BaFin reports employee for insider trading in Wirecard
Germany’s Federal Financial Supervisory Authority (BaFin) today confirmed that it had reported one of its employees to the prosecutors over alleged insider trading in Wirecard.
The report was submitted to the Stuttgart public prosecutor’s office on January 27, 2021. The employee had sold structured products with the underlying Wirecard AG on June 17, 2020. A day after that, Wirecard AG’s auditor Ernst & Young informed Wirecard AG that no sufficient audit evidence could be obtained so far of cash balances on trust accounts to be consolidated in the consolidated financial statements in the amount of EUR 1.9 billion (approximately a quarter of the consolidated balance sheet total).
BaFin explained today that it had detected the suspicious transactions during a special evaluation. The regulator immediately released the employee and initiated disciplinary proceedings.
BaFin tightened the compliance rules for the private securities transactions of its employees in mid-October 2020. Speculative financial transactions, i.e. short-term trading, for example with derivative financial instruments or shares, have no longer been possible since then.
Let’s recall that the European Securities and Markets Authority (ESMA) in November published the results of its Fast Track Peer Review which looked into the events leading to the collapse of Wirecard AG and the supervisory response by BaFin (Bundesanstalt für Finanzdienstleistungaufsicht) and the Financial Reporting Enforcement Panel (FREP).
The Peer Review focused on the application by BaFin and FREP of the Guidelines on Enforcement of Financial Information (GLEFI) and on impediments to the effectiveness of the German two-tier supervisory system for financial reporting in the specific context of the Wirecard case.
ESMA identified deficiencies in the application of the GLEFI in the Wirecard case in several areas.
Some concerned the independence of BaFin from issuers and government. For instance, there was a lack of information about its employees’ shareholdings. This raises doubts on the robustness of BaFin’s internal control system regarding conflicts of interest of its employees vis-à-vis issuers. Also, there is a risk of influence by the Ministry of Finance given the frequency and detail of reporting by BaFin, sometimes before actions were taken.
ESMA also identified deficiencies in the market monitoring by both BaFin and FREP, specifically regarding non-selection (or non-timely selection) of Wirecard’s financial reports for examination based on risks in the period between 2016 and 2018.
Furthermore, FREP’s examination procedures of Wirecard financial reports did not appropriately address areas material to the business of Wirecard, nor the media and whistle-blowing allegations against Wirecard. The analyses performed (level of professional skepticism, timeliness of examination procedures, assessment of disclosures) and their documentation were insufficient.