Short sellers are routinely portrayed as greedy and unethical spivs who profit from the misfortunes of others. In reality, shorts often do the detective work that should be done by others, as evidenced by last week's collapse of German payments giant Wirecard following a €1.9 billion accounting scandal.
The shorts were warning about Wirecard for more than a decade, but those warnings fell on deaf ears. In 2016, BaFin, Germany's financial regulator, investigated shorts for market manipulation. In January 2019, BaFin responded to Financial Times revelations by investigating the newspaper over an allegation of market manipulation. A month later, it banned shorting of Wirecard shares, the first time short selling had been halted for a single company.
Fund managers, too, failed to do their homework. DWS bet around €1billion on Wirecard, much of that money committed after the FT story was published.
Even now, some prominent actors seem blind to their failings. DWS fund manager Tim Albrecht blamed "institutional failings at Wirecard" and "banks who sent positive signals with their credulous analyst reports", while Germany's finance minister, Olaf Scholz, said the "supervisory institutions worked very hard and did their job".
Short seller and veteran Wirecard sceptic John Hempton puts it well. "If ignoring the evidence and prosecuting whistle-blowers is a good job, what is a bad job?"
