel Bernarde, had just fallen asleep. Bernarde, 28, was keeping London hours for his job at Viceroy Research, the financial research firm founded by controversial British investor Fraser
This analyst shorted Wirecard. Then ASIC raided his house After a two-year tussle, Viceroy Research’s Gabriel Bernarde opens up about how the corporate regulator came to his home as it cracked down on activist investors
The police asked Bernarde to stand against the wall – so they could make sure he wasn’t sleeping with a gun.
He was suspected, according to a search warrant, of engaging in insider trading on nine stocks, one of which was Wirecard, the German payments group at the heart of one of the darkest scandals in modern financial history. “I asked if this was a practical joke, and they didn’t think it was funny,” Bernarde told The Australian Financial Review.
After a two-year tussle, Bernarde opens up about how Australia’s corporate regulator came to his home, as it cracked down on activist investors.
Wirecard, once a blue-chip stock on the Frankfurt Stock Exchange, collapsed in June 2020 after its chief executive, Markus Braun, was arrested after the company admitted a bank account that it purported to have €1.9 billion ($3.2 billion) in did not exist. Since then, it has been revealed that Wirecard forged client data to secure a €900 million investment from Softbank, forged documents requested by KPMG during a special audit and hauled millions of euros in cash out of its offices over several years.
Viceroy’s Perring had, years earlier, published an incendiary report accusing Wirecard of engaging in “criminal actions”. Instead, financial markets regulators in Germany decided to investigate the short-sellers – not the company. Encouraged by the company, Germany’s Bafin began investigating whether Perring had been complicit in market manipulation.
In suburban Melbourne, Pallet left her house in an attempt to track down a lawyer to help Bernarde. It was early morning, and she could not wake them.
Meanwhile, Australian Federal Police officers searched the townhouse, sucking up data from Bernarde’s phone and computer – including information relating to Viceroy’s current projects which had been specifically included in the search warrant. They left almost 12 hours later.
Bernarde was shaken but was convinced he had done nothing wrong. The trades in question related to bets on his personal account that netted a few thousand dollars of profits. He says they were a handful of winning trades with modest profits. Most of the other investments lost money. They included positions in companies that had been the subject of Viceroy research reports – German lender Grenke and ASX-listed Tyro Payments.
Bernarde’s decision to short Tyro had come from a visit to Concrete Boots, his local pub, which was only accepting cash because its payment terminals had crashed. He says he sent his concerns to the Australian Securities and Investments Commission and authored a short report that questioned the extent of the company’s poorly performing terminals in January 2021.
The other trades on the search warrant? Bernarde says almost all of came from a publicly available stock tipping website – Betaville – run by a former Financial Times columnist and blogger, Ben Harrington.
Playing Wirecard
Then there were the Wirecard trades – six put options bought days before the German payments company imploded.
That Bernarde was alleged to have engaged in insider trading on Wirecard was both sensational and bizarre for anyone who has followed his career. Bernarde was a graduate at insolvency firm Ferrier Hodgson when he came into contact with Fraser Perring. Perring was the anonymous figure known as Zatarra, who had released a short report on Wirecard in 2016.
Shortly after he penned that report, Perring’s identity was made public. He was followed and intimidated by people acting for Wirecard, he claimed. The reports co-author, Matt Earl, this year launched legal action in Britain against Jones Day and Kroll, claiming the law firm and corporate intelligence outfit had used hacked information to monitor him and harassed him with “specious legal threats” to stop his work.
Bernarde, meanwhile, had authored short reports to build a catalogue of research notes that he hoped might get him a job at a hedge fund. But the Melbourne student and his school friend, Aidan Lau, decided instead to work with Perring to create Viceroy.
Like other activist research firms, Viceroy short sells shares in a particular company, publishes a report that makes public its claims about the company’s performance or suggests potential fraudulent activity, then profits from the resultant share price fall.
Activist shorts are a divisive player in the capital markets. Some believe they profit from spreading panic and misinformation. Others say they call out questionable governance in the capital markets, and get paid for their work in the form of profits.
The aggregate track record among the half dozen firms operating in Australia is mixed. There have been some spectacular hits – such as sandalwood plantations group Quintis and Blue Sky Alternative Investments, both ASX-listed companies that collapsed after the public airing of allegations of misconduct – and some shocking misses such as Rural Funds Group, in which the authors were sued but fled the jurisdiction.
Viceroy had published on Australian stocks such as Syrah Resources and Quintis, the latter of which collapsed following another activist short report by Glaucus Research which described the company as a “Ponzi-like structure” and noted its major customer was “a tiny commodities importer with minimal operations and a small balance sheet”.
Viceroy’s breakthrough moment was in 2017, when it published a report that detailed the sinister corporate structure behind Steinhoff, the South African listed furniture retailer that imploded within days of that report. The identities of those behind the firm remained secret until they were revealed by the Financial Review and South Africa’s Moneywebthe following year.
The public association to Perring, Bernarde says, put him in the sights of people he is convinced were Wirecard-backed operatives seeking to intimidate him. He recalled several strange encounters, from random people at pubs and parties probing him on his career to photos of him on nights out being discovered by reporters.
Bernarde said he found kitchen table conversation on one of his visits to Perring’s house was transcribed live on social media. “I think it was purely intimidation at that point,” he said.
When Wirecard collapsed in June 2020 – after a five-year investigation by the Financial Times – Bernarde said the intimidation stopped instantly. Then, on that August morning, he found himself embroiled in an altogether different encounter. He was later forced to appear at an ASIC office for questioning under an instrument that prohibits the disclosure of the meeting for one year. He faced several hours of intense questioning.
The ASIC officials wanted to ask about Grenke, a Frankfurt-listed asset leasing company. Viceroy had published a report describing the group as “uninvestable” and claiming it had engaged in “blatant accounting fraud”.
“With Grenke, they appeared to be completely oblivious that I had written a report,” says Bernarde. “I asked how they didn’t know that, on the back of the Viceroy report, the entire board quit, the auditors refused to sign off on the accounts, the previous year’s accounts could not be relied on, and that Bafin is investigating them, and had put in their own audit team.
“They said, ‘it’s not our interrogation. It’s yours, basically’.”
Bernarde says he was then asked how he knew Wirecard was about to collapse, before buying six put options through his IG Markets accounts.
Bernarde explained his association with Perring – the earliest Wirecard critic. “They took all the Viceroy stuff. How did they not know we wrote significant portions of the Wirecard story?” he says.
Domenic Lucarelli, Bernarde’s lawyer, told the Financial Review that after they left the interview he was “comfortable that he did not have any case to answer”.
“I was more curious than ever as to why the investigation process had been so heavy-handed, even after ASIC got access to all of his data from the execution of the warrants,” he said in a written response to questions.
It took ASIC less than a fortnight to tell Bernarde it did not intend to take any further action. He attempted to have the corporate regulator destroy the data it had taken from him that morning.
“To date, close to two years on, this issue of whether ASIC has retained any of Mr Bernarde’s property remains unresolved and the subject of ongoing communication with the regulator.” Lucarelli said.
“ASIC does not discuss any investigations it undertakes, other than to confirm that we did indeed send a NFA to the subject,” a spokesman for the regulator said in response to questions.
Professional hazard
Bernarde says he is finally ready to share his experience of the tangle with ASIC, and the impressions that it left on him. He doubts the heavy-handed treatment he got was a simple mishap, given it coincided with several other hedge funds and analysts that had published critical opinions on ASX companies being hauled in for secret questioning sessions.
Three months before the raid, ASIC published its guidelines on activist short selling. Sources within the regulator say the investigation into Bernarde’s trades were independent of any work on activist short selling activities.
Whatever the intention, activist short reports on Australian companies have ground to a halt. Bernarde says he won’t be writing on Australian stocks again. “This is their Bafin moment,” he adds, referring to the failures of the German regulators that aggressively pursued hedge funds and reporters who sought to expose Wirecard rather than probe the company itself.
“We do their job better than they do.”
ASIC’s powers, he says, created a professional hazard to anyone who works in financial services and “voices a somewhat controversial opinion”.
Lucarelli believes there’s a case to be made for a review of ASIC’s investigative processes following the probe into Bernarde.
“When ASIC’s investigative process involves ‘kicking down doors’ and executing warrants in the early hours on people’s homes, and subsequently compelling attendance at compulsory interviews and gagging those who attend with associated confidentiality orders which last for a year, careful scrutiny and oversight of the proper use of this power is absolutely crucial to the sanctity of market and the good reputation of its regulator,” he said.
“Despite use of these ‘heavy-handed’ investigative tactics in this instance, ASIC concluded its investigation without taking any enforcement action at all. This shows clearly that the outcome did not in any way justify this alarming means of investigation.”
ASIC insists it has no desire to silence short sellers or negative research.
“ASIC recognises the role short-selling can play, provided appropriate practices are followed,” a spokesman says. “ASIC has published clear guidance on the matter, which warns against false and misleading statements and other potentially manipulative conduct, and offers key recommendations to avoid unfair outcomes.”
Bernarde has since moved to the United Kingdom, closer to Pallet’s family and to Perring’s home. Lau lives in France.
