It did not take long for Leo Perry to conclude that something deeply suspicious was going on at Wirecard. “What was really weird was how well documented it was,” said Mr Perry, who co-runs Ennismore Fund Management.
What he never expected, however, was that it would take six years for the rest of the world to cotton on, or that he could be spectacularly vindicated yet still barely profit from his work.
As Wirecard morphed from a stock market curiosity into a financial technology group more valuable than Deutsche Bank, time and again it sidestepped questions and smeared its critics.
With the company now insolvent after allegations of a multibillion-euro fraud, the experience of Mr Perry raises the question of how, and why, so many managed to rationalise what he considered to be obvious evidence of wrongdoing.
“We consistently underestimated people’s ability to look the other way: that means Wirecard’s bankers, investors, the regulator,” said Mr Perry, the first time he has spoken publicly about his longtime nemesis.
Leo Perry (right) and Dan McCrum © Charlie Bibby/Financial Times
At our first meeting in September 2014, Mr Perry had conducted a swift tour of Wirecard’s expansion into Asia, via the trail of paperwork it left behind. What he described did not add up.
Softly spoken, the 42-year-old Mr Perry has a habit of chuckling to himself as he explains the more absurd details of implausible accounting and suspect takeovers. “If those transactions were fraudulent, it’s by far the best documented fraud that we’ve ever come across,” he said.
Yet to the outside world the series of takeovers that started in 2010 was what turned Wirecard from a modest payment processor in a suburb of Munich into a global business.
Ennismore had first bet against Wirecard in 2008 when Mr Perry was still a junior investor. He joined the firm in 2001 after working in the back office of a couple of investment banks, and had a similar role keeping the books straight as one of just six staff at the hedge fund under Geoff Oldfield, who had made his name at Barings the previous decade. Training, Mr Perry said, consisted of, “Here’s some books to read. Here’s how it works. Come talk to us when you want.”
In 2008 Wirecard’s accounting was attacked by a German investor association. But Wirecard hired the Big Four accounting firm EY, who gave it the all clear, and the German authorities prosecuted two of the authors of the critique for market manipulation.
In 2014, by then one of three senior investors at the $1bn firm, Mr Perry had found success by betting against companies which emerged at the top of Aim, a loosely regulated corner of the London stock market. Cupid, an online dating company, and Velti, a Greek marketing group had both spectacularly blown up.
As a short seller, who sells borrowed stock on the expectation its price will fall, Mr Perry said “you can get much more concrete evidence than you ever do on the long side. You can find something which is clearly contradicted by what management have said or by fact-checking on the ground.”
He was prompted to take another look at Wirecard on the suggestion of Dan Yu, the short seller behind Gotham City Research. Mr Yu’s suspicion was that Wirecard processed payments for legally problematic areas of online commerce, such as gambling, but Mr Perry was not convinced that was a reason to short it. “You see that with European banks which have done massive amounts of money laundering and it’s not terminal for them,” he said.
Instead, he looked at the financial statements. “It was an obvious fraud because you worked back from the balance sheet and the assets,” he said. “In their case it was mostly things they had acquired, and the numbers didn’t tie in: what they acquired wasn’t worth very much.”
Mr Perry’s research preceded a series of articles eventually published on FT Alphaville in 2015, which raised questions about that accounting.
He knew that taking a short position in Germany would be difficult. Counterparts at US hedge funds warned him that they would not never again bet against German stocks after a market squeeze was allowed to develop that temporarily made carmaker Volkswagen the most valuable company in the world in 2008.
Still, Mr Perry, said, “For the first couple of years at least, two or three years, we were consistently surprised by how just willingly blind people were.”
“The penny on that really dropped after the details of the Indian acquisition came out,” he said. “And if people weren’t going to see that was a joke then it was going to take something from the inside.”
In 2015 Wirecard announced it would buy a set of Indian payments businesses for €340m. But by tracing through Indian public filings, a Californian hedge fund manager, Eduardo Marques of Valiant Capital, unearthed strange details. A Mauritius entity was involved that seemed to have made almost €300m of profit from the deal.
In response, Wirecard wrapped itself in the reputation of lawyers and accountants. It said the Mauritius fund was a publicity-shy private equity firm advised by Linklaters, and that extensive due diligence on the deal was done by Osborne Clarke and Baker Tilly.
Wirecard had also succeeded in demonising its critics when hit by a short seller report in February 2016, which focused on questions of money laundering. Matthew Earl and Fraser Perring, later identified as the report’s authors, were for years investigated by the German authorities for market manipulation in cases that were eventually dropped.
After that, Mr Perry said, “Wirecard was just inoculated basically” with all future critics dismissed as manipulators — or their accomplices. In 2017 the share price doubled, forcing many hedge funds to abandon their bets.
Mr Perry stuck at it. He spent a summer surveying German retailers, as Wirecard’s published figures implied a huge market share in serving the sector. His results suggested that was not the case. “We estimated a very low single-digit [percentage] based on going to the retailers and just asking them or looking at the source code of their websites,” he said.
Valiant’s Mr Marques calls Wirecard “the most formidable adversary I have ever faced”. He last year wrote a presentation summarising his research, entitled “Wirecard — where short sellers go to retire”. It urged investors to focus not on the numbers in the FT reports of fake contracts in Wirecard’s Singapore office, but the practices revealed by the episode.
“Once a company is making up a hundred million, well they can make up a billion just at the stroke of a pen — it’s just a zero on a made-up document,” said Mr Perry. “So it’s very easy to do and on paper it makes the company worth ten times as much.”
By the time that Wirecard collapsed last month, €1.9bn of its cash probably did “not exist”, the company said, and an as yet unknown amount of other assets.
It leaves a big question for EY, the accounting firm which oversaw Wirecard’s books for the last decade and has said it was duped by a “elaborate and sophisticated fraud”.
“The one thing an auditor should do is verify the cash balance, and if they didn’t even do that it’s hard to have any sympathy for them,” said Mr Perry.
Still, he could not believe his luck when, even after news broke of the cash hole, some investment banks were still willing to accept short bets from Ennismore. “Which company has ever come back from admitting to a €2bn black hole?” said Mr Perry.
Without those final bets, in spite of spotting the problems so early, Ennismore would have lost money from shorting Wirecard overall because of the high cost of paying fees for an extended period to borrow stock. In absolute terms, Mr Perry said, the $500m fund he co-manages made profits of around $10m for its investors from the six years of work.
“Is it worth it?” he said. “I have to say yes, because I’m still in the business. But I wouldn’t recommend short selling if you want a stress-free life.”