FRANKFURT, July 16 (Reuters) - German authorities pressed on for four years investigating investors who bet against Wirecard AG's shares, even after a UK regulator concluded that their evidence against the short sellers was "not sufficient," according to documents and people familiar with the matter.
With encouragement from Wirecard's lawyers and despite red flags about the company, financial markets watchdog Bafin and Bavarian state prosecutors in Munich moved swiftly against short sellers after a February 2016 research report alleged fraud and money-laundering at Wirecard, according to confidential documents related to the probe.
The documents, which include hundreds of pages of investigative reports, correspondence and other memos, have not been previously reported. While it is known that German authorities investigated skeptical investors who raised questions about the company behind one of the biggest corporate frauds in German history, the documents provide new details about the speed and tenacity with which they pursued detractors and the extent of their faith in management.
Just a little over a month after the short-seller report was published in 2016, Wirecard's lawyers urged Bafin to investigate, saying any help the regulator could "provide to us is very much appreciated." Bafin confirmed to the company the same day that it was investigating the investors for "market manipulation," the emails show.
By mid-May that year, Bafin had sent a 45-page report to prosecutors in Bavaria, where Wirecard is based, urging them to launch a criminal inquiry against 37 investors, including those from the United Kingdom and the United States.
The investigation ran into a wall a few months later, when British regulators told the Germans they did not have sufficient evidence against the suspects to conduct police searches. But German authorities continued the probe through at least March of this year.
Fraser Perring, one of the authors of the February 2016 report, who had bet on a fall in Wirecard's shares and was investigated for market manipulation, told Reuters he sent Bafin his findings in February 2016.
Perring said he heard nothing back until he found out in 2018 that he was under criminal inquiry in Germany. "They persecuted the critics," Perring said. Munich prosecutors abandoned their case against him this March.
A Bafin spokeswoman told Reuters it took all whistle-blower complaints seriously, and that the agency had also investigated Wirecard. Munich state prosecutors declined to comment on the specifics of their investigation into the short sellers.
UK's Financial Conduct Authority and Wirecard declined to comment.
The behind-the-scenes details of how German authorities conducted their probe are likely to add pressure on regulators, according to German lawmakers. It comes as the Financial Action Task Force, a global watchdog that oversees money-laundering controls in various countries, is due to review Germany’s record.
Bafin's aggressive approach had "sent a strong signal that neutered criticism of Wirecard," said Fabio De Masi, a German lawmaker who has called for an overhaul of the agency. "Many small investors took Bafin at its word."
Wirecard, which started out processing payments for adult entertainment and gambling websites, filed for insolvency on June 25 after the discovery of a 1.9 billion euro hole in its accounts.
German prosecutors have since opened investigations into suspected money laundering, fraud and market manipulation at the company. Markus Braun, the company’s former chief executive, was arrested before being released on bail. Braun’s lawyer did not respond to a request for comment.
Germany's pursuit of short sellers began when Perring’s previously little-known outfit, called Zatarra Research, published its report about Wirecard. The 101-page report alleged it had new evidence that linked Wirecard to money laundering of betting proceeds from offshore poker sites back into the United States, where online gambling was illegal.
The co-author of the report, Matthew Earl, told Reuters he called Bafin’s whistleblower line in January 2017. "As soon as I mentioned Wirecard, the person claimed not to be able to speak good English and, a second time, they hung up," Earl said.
He said he heard nothing until he was told more than a year later that he was being investigated by German authorities for suspected market manipulation. In July 2018, prosecutors told Earl in a letter they would not pursue the case against him but did not give a reason.
Bafin said it acts on information received on its whistleblower line but did not elaborate.
The 2016 Zatarra report had come after German police carried out a "large-scale" raid of Wirecard in December 2015 for suspected money laundering, following a request by the U.S. Justice Department, Munich state prosecutors told Reuters in response to questions about this story. They did not elaborate.
The Bafin spokeswoman said the search had brought no "new information."
The U.S. Justice Department declined to comment.
It wasn't the first time that questions had been raised about Wirecard. State prosecutors in Munich told Reuters that they had conducted a two-year investigation into the company over money laundering linked to U.S. online gambling in 2010, but had found no wrongdoing. Reuters could not learn further details of the probe.
At the time, Bafin also carried out its own investigation, looking into links between illegal online gambling in the United States and Wirecard’s bank, according the agency’s spokeswoman.
Bafin said subsequent checks in 2011 revealed that any shortcomings it had found had been resolved.
When the Zatarra report was released, German officials turned their attention to investors, correspondence between Wirecard's lawyers, Bafin and prosecutors shows.
In an April 1, 2016 email, Wirecard lawyers at Gowling WLG wrote to Bafin, asking whether it was acting against short sellers and insisting the matter was "very urgent.”
The regulator replied: "Bafin is investigating the incident with regard to potential market manipulation."
Gowling declined to comment for this story.
The Bafin spokeswoman said the trigger of the agency's probe into short sellers did not come from Wirecard, but from different sources. "It is standard procedure that Bafin is in contact with lawyers representing a company," she said.
On May 12, 2016, Bafin sent its report to Munich prosecutors, outlining the case against a "network of suspects" involved in market manipulation.
The report criticised Zatarra Research for "emphasising incriminating information but nothing that spoke in favour of" Wirecard. Although factually accurate, the Zatarra report's negative findings were “misleading,” it concluded.
In the report, Bafin pointed to the fact that Braun, the CEO at the time, had bought shares in the company, illustrating his faith in it. Braun "is convinced of the positive development of his company," Bafin officials wrote.
It followed up a few days later, forwarding an email from Wirecard’s lawyers to prosecutors that accused short sellers of "acting as a pack" against the company.
The Bafin spokeswoman told Reuters the agency doesn’t comment on its assessments.
A few months later, Munich's state prosecutors asked UK's Financial Conduct Authority for assistance in investigating the British suspects named in Bafin’s report, but they didn’t get far.
In an internal memo from February 2017, an official at Munich's state prosecutors recorded the results of his conversation with FCA officials. Stephan Necknig wrote they had told him the Germans had relied on “trading behaviour of the suspects as well as anonymous tips by email about their alleged connections with the Zatarra report,” which will “not be sufficient for a search warrant.” In addition, the FCA told him it did not have the power to ask for a search warrant and would have to rely on other agencies.
Necknig wrote he saw no clear way to pursue the investigation. “I did not see a chance of getting legal assistance from the United Kingdom, neither to carry out home searches nor to interrogate suspects or take over the prosecution,” he wrote. “Seeking legal assistance from Israel or the USA seemed to make even less sense.”
In an email to Reuters, Necknig confirmed the assessment he had laid out in the memo and said he did not attempt to pursue further investigation in the United Kingdom.
The setback did not deter German authorities, however. In September 2017, in response to a request from Munich state prosecutors, Bafin sent a 9-page report to prosecutors outlining short positions in Wirecard stock and potential profits of some of the investors it was investigating.
The probe continued at least through this year. In March, just three months before Wirecard’s collapse, prosecutors dropped their case against Perring after he agreed to make a donation of an undisclosed sum to a charitable organization. (Additional reporting by Joern Poltz in Munich, Hans Seidenstuecker in Frankfurt and Douglas Busvine in Berlin; Editing by Paritosh Bansal and Edward Tobin)