On the power of expensive lawyers

Dan McCrum of the FT has a further piece here about how various agents, including the German regulators, tried to stifle his investigation of Wirecard. The article is behind a paywall, but is summarised almost verbatim by Tyler Durden at Zerohedge here.

Many of the issues have already been picked up in mainstream media, but there are two that deserve more comment.

First, we should all be concerned about the extensive use of lawyers to stifle fair comment on business practice. When the FT suggested in 2015 that there appeared to be a €250m hole in the group’s balance sheet, Wirecard responded with letters from Schillings, a UK law firm specialising in ‘reputation management’. In July 2018, Wirecard’s lawyers in London, Herbert Smith, accused McCrum of intending to publish information about Wirecard as part of a short selling strategy. This could well have dissuaded the FT from publishing, but they went ahead with an article in October 2019 showing that half of Wirecard’s claimed business simply didn’t exist.

Eumaeus is only too conscious of the power of lawyers. After I (Buckner) conducted a ‘mystery shopper’ exercise in March 2019, and found that Age UK customers were being directed to financial advisor called ‘Hub’, who were wholly owned by Just Group, I pointed out to Age UK chairman Sir Brian Pomeroy that I had been able to obtain an offer for a very similar product from Legal & General for less than 5 percent, which we thought Hub’s salesman should have offered (L&G also being on the panel). I said we would publish the results of our research. As Private Eye later (August 2019) wrote:

Cue a stiff letter from Julian Pike of expensive ‘reputation management’ solicitors Farrer & Co insisting that Buckner’s comparison was invalid and requesting an assurance he wouldn’t publish.

I lodged complaints with both the Charity Commission and the Financial Conduct Authority, but it was no surprise to hear nothing from either. The whole affair reflects the pitiful state of financial regulation and the huge power wielded by vested interests through their lawyers. (To be sure, Age UK no longer offers the product, but it is unclear why).

Second, there is a presumption by regulators and prosecutors that short selling is essentially corrupt, or ‘market manipulation’. Wirecard repeatedly characterised any criticism of its business as the work of market manipulators, and BaFin, the German regulator imposed a punitive ban on short selling bets against Wirecard for two months in 2019.

It was only on 3 September that the German prosecutors dropped their investigation into the two Financial Times journalists who were under suspiction of ‘potential market manipulation’, although there is still a parallel criminal complaint against short-sellers alleging ‘market manipulation’ on Wirecard shares.

UK and European law and regulation needs to change. A cursory reading of the FCA rules on market abuse suggest a presumption that all information is secret and must be kept so. Likewise, the German prosecutors said: “There were no indications that the accused themselves consciously disclosed the content and time of their reports to third parties and thus passed on inside information.”

But the whole market is driven by the free flow of information. As we commented here, the Basel model for HBOS – indicating that a loss would occur once in a thousand years – failed precisely because there was no free flow of information of the sort presumed by Vasicek, the originator of the model. As we said:

The problem with any such theory is the way that vested interests (and regulators) like to keep things secret.