Hot bets with Wirecard: Bafin auditors gambled with high-risk papers

The fact that financial supervisors have been openly trading in Wirecard papers privately is nothing new. But to what extent they speculated with high-risk financial instruments. According to "Capital", there were even "shortsellers" within Bafin who were betting on falling prices shortly before the collapse.

In the months before the Wirecard bankruptcy, employees of the financial supervisory authority Bafin not only traded in shares in the payment processor, but also in high-risk derivatives. This emerges from the response of the Federal Ministry of Finance to a request from the FDP Bundestag member Bettina Stark-Watzinger, which Capital has received. According to this, Bafin employees speculated privately in the first half of 2020 with a number of different certificates based on Wirecard shares – including warrants, bonus certificates and various leverage products. In addition, officials did business in contracts for difference (CFD), which are considered extremely speculative and are not sold on the exchange. Investors speculated on falling prices in at least two of the financial instruments traded.

The financial supervisory authority and its President Felix Hufeld are under heavy attack after the EY auditors refused their certificate in June and it became clear that Wirecard's balance sheets had been inflated over the years and bank balances in the billions had been simulated. Critics accuse the Bafin of not having adequately investigated the well-documented allegations of the "Financial Times" since the beginning of 2019 and instead having concentrated their investigations on alleged market manipulation by the "FT" journalists and speculators. As early as August it became known that Bafin employees were actively trading in Wirecard shares parallel to the investigations. According to the previous internal rules, such deals are allowed. However, officials must report their transactions to their superiors in advance and have them approved in order to prevent them from being able to use official insider knowledge.

27 different derivatives

As can be seen from the list of the Federal Ministry of Finance, the business of Bafin employees with derivatives on the Wirecard share increased sharply this year – apparently in order to benefit from the sharp fluctuations in the price. In 2019, employees traded in 13 different financial instruments, the value of which was based on the price development of the payment group. This year there were 27 different share derivatives up to the bankruptcy of Wirecard at the end of June. In addition there were contracts for difference, to which the Ministry of Finance did not provide any details, because these papers, for which private investors have to set up their own accounts with special CFD brokers and positions often build up and dissolve at extremely short notice, are not "clearly identifiable" due to the lack of securities identification numbers.

The answer to the FDP financial expert, Stark-Watzinger, also left an open question at what point in time and in how many cases the respective certificates were bought or sold. Given a total of 153 Wirecard-related transactions, which Bafin employees reported for the first six months of 2020 according to earlier information from the Ministry of Finance, it emerges that speculative certificates were traded in at least just under a fifth of the approved deals. If each derivative was not traded in just one case, the proportion would be even higher.

According to the Ministry of Finance, to which Bafin is subordinate, the authority does not record how long employees keep their financial products for data protection reasons. However, certificates rarely serve to build up long-term wealth. The list of derivatives shows that Bafin employees also bought products with a comparatively manageable risk such as reverse convertibles and discount certificates, but above all high-risk gaming securities such as knock-out certificates, which become practically worthless when the share price rises certain predefined thresholds are reached. In the case of several products on the Bafin list, the risk indicator was therefore given with the highest level in the associated prospectuses. In most cases, the officials suffered a total loss after the balance sheet manipulation and the bankruptcy of the Bavarian Dax group – unless they sold in time, which is not evident from the list.

The list of financial instruments traded this year shows that Bafin employees bet on both rising and falling prices at Wirecard. Various turbo certificates can be found there, which are based on a positive price development. This also includes a Turbo Warrant from Société Générale, which the bank launched on April 28 – that is, on the day the special analysis by KPMG was published, which Wirecard boss Markus Braun sold as a discharge from all allegations. In the case of turbo certificates, the buyer's investment is leveraged, for example by the bank that issued the security multiplying the stake with a loan.

"Shortseller" in the Bafin

However, employees of the financial supervisory authority also traded in derivatives that benefit from falling prices. According to the Ministry of Finance, one of them was a paper from Société Générale called "Factor 4x Short Wirecard 5 Index", in which, among other things, price losses in the share led to an increase in the certificate price and were multiplied by a factor of four. A certificate with the title "Bonus Reverse Cap" from Bank Unicredit, which was based on price losses, was also traded.

The fact that such speculative transactions by Bafin employees were also approved by their superiors seems very curious in view of the previous history: At the beginning of 2019, the financial supervisory authority imposed a short sale ban for a single title for the first time in order to protect Wirecard against alleged attacks by investors who were falling with short sales Speculate courses to protect. In addition, she filed criminal charges against several investors and journalists of the "FT" because, according to Bafin, they had manipulated the price of Wirecard shares with the help of insider knowledge. It is also noteworthy that Bafin was reported to Bafin by employees of the WA2 department in the first half of 2020 more than every fourth securities transaction related to Wirecard: The securities supervision department is responsible, among other things, for tracking market manipulation as well as monitoring short sales and insider trading – Topics that have played a major role at Wirecard since the beginning of 2019.

"If those who are supposed to ensure the integrity of the market trade with highly speculative financial instruments, there is a bad aftertaste," said FDP finance politician Stark-Watzinger to Capital. "It cannot be ruled out that inside knowledge was misused for private financial transactions." She pointed out that the private sector has long had strict rules for private stock transactions. "As the real guardian of the market regime, the Bafin has contributed to an immense loss of image for Germany's financial center."

The parliamentary managing director of the FDP parliamentary group criticized particularly sharply that the Federal Ministry of Finance had described the internal control system of the financial supervisory authority for share transactions by employees as "strict and appropriate" after the deal became known in mid-August. "Against the background of the figures presented here, this statement is a farce," said Stark-Watzinger. "Like a football referee who shouldn't bet on the game he whistles, financial regulators shouldn't be allowed to trade in financial instruments they oversee," she said. After sharp criticism of the share deals, Finance Minister Olaf Scholz (SPD) recently announced that the internal guidelines would be tightened. At the European Central Bank, for example, employees are not allowed to trade in securities from financial companies that are monitored by the ECB.

The article was published by Capital.de on September 19, 2020.