New accusations against BaFin, in a case similar to the inaction of the ASF when it comes to the manipulation at SIF Banat Crişana

English Section / 18 august 2020

New accusations against BaFin, in a case similar to the inaction of the ASF when it comes to the manipulation at SIF Banat Crişana

New accusations have been issued against BaFin (Bundesanstalt fur Finanzdienstleistungsaufsicht) - the institution similar to the Financial Oversight Authority (ASF) -, in a case similar to the inaction of the ASF in the case of the manipulation of SIF Banat Crişana. These have appeared after a response by the German Finance Ministry has been made public, which shows that officials of the financial oversight authority in Germany have increased the number of trades with Wirecard stocks in the months prior to the company's collapse.

Basically, while "overseeing" and "investigating" the company, BaFin allowed employees to trade Wirecard shares, so that in the first six months of 2020 about 2.4% of all financial trades performed by officials of the German authority were made with Wirecard shares or derivatives. This happened after last year BaFin banned short-selling in Wirecard shares for two months.

For context, the European Central Bank (ECB) has banned its staff from trading Wirecard, whereas the Securities and Exchange Commission (SEC), the regulator of the American market, forbids its employees from trading shares in companies that are under investigation. The Autorite des marches financiers (AMF) - the French authority similar to the ASF - and the ESMA (the European authority for securities) have policies that completely prohibit officials from conducting such financial transactions - the ESMA has that rule even for issuers it does not oversee.

The situation of the large scale fraud at Wirecard has become completely shameful for Germany, a country which, just like Romania, apparently seems to apply a more lax regulatory policy in the relationship with the issuers. But, as BURSA wrote last week, the series of violations of professional norms of the BaFin in relation to Wirecard is long: The German overseer has a relatively long history of publicly defending the German company, and has in fact has even begun investigations against those who have tried to make public the offenses committed by the Wirecard employees and executives, and even went as far as banning short-selling in the company's stock - while at the same time ignoring the accusations of fraud.

Besides, in the last few years, under the protection of BaFin, Wirecard became "the biggest fintech" on the European market (with a capitalization of 24 billion Euros in August 2018), and that is also due to the auditors' connivance. Given the investigations conducted on the company, it is more than certain that the institution had information that was not publicly available to all investors.

Over the years, as Wirecard executives were fictitiously inflating the payment processor's balance sheet and profits, propelling the company into the prestigious DAX 30 index, BaFin employees increased their trading with Wirecard shares, according to new data from the German finance ministry.

But the German authority responded to the new revelations claiming that "the financial transactions are not unusual" and that "they have been disclosed and authorized by the supervisors". A response which sounds like "yes, we do that all the time".

Besides, in all of 2018, trades of BaFin employees with Wirecard shares and derivatives account for 1.2% of the total financial trades by officials of the regulator. In 2019, the weight of Wirecard trades increased to 1.7%, and then, in the first half of 2020, and implicitly in the months prior to the crash, they increased to 2.4%.

"I hope they had big long positions", a European trader commented on Twitter.

BaFin did not disclose details on the market positions of its employees prior to the Wirecard collapse, but it did say that about a fifth of its employees bought or sold shares in the issuer in the first six months of the year.

BaFin's defense is also that the authority does not completely watch Wirecard's activity, only that of the Wirecard bank, which represents a small part of the company. This brings an aspect that is at the very least strange through the fact that BaFin was not the overseer of the entire Wirecard group.

"In my opinion, it deserves to be closed (the institution). I can only imagine what I would read in German newspapers if something similar had happened in Italy", Vladimiro Giacche, Finance Ph. D. at the University of Pisa, Italy, comments on the case.

Another big surprise, given that the collapse of Wirecard and BaFin's supervisory failures have led to cumulative losses of billions of euros for small investors and fund managers, is that the situation has not led to large hearings in the Bundestag or to the launch of more extensive criminal investigations. The investigations launched by the German prosecutor's office have so far been limited to Wirecard's top executives, of which 3 have been arrested. All this time, the BaFin leadership has launched an extraordinary apology campaign.

The new information has recently reached the public thanks to the MP of the Greens, Danyal Bayaz. He recently said that "the compliance controls of BaFin need to undergo a review".

"The trades with Wirecard shares conducted by the BaFin staff are surprising and raise questions, such as concerning the scale of the transaction volume and whether the officials who traded had inside information", Florian Toncar, deputy from the FDP in the German parliament and lawyer specialized in banking and financial regulation, recently said.

In defense of BaFin, the Berlin Ministry of Finance said that the institution had strict controls in place to prevent insider trading and that the increase in trades was not "unusual" given the volatility of Wirecard shares and information in the media about the company.

So far, the ESMA is the only institution which began an investigation against BaFin for potential irregularities in its supervision activity, and it did so at the request of the European Commission.

As further evidence of the company's protection by politicians and of the connections the company had, during her visit to Beijing in September 2019, chancellor Angela Merkel raised the issue of Wirecard taking over a Chinese company, which would have significantly raised the turnover of the German company.

In any case, the scandal showed, as former banker Martin Hutchinson wrote on his website, that "even German overseers are useless."

The situation in Germany is somewhat similar to the one in Romania, where the Financial Oversight Authority (ASF) tolerates without any explanation an alteration of the NAV of SIF Banat - Crişana (SIF1).

In total, the NAV of SIF Banat Crişana is inflated by 330 million Euros, with the latest manipulative reporting (July) being seemingly encouraged by the inaction of the ASF, which came into public debate with a draft regulation which speeds up by two months the application of some calculation procedures which were already prepared (under European coordination) and which allow the manager of SIF Banat Crişana to resort to an evaluator once the regulation is passed and to stop "marking to market" the value of the companies that are not liquid, such as SIFI. That comes as the manager of SIF Banat Crişana had on hand the solutions of taking SIF Imobiliare private and/or using squeeze-out anyway.

In the month of July alone the manager of SIF Banat - Crişana reported a NAV increase of 467.7 million lei, and stuffed many explanations in a small print NOTE on the legally compliant methodology they used to calculate that increase, but without mentioning anywhere that in fact, the performance of SIF Banat Crişana is negative.

The manager of SIF Banat Crişana is misleading the public:

"The NAV of SIF Banat-Crişana on July 31st, 2020 saw an increase of 467,757,851 lei, representing 13% of the value on June 30, 2020. The increase is the result of the increase in value of the block of shares held in SIF Imobiliare PLC, which on July 31st 2020 was valued at 1799.9 million lei, an amount resulting from the marking to market at the price of 400 lei/share following the transaction of July 16th, 2020 (calculated according to the provisions of art. 113 letter a) point 2 of ASF Regulation no. 9/2014)".

In reality, the increase of 467,757,851 lei which they are reporting, is not derived from the methodology recommended by ASF Regulation no. 9/2014, because had they followed it, then they should have declared an increase of 512,995,554 lei.

The difference between the manager of SIF Banat Crişana and the correctly calculated number is 45,237,703 lei (9.3 million Euros).

A negative difference of 9.3 million Euros (that is the actual performance for the month of July), amount which was derived from the value calculated according to the provisions of art.113 letter a) section 2 of ASF Regulation no. 9/2014, without the manager of SIF Banat Crişana making any mention of having extracted the amount.

This concealment of the negative performance of SIF Banat Crişana in July cannot be uncovered by the investors who have confidence in the manner of management of SIF Banat Crişana and in the market institutions tasked with investor protection.

The negative performance of SIF Banat Crişana remains hidden from investors, under the mountain of explanations concerning the increase.

That fact represents disinformation and it is an offense.

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