Charlotte Street Partners

DAILY BRIEFING

DAILY BRIEFING

Short sellers and rat smellers

Written by Juan Palenzuela,  associate
Edited by Adam Shaw, associate partner
24 June 2020

Good morning,

If something looks wrong, there probably is something wrong. That was certainly true of Wirecard, a German publicly-traded company that on Monday admitted that “there is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion EUR do not exist”. As a result, its chief executive was preventively thrown in prison yesterday and the future of the company is now in doubt.
 
Far from coming as a surprise, many wonder instead why this admission took so long. Wirecard has been a target for short sellers and investigative journalists alike since at least 2010. One notable short seller, Matt Earl, started receiving home visits in 2018  from strangers asking about his interest in Wirecard. In February 2019, the Financial Times reported on Wirecard’s dubious accounts, only to be sued by the company months later. Earlier this month, Citizen Lab, an internet watchdog, uncovered the work of a hacking-for-hire group named Dark Basin. Among many of its targets were Wirecard critics.
 
The demise of the company reminded me of the usefulness of short sellers to occasionally spot outright fraud and make markets more efficient. Many of Matt Earl’s initial findings prompted further interest in the company and will potentially be used as evidence by German prosecutors. But it has also raised questions around the hegemony of the ‘big four’ accounting firms.
 
Although EY, Wirecard’s auditor, did not sign off the 2019 accounts; it did so repeatedly in the years prior, even as evidence mounted that all was not necessarily in order. More surprising, however, is that the journalists and short sellers who uncovered the fraud did so researching largely public records while managing personal, cyber and legal attacks.
 
All of which begs the question: how can auditors, who in theory have the power to access every receipt and document they wish to see before signing off accounts, be deceived in this way?

News

A 7.5-magnitude earthquake hit parts of southern and central Mexico yesterday, killing at least five people. “Fortunately there was no major damage,” Mexican president Andrés Manuel López Obrador said in a video posted on social media early in the afternoon.
 
Yesterday, Twitter posted an advisory note on another of President Trump’s tweets, as the president continues his “law and order” rhetoric with regards to the protests that have erupted in the country. The tweet, which promised protestors would be met with “serious force” is now shown with a disclaimer that reads: “This tweet violated the Twitter Rules about abusive behaviour. However, Twitter has determined that it may be in the public’s interest for the Tweet to remain accessible.”
 
North Korea has suspended its plans for military action against its neighbours to the south, according to state media. The Central Military Commission said it made its decision after taking what it called the “prevailing situation” into consideration. The country elevated tensions last week, after blowing up the joint liaison office and threatening to send troops to the border area.

Business and economy

Chancellor Rishi Sunak is considering a furlough replacement schemedesigned by Scottish fintech company Toupay in partnership with NTT DATA UK. Toupay’s system is set to go live for large scale corporate customers in August, but can also be adapted for small and medium sized enterprises by extending existing state-backed guarantees to allow a separate “credit rating”. 

Segway has announced that it will end production of its iconic vehicle on 15 July. The vehicle, which the company once claimed would revolutionise the personal transport market, accounted for less than 1.5% of the company’s revenue last year. The company said 21 employees will be laid off as a result.
 
A rescue loan deal for Tata Steel, Britain’s largest steelmaker, is set to be agreed with the UK government within days, the Financial Times reports. The deal would help preserve nearly 8,000 jobs and the state loan, which could be worth hundreds of millions of pounds, is due to be the first major transaction under the government’s Project Birch, the mechanism through which the government will pump money into strategically important companies.
 
Ford called for a scrappage scheme to help drive sales in the UK, after a survey by the Society of Motor Manufacturers and Traders revealed that up to one in six jobs in the UK’s automotive industry are at risk of redundancy.

Columns of note

Benny Higgins, chair of the Scottish government’s advisory group on economic recovery, writes in The Times today that ministers must reset the relationship with business. Collaboration between the government and the private sector is essential, Higgins says, if Scotland is to flourish after its Covid-19 recovery. The advisory group published its report, including a list of 25 recommendations, on Monday.

On Project Syndicate, Mauricio Cárdenas and Juan Lucas Restrepo think that the Covid-19 crisis has highlighted the risks of unhealthy diets and the extreme fragility of the global food system. The economic reconstruction that will follow will be a perfect opportunity to change that.

Cartoon source: The Telegraph

Markets

What happened yesterday?

Equity markets continued their run after perceived progress on phase one of the trade deal between China and the United States.
 
In the US, the Dow Jones Industrial Average was 0.50% higher at 26,156.10, while the S&P too was 0.43% stronger at 3,131.29 and the Nasdaq Composite saw out the session 0.74% firmer at 10,131.37.
 
In Europe, the benchmark Stoxx 600 was up by 1.3% at 367.4, alongside a 2.13% advance for Germany’s exporter-heavy Dax to 12,523.76 while the FTSE Mibtel added 1.86% to 19,841.58.

In the UK, strong Purchasing Managers Index data announced yesterday boosted the FTSE’s run further. The FTSE 100 ended the session up 1.21% at 6,320.12, and the FTSE 250 was 0.45% firmer at 17,652.80.
 
On company announcements:
 
RBS said it will give business customers an additional six months to capitalise on incentives to change their accounts to other banks – a legacy requirement of its bailout during the financial crisis. Fewer businesses have taken advantage of the opportunity to switch during the ongoing pandemic.
 
Checkout.com raised new funding, led by Coatue Management, tripling its valuation to $5.5 billion, making it one of the UK’s most highly valued private tech firms. The FT suggested the payments start-up’s “rapid rise illustrates the growth in digital payments as companies process more sales online during the COVID-19 crisis”.

What’s happening today?

Finals
Alpha Fin. Mkts
Discoverie Grp.
HarbourVest Private Equity
Iomart
Manolete Partn.
Premier Foods
Savannah Energy
Stagecoach
Uls Tech

Annual reports
HarbourVest Private Equity
Savannah Energy

Final dividend payment
Avast
Capital & Regional

Interim dividend payment date
Fidelity

Int. economic announcements
(09:00) IFO Business Climate (GER)
(09:00) IFO Expectations (GER)
(09:00) IFO Current Assessment (GER)
(12:00) MBA Mortgage Applications (US) 
(14:00) House Price Index (US)
(15:30) Crude Oil Inventories (US)

Source: Financial Times

did you know

The verb ‘egg’ has been in the English language longer than the noun ‘egg’.

Parliamentary highlights

House of Commons

Oral questions
Northern Ireland

Prime Minister’s Question Time

Ten Minute Rule Motion

Demonstrations (Abortion Clinics) – Dr Rupa Huq

Opposition Day Debate
Westferry Printworks Development; Testing of NHS and Social Care Staff

Adjournment
Protection of UK food standards – John Lamont

House of Lords 

Oral questions

Statement

Legislation

Fisheries Bill [HL] – Report stage (day 2) – Lord Gardiner of Kimble

Scottish Parliament 

Parliamentary bureau motions

First minister’s questions

Ministerial statement

Providing Financial Stability for Farmers and Crofters

Stage 1 debate
Social Security Administration and Tribunal Membership (Scotland) Bill

 

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