In the first six months of 2020, 2.4% of all financial transactions undertaken by employees of BaFin were in Wirecard shares and derivatives.
Photo: michael dalder/ReutersBERLIN—Germany’s stock-market regulator allowed its staff to trade Wirecard AG WDI -5.61% shares while it was investigating the company, putting the spotlight again on an agency that has come under scrutiny for ignoring red flags about the now insolvent fintech giant for a decade.
In the first six months of 2020, 2.4% of all financial transactions undertaken by employees of BaFin, the regulator, were in Wirecard shares and derivatives, Germany’s finance ministry said in a written response to questions by opposition lawmakers that was seen by The Wall Street Journal. This was up from 1.7% in the entire year before. BaFin has said it opened a market manipulation investigation into Wirecard at the end of January 2019.
BaFin said the movement in financial transactions wasn’t unusual, and that the trades had been disclosed and authorized by supervisors at BaFin.
In what could be Europe’s largest accounting scandal in decades, Wirecard filed for insolvency in June after disclosing that more than $2 billion of its cash supposedly held in escrow accounts probably didn’t exist. The company’s market value has dropped to less than €200 million from almost €13 billion in mid-June.
More on Wirecard
German prosecutors have arrested several former Wirecard executives, including longtime Chief Executive Markus Braun, who they suspect inflated the company’s results by booking fake income for years. Mr. Braun has repeatedly denied wrongdoing. Prosecutors say they are also investigating potential money laundering. A lawyer for one of the other arrested executives said his client rejects the accusations, a lawyer for another hasn’t responded to requests for comment.
While BaFin staff was buying and selling Wirecard shares, BaFin was investigating the company based on media reports about suspected accounting manipulation at its unit in Singapore and an anonymous complaint it received in early 2019. BaFin, as a financial supervisor, also directly oversees Wirecard Bank, which is part of Wirecard.
“It certainly does not help to build market confidence when the staff of the market regulator and bank supervisor is allowed to trade on a company which is under investigation, owns a bank and does payment services,” said Jérôme Legras, head of research at Axiom Alternative Investments.
In contrast, the European Central Bank, which supervises the largest banks in the euro area and has no direct role over Wirecard, forbids its staff from holding shares in the company “given that this entity qualifies as a financial corporation established in the union,” a spokeswoman said.
In the U.S., the Securities and Exchange Commission prohibits employees from buying or selling securities issued by an entity under investigation by the commission, according to its ethics code for employees.
In the U.K., the Financial Conduct Authority allows staff to trade shares as long as they get permission beforehand but it forbids purchases in any FCA-supervised firm or their financial holding companies. Those include banks, asset managers and insurers.
The German finance ministry in its response to lawmakers said in 2019 and the first six months of 2020, 20% of BaFin staff had declared private transactions with financial instruments. It didn’t break down the trade of Wirecard shares into buys and sells. Information about trades before 2018 weren’t available as German data protection law forces BaFin to regularly delete such information.
Reports about possible fraud at Wirecard had been widely publicized—and vehemently denied by the company—since early 2019.
BaFin said it didn’t know whether employees had engaged in the short selling of Wirecard shares—effectively a financial bet on the share price falling—as staff wasn’t required to disclose this information.
Under paragraph 28 of the German securities trading act, BaFin staff must notify all private transactions with financial instruments. A supervisor then ensures that the employee has no insider information in relation to the transaction. The finance ministry said BaFin hadn’t detected any violation.
According to the ministry, BaFin said the increase in Wirecard transactions wasn’t unusual or conspicuous. It explained the increase by the share price’s high volatility during the period.
BaFin has come under fire from German lawmakers since the collapse of Wirecard for failing to act on repeated warnings about deceptive financial practices at the company since 2008, prompting questions about Germany’s ability to protect investors from white-collar fraud. BaFin President Felix Hufeld has called the Wirecard collapse a disaster but insisted Germany’s supervisory mechanisms were sound.
Opposition lawmakers have been grilling Finance Minister Olaf Scholz, who oversees BaFin, and many are calling for a parliamentary investigation into the scandal.
The timing is awkward for Mr. Scholz, who this week was named his party’s candidate for chancellor at next year’s federal elections. Mr. Scholz has defended BaFin, arguing that the regulator had acted within its mandate, and he has proposed laws to strengthen BaFin‘s powers.
Write to Patricia Kowsmann at patricia.kowsmann@wsj.com and Ruth Bender at Ruth.Bender@wsj.com
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