Renowned short seller David Einhorn has hit out at auditors and regulators for failing to detect signs that now-bankrupt German fintech Wirecard was a fraud “hiding in plain sight”.
“There were many voices yelling ‘Fraud!’ at the top of their lungs,” the head of hedge fund Greenlight Capital wrote in his quarterly letter to investors, citing articles in the Financial Times and the German business newspaper Handelsblatt.
“Rather than investigate the fraud allegations, the auditors continued signing the annual financial statements. The German authorities launched a criminal investigation into the relationship between short sellers and the press and, for a time, they restricted short selling of the stock.”
Mr Einhorn also took aim at the sellside analysts who “refused to engage in any real analysis of the controversy”, despite concerns over its accounting methods.
Greenlight’s main fund gained 1 per cent in the second quarter, according to the investor letter, and is now down about 20 per cent in the first half of the year. The equities-focused hedge fund tries to buy stocks that are undervalued by the market, a style of investing that has fallen out of favour with investors as high-growth stocks have outperformed.
Short sellers borrow shares in a company and then sell them, hoping to buy them back at a lower price and profit from the difference. Mr Einhorn set up Greenlight in 1996 and made his name and fortune from betting on the collapse of Lehman Brothers during the financial crisis.
Mr Einhorn’s investor letter said he first looked at Wirecard as far back as 2010, when its shares were trading at just €8 each, but he decided not to get involved. By the time Wirecard went bankrupt in June, Greenlight had a “small short position”, the letter said, without going into details of when the trade was put on.
In June the once high-flying payments group filed for insolvency after admitting that €1.9bn of its cash probably did “not exist”. Its former chief executive Markus Braun has since been arrested. He denies any wrongdoing. Wirecard’s auditor EY, which signed off its accounts for more than a decade, is also facing intense scrutiny.
“When a fraud like this is exposed, it’s customary to ask, what were the signs?” wrote Mr Einhorn. “In [Wirecard’s] case, they were hiding in plain sight — which is to say, they weren’t hiding at all.”
Greenlight’s letter criticised regulators for failing to take strong action against fraudulent behaviour for fear that it will hurt shareholders. “Small frauds” such as Wirecard become “national embarrassment-sized frauds” if they are not dealt with, it said.
In a statement to the Financial Times, the German regulator BaFin said Mr Einhorn’s comment did not provide the full picture. The financial regulator said it had opened an inquiry into Wirecard at the same time it launched a criminal investigation into the relationship between short sellers and the press, and it also looked into whether the company had manipulated its share price by giving false statements.
BaFin highlighted that Germany and the UK operated different regulatory processes.
Mr Einhorn’s letter also mentioned Tesla. A longtime critic of the electric carmaker and its chief executive Elon Musk, Mr Einhorn went on to accuse the company of “abusing its stakeholders” through egregious accounting practices.
Last month Tesla reported its fourth consecutive quarterly net profit, which now makes it eligible to enter the S&P 500 index, the main US equity market benchmark. Its shares have more than tripled since the start of the year, helping the Fremont, California-based company to overtake Toyota as the most valuable carmaker in the world.
Mr Einhorn is among the list of short sellers who have nursed heavy losses as Tesla’s share price has skyrocketed.
“Through what appears to be sheer abuse of the accounting rules, [Tesla] has now contrived reported profits to make it technically eligible [to be in the S&P 500],” wrote Mr Einhorn, who has repeatedly called into question Tesla’s accounting methods.
His criticisms echo those of rival short seller Jim Chanos of Kynikos Associates, who has denounced the company for burnishing its results through aggressive accounting. Notably Mr Chanos likes to point out that, excluding the gains from zero-emissions tax credits that Tesla sells to rival carmakers, the company has never made a profit.
Mr Einhorn’s letter said: “As with [Wirecard] and the Dax, we expect the [Tesla] parabola to end around the speculated inclusion in the prestigious S&P 500 index.”
In an email, Mr Musk said: “Mental illness is tragic & did you know that Einhorn means unicorn?”
EY said in a statement that Wirecard’s collapse “is the product of a wholly exceptional, large-scale, highly sophisticated international fraud involving multiple third parties [ . . .] expertly designed to circumvent all the checks and balances”. It added: “It was ultimately the work of EY Germany that exposed the fraud related to Wirecard AG.”
Tesla and BaFin, the German financial regulator, did not immediately respond to requests for comment.