The Long-Short is a podcast by the Alternative Investment Management Association, focusing on the very latest insights on the alternative investment industry.

Each episode will examine topical areas of interest from across the alternative investment universe with news, views and analysis delivered by AIMA’s global team, as well as a host of industry experts.

The Financial Times was at the forefront of uncovering the $2 billion fraud at the centre of Wirecard’s accounts, leading to the German payment processing giant’s collapse in 2020. 

Two years on, the lead investigative journalist Dan McCrum sits down with The Long-Short to discuss his new book, Money Men, which details how his team, assisted by a cast of committed short sellers, exposed the truth.

In part two, The Long-Short is re-joined by AIMA CEO Jack Inglis, who was an outspoken advocate for short sellers at the time of the Wirecard scandal, and who offered a timely reminder that the case in favour of short sellers has been building long before Wirecard came onto the scene.

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Hosts: Tom Kehoe, AIMA; Drew Nicol, AIMA,

Guest: Dan McCrum, Investigative Reporter at the Financial Times and author of Money Men

Interlude: Dawn Angley, AIMA

Tom Kehoe, AIMA  00:05

Hello and welcome to The Long-Short, a new podcast brought to you by AIMA, The Alternative Investment Management Association, focusing on the very latest insights on hedge funds and private credit. My name is Tom Kehoe. AIMA is the global representative of the Alternative Investment Industry with around 2,000 corporate members spread across 60 countries. Of these are fund manager members account for approximately two and a half trillion dollars in hedge fund and private credit assets. Each weekly episode of The Long-Short will examine topical areas of interest from across the alternative investment universe. News, views and analysis delivered by AIMA's global team as well as a host of industry experts. So, whether you're a hedge fund or private credit industry veteran, a student of the industry, or just someone interested in learning more about hedge funds and private credit, this podcast will be your ideal companion to help navigate you to the long and short of this fascinating industry.

Tom Kehoe, AIMA

Hello and welcome to episode 32 of The Long-Short.

Drew Nicol, AIMA  01:03

Today we are delighted to bring you a Long-Short exclusive. Two years ago, this month, a multi-billion-dollar German payment processing company Wirecard filed for insolvency after an astonishing 1.9-billion-euro hole was discovered in its balance sheet by activists, short sellers and journalists. This led to the arrest of its CEO, Markus Braun, on counts of fraud, account rigging, market manipulation and breach of trust. While it's larger than life CFO, Jan Marsalek, is nowhere to be seen and two years on remains a fugitive. The Wirecard scandal sent shockwaves across global stock markets as well as raising very difficult questions about the regulatory failures on the part of the German and European top financial Watchdogs.

Tom Kehoe, AIMA  01:49

Essential to this saga is Dan McCrum, FT investigative journalist who following a tip off from a hedge fund prompted a six-year investigation that culminated in the exposure of the world's biggest financial fraud since Enron.

Drew Nicol, AIMA  02:02

Through the course of this investigation, McCrum encountered a world stranger and more dangerous than he ever imagined. A world of whistleblowers private, malicious cyber hackers and spies. At times it looked like his crusade and that of his short seller compatriots, would all be in vain. As in the space of a few short years, Wirecard had come from nowhere to overtake huge German industry giants like Deutsche Bank and Commerce Bank, taking over the latter to hold the much-coveted position in Germany's leading stock index. And now, like all good storytellers, Dan has published his first book.

Tom Kehoe, AIMA  02:37

Yes, indeed Money Man is the astonishing inside story of Wirecard's multibillion dollar fraud. That McCrum is reporting on Wirecard has been recognized with the Impact Award for Distinguished financial journalism from the New York Writers Association, as well as the Ludwig Erhard prize for economic journalism, a reporters forum report prize and a special award by the Helmut Schmidt prize jury for investigative journalism. And in 2020, Dan was named journalist of the year at a British journalism award, and he sat down with The Long-Short just before the launch of his new book.

Drew Nicol, AIMA  03:11

So, part one of today's podcast will feature the not to be missed Interview with Dan. While in part two, we will speak to AIMA's CEO Jack Inglis to get his take on the Wirecard fraud and the obsessive role that short sellers play in unearthing financial malfeasance with the likes of Enron and Wirecard, and many other cases, in their quest for the truth and protecting the interests of investors.

Tom Kehoe, AIMA  03:35

So, sit back, listen, we hope you enjoy the show.

Drew Nicol, AIMA  03:41

Dan McCrum, thank you so much for joining us on The Long-Short today.

Dan McCrum, Financial Times 03:44

Hello, thank you for having me on.

Drew Nicol, AIMA  03:46

So, we are recording this episode only a few days before your first book, money men is published, which details your central role in the rise, and fall, of the German payment processing giant Wirecard. So, first question, how are you feeling today?

Dan McCrum, Financial Times  04:04

It feels terrific. I mean, it's a real odyssey writing a book anyway. And it's this most incredible story, which I lived and breathed for eight years now. And it kind of turned my life upside down. And so, to be able to share some of like the weird and amazing things which happened with the world. I'm quite excited to see how people react to it.

Tom Kehoe, AIMA  04:29

And, Dan, before we get into the book, and for those listeners who do not know about you, can you give us a little bit of background on your career to date. I mean, you started your career as an analyst right at Citi before moving into the world of journalism and have been at the FT for several years now. So, what made you shift gears then from working in the city to writing about it instead?

Dan McCrum, Financial Times 04:51

So yeah, the potted history is, I mean, like a lot of people, I did a grad scheme at an investment bank, and I found myself working in the research department at Citi Group. And, I did it for a few years, long enough to sort of get a sense of how things worked. And, you know, I was in my early 20s, and I was kind of looking around going, there's nobody here whose job I actually want. And that was kind of a telling sign. And, and I realised I'd always wanted to be a journalist. So, I should probably quit before the markets crash and there's lots more intelligent people who might try and do the same thing. So, I just resigned and decided I'd have a go at being a reporter at Provel.

Drew Nicol, AIMA  05:38

Admirable, and I think it would be fair to say that most people have at least heard of Wirecard and, may have somewhat of an idea of what exactly went on with that whole saga. But just on the off chance there is anyone who has never heard that fabled name before, could you just give us like a real highlight overview of the journey that you and Wirecard went on?

Dan McCrum, Financial Times 06:06

Yes, so Wirecard wasn't even really a household name in Germany. It was this little payments company which started life as this little payments company. And it told everyone, it was the European PayPal, and it is a pretty simple business. If you had like an online store, it would help you take payments from customers and get the money from the credit card company to you. It was pretty simple. And it became a bit of a stock market sensation. And over time, it slowly got more and more valuable. And what happened was way back in 2014, I started looking into it. And it looked a little bit fraudulent, there were a bunch of red flags, some of its numbers didn't make sense. And to give you the very broad overview, before we jump into the details, nothing really happened, you know, wrote a bunch of stories, the company got attacked by short sellers. And every time, the German authorities came to Wirecards’ defence, and sort of investigated the company's critics or dismiss what they would say. And it got so big that it entered the DAX 30, the equivalent of the footsie 100. And it was the next big thing. It was this huge company, which was going to transform, you know, the whole economy, bring cashless payments to the world. And, it turns out that it was a gigantic fraud. And with the help of some whistleblowers, and with a few adventures along the way, the Financial Times was finally able to expose this, and it came crashing down in the summer of 2020. And there's been a parliamentary inquiry since, there are some trials due to start of some former executives in September. And the story that I've written is really the, you know, we hear a lot about dirty money. And this is the experience of when dirty money comes after you. And so, there were hackers, there were private detectives, they were high powered lawyers, all sorts of weird and wonderful stuff happened.

Tom Kehoe, AIMA  08:10

And again, fascinating read, for those who don't have a book, please do pick it up at your local bookshop or on your online bookstore. Great read and great accounting. Many congratulations for your book being done. And let's go back to what you said you were first tipped off about Wirecard being potentially rotten back in 2014, from a fund manager that had just uncovered a fraudulent mining company using much the same skills as an investigative journalist.

Do you feel then that the investigative work that you do has much in common with that or fund managers researching investment opportunities, including as you describe short sellers, you know, taking short positions on the stock, that being with a fund manager takes a view that a share price will fall in value, given their belief that the stock is overvalued, except your research ends up with a front page splash instead of the fund manager being depicted as a bearish trade?

Dan McCrum, Financial Times 09:16

Yes, so the fund manager, you mentioned there is John Hampton, the Australian guy behind Bronte capital, we were chatting about frauds. And he knew the sort of stories I was interested in. And he said to me, Dan, would you be interested in some German gangsters? And like, sure, yeah, that sounds really interesting. I jotted the name Wirecard and started to have a little look into it. The reason why I was talking to John is because I sort of worked out that short sellers were kind of interesting, these hedge fund managers who are trying to look for companies who are overvalued. And I think a lot of the skills are similar. And really, I mean, your job as a journalist isn't to become experts in everything, it's to find the experts and get them to tell you the important information that you need. And so, I had decided that short sellers, were interesting because they were looking for corporate wrongdoing. And I basically wanted to find the next Enron, people like John, and there's quite a few hedge fund managers who pop up in the tail, they do quite journalistic work, they're looking for evidence of lies, things which don't fit. And you know, there's a bunch of financial analysis in there as well. But really, you know, the beauty of a fraudulent company from the perspective of an investor is that it can very quickly go from 100 to zero. And so, if you can spot that in advance, and if you can get confidence that this is a fraud, you can make a lot of money. But there are differences between those sorts of investors and journalists. And one of the big ones is that I can ring up a company, or I can ring up other people, and get them to talk to me in a way that a hedge fund manager or an investor can't, because you can sort of brush off as, you know, a random hedge fund manager, but if the Financial Times comes and knocks on your door, and threatens to write a story about you, you kind of have to say something. We don't have any dog in the fight and I think you see that sometimes, I mean, short sellers get a lot of criticism, a lot of it unjust, and that becomes a big part of the Wirecard story. But, you know, sometimes the public short sellers do throw a whole lot of mud at a company just to see what sticks. Whereas, if you're being a journalist at the Financial Times, you know, we have to check everything that's been told to us, we sort of understand what the, you know, the incentives of the guys were speaking to. And, you know, we only print what we can prove or, you know, reconstruct for ourselves, but yet they make great sources. And, you know, everybody in finance has a financial interest, the management will want their stock options to pay out, I think, you just get used to dealing with the kind of financial interest that, that hedge funds and other investors have. And I find them interesting characters.

Drew Nicol, AIMA  12:08

And I'm going to take pity on our listeners here, because we've mentioned fraud, we've mentioned German gangsters, and hinted at a few adventures on the way. And so, I'm just going to have to ask you about this directly. Because one of the short sellers that you mentioned, who put out some written research, are the authors of the Zatarra Report. I hope I'm saying that correctly, I've only read it up until now. And that's really one of the first examples of corporate malfeasance at Wirecard. And once that came to light, alongside your own coverage, everybody involved including yourself, and these fund managers came in for some, under some real pressure, in what can really only be described as sort of Cold War style espionage, with cyber-attacks, and even, you know, people sort of turning up on your driveway and unmarked cars. And there's a lot more details there as well. And, and so really does read like something out of, you know, an Ian Fleming novel, rather than something that actually happened to you, as a, you know, an FT reporter in London of all places. And, you know, only a short time ago as well. So, I think the question I really wanted to ask is, was there any point where you really genuinely felt worried? I mean, you give some examples about the protocols you put in place to try and stay safe, but at you're most concerned, how concerned were you if that makes sense?

Dan McCrum, Financial Times 13:42

So, it was pretty scary at times. So, one of the one of the characters in the book is Matt Earl, He's a short fella who runs shallow for research these days. But he was also behind this Zatarra attack, which in 2016, published at then anonymous dossier, saying there was a whole bunch of money laundering being done by Wirecard. And the authorities should investigate. And Matt and I have often talked about what we experienced after that, and it was a really weird thing. Because if you try to talk to friends or other people about it, and basically say, yes, so there's this German bank, which is out to get me. You just sound mad, right? And the infuriating thing was, is that for a very long time, there was no way we could prove Wirecard was behind it. So, it started with the hackers, so me and my colleagues and lots of other people who had criticised Wirecard, started to get all these phishing emails, turns out was from an Indian hacker again, and then this anonymous whistleblower pops up on the internet with pictures of some of my emails, which were real. And so, we knew somebody had been and then these private detective starts showing up and you become really, incredibly, paranoid and I started finding myself doing strange things, like, I'm just looking at my window here, I live at the end of a cul de sac. And at the end of it is this big hedge. And I knew that one way you can spot cameras as if you shine a light on them. So, when I'm driving at night, I would just try and sort of like sweep the headlights across the hedge, keeping an eye out for a little reflection, partly because I didn't want my neighbours to see me going and just like nosing around in the hedge looking for a camera, which wasn't there. But that kind of that sort of pressure, knowing that you have some of these guys who are out to get you down becomes really oppressive. And particularly when things heated up in 2019, when we were in the real battle with the company, we started to realise that Russian spies were somehow involved, and you start to become a little bit worried about your safety, you know, if I stand close to the platform is someone going to just push me in front of a train, or, you know, as you're cycling home on the bike, I would always have this like nagging worry, in the back of my mind, particularly when you're cycling home in the dark that I got hit by a bus here, it will really solve a lot of problems for a lot of people.

Drew Nicol, AIMA  16:03

And something else that really struck me, and I can I have a lot of sympathy with you here in my former life as a journalist myself, you make repeated reference to how thrifty the FT really had to be. And I think you mentioned it even in the first few pages, especially at the end as well, when you're talking about all the legal guidance and everything you had to do to make sure that you were telling these really important stories in accurately and responsibly. You mentioned before that you can only publish what you can stand up. And you know, it's always your name there at the top of those stories and stuff on the outside, the Financial Times may come across as you know, real big beasts of the financial world. And I think you lean upon those global resources, several points throughout the story. But, when you went up against Wirecard, you came across much more as you know, the David rather than the Goliath in this story, which maybe was an unusual experience for you. And I really liked your wife's quote, when she you know, you tend to be full of optimism. And then she says, you know, it's always the people with the most money that win, which must have been, you know, an unfortunate truism. And I obviously, had huge sympathies for everything you were under. But when I was reading, I couldn't help but also be struck by the community of boutique fund managers that you were working with, and that seemed to be working at least as hard as you to sort of uncover the truth, and those that had short positions were bleeding every day. And you know, for anyone who doesn't understand that there is a daily fee you pay, to borrow the shares to short them, that increases as the share price goes up, or you know, the wrong way in this case. And in addition to all the legal fees you've got. So, in some ways, I did sort of get the impression that they were sort of the real David's of this story, and I just wondered if you agreed with that?

Dan McCrum, Financial Times 18:07

Yeah, I mean, I think it was difficult for everybody, because so, to take the hedge fund guys first, I mean, there were a small group of hedge fund managers who were basically completely convinced that Wirecard was a fraud, much like we were. And I just saw it again, and again, Wirecard became an obsession, because you would look at it and you go, ‘Oh, my God! There's all this evidence that they were up to no good, look, it's here and here and here and look at the paperwork!’. And so, these investors would be like, I've got so much evidence, and then they would be driven slowly mad, because none of it would work. Then you know Wirecard would wriggle off the hook somehow. And so Eduardo Marques, who was at Valiant, and now runs Pertento, was one of the key guys who did a lot of work and would sort of be sharing his research with me. And, I remember him saying, what was it, you know, we basically have to catch Markus Braun, the chief executive at a pedo party with Harvey Weinstein, for anyone to care. It was so baffling that all this evidence had been presented, that Wirecard was a fraud, and nothing seemed to happen. But he also made a very good point, which was, so in 2019, I had discovered a whistleblower, or a whistleblower had got in touch, and had given me a whole load of evidence of this sort of organised book cooking operation in Singapore where Wirecard had its’ headquarters. And so, I had written a series of stories, saying, hey, there's a whole bunch of evidence of fraud here. This is really weird, but the numbers were quite small. It was only about $13 million worth of fake contracts. And Wirecard at the time had €2 billion of annual sales, and, what Eduardo always said was, people made the mistake of looking at the numbers, which was small, and using that to dismiss it. Whereas what they should have been looking at was the practices. Why on earth hadn't Wirecar fired everybody involved? At the first time this came to light, why was there this internal coverup? Why was it, you know, allowing this to happen? And it turned out the answer was because it was a giant criminal organisation.  But for a long time, it's answered that are these numbers aren't very big seem to carry weight. And in terms of that, the numbers as well, I mean, you mentioned the, you know, those moments where I put in, like, how the FT was very cost conscious. You know, what I was trying to do with the story as well was, I wanted to give people a sense of the journalism, and what was involved. So, the mistakes are in there as well. And, and there'd be moments like, I remember when, when I flew out to Singapore to meet this whistleblower for the first time. And to save 170 pounds, the FT said, “oh, I can change in Brunei”, which was like 1,000-mile detour. So, we're doing that sort of thing. And then Wirecard was doing stuff like dropping 18,000 pounds a day, on this sort of sprawling private detective operation who are running around London, following people. So yeah, I was trying to convey the sort of the mismatch of resources as well. And in terms of I just remembered, as well. Sorry. I tried to answer your question and got completely distracted talking about the fun adventure. And they, in terms of that, David and Goliath aspect, a lot of these hedge funds have sort of much more resources to go and investigate things. But yes, there was a period where sort of in 2017, the Wildcard share price kept just going up and up and up and up. And it, sort of, blew most of the hedge funds out of the water. And they had to abandon it. And I think I say in the book, one guy, he became so annoyed that he had to close his short position. And his fund had to just stop trading via card. But he told me he was so infuriated that if by the time he retired, Wirecard was still going, he was just going to dedicate his retirement to exposing them.

Tom Kehoe, AIMA  22:10

I mean, it's a complete obsession, as you say, it takes real bravery and belief to commit to the short positions, and the hedge funds, who did stick by it, have been vindicated. And there will be some, of course, who say it is wrong for fund managers to benefit from corporate misery. But I would say it would be a lot less misery, for those investors, who continue to buy their shares up to the peak, that you say that if they paid heed to the public signals being put out by short sellers, and by the action of yourself.  But your book describes also, how the FT, and other fund managers were able to gather clear evidence of fraud, and you alluded to it as well in terms of going out and meeting the whistleblower, by simply bothering to visit some of the locations of Wirecard’s, alleged clients. So how much did the cross-border nature then of Wirecard’s activities protected from the regulatory scrutiny? And should regulators be doing more to collaborate when evidence of corporate malfeasance is presented?

Dan McCrum, Financial Times 23:19

There is this great moment where there's this American researcher, Susanna Kroeber. As you say, she goes and visits all of Wirecard’s offices in Asia. And she finds herself, sort of, going down dirt tracks, looking for buildings, which aren't there, or sort of walking through empty shopping malls. Every single thing that she does gives her more evidence that yeah, none of this makes sense. There's nothing really here, you sort of keep seeing this again and again. But she said to me while she was on that dirt track, going slightly mad, because it's like, is this the address? Have I maybe slightly got it wrong, isn't it, you know, going to visit three different places to make sure she hasn't made a mistake? It's just like, I'm going slightly crazy doing this, who in their right mind is going to do this sort of work, just to look into a stock investment. And then when she did publish this research, and she spoke to fund managers, and she said, she told me, she would just have these strange conversations where she realised people were just talking past each other, but they're a big company, you know, they're responsible senior executives, why would they be lying to us? And she's like, well, because there's money at stake. But again, it's that mental leap, which is required to, to look at something and go, I think this is fraud rather than, oh, I think this is the next big thing. And there was another part to your question. And in that reminiscence, I've completely forgotten. What was it?

Tom Kehoe, AIMA  24:46

The question was then, how much did the cross-border nature then of Wirecard’s activities protected from the regulatory scrutiny? And should regulators be doing more to collaborate when evidence of corporate malfeasance like this is presented?

Dan McCrum, Financial Times 25:03

So, I think since my car collapsed, the German regulator BaFin has become much more open to listening to investors and short sellers. Because prior to wildcards collapse, it was sent a whole bunch of dossiers and whistleblower reports, which it seems to ignore. You know, I think regulators should do a better job in paying attention to these sorts of issues, particularly when they're raised in a public forum. And I think you can see a difference in attitude. So, there does seem to be a little bit of a distaste with an Anglo-Saxon approach. So, in the US and in the UK, the regulators do at least say that they pay attention to short sellers. And the FCA does seem to be reasonably open to the idea that they might have something useful to say, whereas you see it again, in Germany, but also in France, that short sellers are treated as inherently suspect, and are just trying to do down good companies. And we touched on this earlier. I mean, it's a long debate about, you know, what is legitimate criticism, you know, and the role of short sellers in markets. And I think it's a very healthy thing, right? It's like having the Joker in the court of the King to, sort of, poke fun at everyone and puncture people who are getting too big for their boots, or, you know, getting too carried away. You need someone in markets to go well, hang on a second, is all of this cracked up to what everyone thinks it is. Because markets and people get carried away quite a lot. I mean, we've just seen that with the collapse in Bitcoin and all the various crypto markets.

Drew Nicol, AIMA  26:41

Okay, Dan, and Tom, I'm going to have to apologise here, because you only allude to this point briefly in the book, but I couldn't help dwell on it, because it was my small area of obsession in this story, which was the short selling ban that came from the local regulator and were then subsequently endorsed by the European regulator. And I couldn't help but feel at the time, that this really exposed some fundamental flaws in the way this process was applied. And you've sort of alluded to maybe a philosophical reason behind why this was pushed through. And, you've also mentioned how Wirecard became this, you know, darling of the, of the German financial market, you know, especially when it when it joined the DAX 30. But maybe I'm showing my naivety here, but I just, I couldn't help but feel watching this in real time that it was rushed, if I remember correctly, you know, ESMA has 24 hours to agree to these things. And it's pushed through, and it really seems to be a real lack of scrutiny. And obviously, in hindsight, it really has raised some questions for me. So, do you really think there's, there's lessons to be learned here and how these bans are applied?

Dan McCrum, Financial Times 28:03

So, I think there's a lesson throughout the book, which is that people keep assuming somebody else has done the work. And all you have to do is, get the first person to say, yeah, everything's fine. And everyone else assumes that they have done the work. And so Wirecard would do it with, you know, it's auditors would sign off, the bankers would rely on that, the investors would rely on the bankers, and so on. So, you saw the same thing with this short selling. In early 2019, BaFin comes out and says, we're going to ban short selling and Wirecard shares, to protect the German economy and market. And it's this very powerful weapon, which they had only previously used during the financial crisis against 11 DACS. So, it's the first time they were stepping in to protect one company. The way it happened was a couple of guys in a nightclub were having a conversation, about how there was a rumour going around that the Financial Times story was about to break, which was going to be bad for Wirecard. And it's pretty clear to me, that rumour was leaked by Wirecard to discredit us. And so, what Jan Marsalek, who is, who was chief operating officer for Wirecard, this sort of charismatic, wannabe spy from Austria, who was behind all the dirty tricks. He gets one of the guys in the room to say, yeah, I knew an FT story was coming. So, they put together a witness statement. They call him an investor. And Wirecard hand delivers this to prosecutors in Munich. Here we go. Solid gold evidence that the Financial Times is corrupt. And there's an orchestrated campaign to attack this German company. And so, the prosecutors give it to BaFin, and BaFin gives it to ESMA, and everyone is taking it very seriously. But you know, well, if the prosecutors are taking it seriously, we should take it seriously. If BaFin is taking it seriously, we should take it seriously. But there are a couple of problems with this. For one, the guy from the nightclub hadn't signed the witness statement. And if prosecutors had looked into it, an investor was a bit of a stretch to describe him, he was married to a star of The Only Way Is Essex and he had a conviction. The police had tried to convict him for, basically, running a cocaine gang in London that drove around delivering parcels of cocaine on mopeds. But they couldn't get him on that, they just got him, he was only convicted on the charge of hiding 116,000 pounds of drug gang cash underneath his daughter's bed, which the police found when they raided his house. And this was the witness who caused this unprecedent intervention in markets by the German authorities. And as soon as you step back and examine it, it's like, wow, that seems a little funky, doesn't it? But yeah, it was amazing that they just took it and ran with it. And obviously, this idea that Wirecard would damage European markets, where it to collapse was wrong, because it did collapse, and nothing happened.

Tom Kehoe, AIMA  31:13

And, Dan, just going back to the reputation around short selling for a moment, a quick Google search on short selling, and then you look at the references of short selling around Wirecard, to depict the short selling actors as instigating a short attack. I feel that kind of language, that kind of aggressive type of language. It's not really a fair description, when what short sellers are actually doing is warning investors and the public as to what the research has found. So, Dan, would you agree that this description of a short attack really plays into the hands of firms like Wirecard, who will inevitably go and characterise short sellers, as the bad guys peddling false information for their financial gain?

Dan McCrum, Financial Times 32:02

It's a tricky subject, isn't it? Because sometimes the term short attack is justified. Because you have activist short sellers, like, say, Muddy Waters, run by Carson Block, which is probably the most famous in the United States’. And they will stand up one day, typically with some dossier of information, say, there are serious problems with this company. Everyone should pay attention, get out, now the share price has gone to zero. And that is an attack. They suddenly appeared from nowhere, and without warning, told everyone, there's a problem at the company. So, I think, yeah, I can see how that language is used. And it obviously it becomes more complicated than that. Because it depends on well, who is the short seller? How good is their work? And then you get into interesting questions about well, how long do they stand by that work? Is it fair to say, stand up and go this company is a fraud? Watch the share price drop, and then take profits straight away? Should you have to wait a certain period between then and taking your profits? You know, or should you have to hold on, tell everyone immediately when you change your position? So, even if everything you have done is correct, and you could be bang on right? I think you can call those sorts of tactics and attack. And so, the question is not somebody has been attacked, oh my God that's inherently wrong. It's well, was the attack justified? Was what they said correct? And not all criticism is an attack of that nature. So, I think there are different tactics. And so, it's very hard to make a sort of, a blanket response to it. But I think, I think what you can say is any company, which is complaining about a short seller attack, and is doing what we would call an ad hominem argument, if they're going after the player saying, these are scarless short sellers, instead of calmly answering the questions which have raised and say, well, if you have questions, we'll sit down with you and give reasonable answers. That's much more telling. So, it's who uses those terms attack? And if, if the company is doing it, then I'd be very suspicious.

Drew Nicol, AIMA  34:28

I think it is tricky, because of course, your right to it's difficult to generalise massively about sort of a hole, even though short sellers make up a very small segment of the hedge fund industry and activists, short sellers make an even smaller subset subset of that subset. But I think there is something again, just to come back to your own work on this and maybe just draw back to the to the top of the conversation we were talking about parallels. There really was a question of the level of conviction that was required throughout this journey. Because you point out, you know, the evidence seemed to mount and mount and mount, and nothing seemed to happen for the longest time, you know, nothing happened. And then it sort of all happened at once. And they did seem to be, you know, we've mentioned the costs, we've mentioned, the, you know, the personal costs, and you know, maybe even your own safety, you had to put on the line. But, when it comes to your own work at the FT and, you know, again, I can't help but draw the parallel with the hedge funds that helped you along the way. Was there ever a point where you thought, do you know what, I just, this isn't going to work. I'm done. You know, was there, you know, you obviously, you have your editors, and was there ever a wobble or, because you seem so steadfast throughout, but I don't know, maybe, maybe that just didn't come across.

Dan McCrum, Financial Times 36:00

So, I was always convinced that Wirecard was a criminal company, every single interaction with them, just made us think that is weird. This is not how normal companies behave. So, one of the best examples is, after the Zatarra attack, my boss who I worked with the whole time on the story, sort of old school city editor, reporter, Paul Murphy, who has a bunch of these sources we call bandits, basically, prolific stock market traders. And so, this entire report has been published, the Wirecard share prices crashed, all this weird stuff starts happening. And in the middle of it, the guy who owns the Fabric nightclub, you know, the big one in Smithfield. He gets in touch with Paul. And he said, he's one of Paul's long standing secret sauces. They used to chat all the time about stock market gossip and stuff. And he goes, I've got this German guy who likes to talk to you. His name's Jan Marsalek. He's a, he's something to do with a company called Wirecard, and we’re like, what on earth is happening here? How has the chief operating officer of a German financial institution worked out who our secret source is, and he wants him to arrange a conversation. Normal companies have PR firms to do that. And we said, No. They're threatening to sue us for one. I mean, they were huge. They were throwing lots of expensive loans and lawyers at us. But it's that sort of thing. That is really weird when it happens. And the frustrating thing was, I mean, one of the amazing things about the book is to finally be able to tell all the stories of what was going on. Because you can't put that into print, you can't turn that into an FT story. And so, I was always convinced, but there was a moment in sort of early 2017, when I had written a whole bunch of articles saying, Wirecard seems like a bit of a fraud, without actually using the F word, because you didn't want to get sued. And then the Zatarra reports come along, and said, it’s a whole money laundering operation. So, all of these allegations have been aired against Wirecard. And in early 2017, the accounting firm EY signs off on Wirecard’s accounts, and says everything's fine. And then the German regulator BaFin comes out and says, we're investigating the short sellers. So presumably, there's nothing to see here. And at that point, I kind of gave up. I felt like when my career, as I explained in the book, my career wasn't going brilliantly at that moment. And I try my best and I just assumed while there are other stories here, I'll just have to leave it alone.

Tom Kehoe, AIMA  38:43

Dan, the story still goes on. Are there any mysteries for you left outstanding that you'd like to solve from this. I mean, I'm keen to know, as is Drew, did you ever get to meet Jan Marsalek? Or did you ever get to meet with Markus Braun? I know that there were invitations. Have you ever followed up on them? Have they ever allowed you to meet with them?

Dan McCrum, Financial Times 38:43

So, Markus Braun I never met, I might go to the trial in Germany in the autumn, maybe just to, take a look at him and wave hello. But yeah, beyond one interview in December 2014, that was the only conversation I've ever had with him. But Jan Marsalek, I've never spoken to. So, behind me on my wall is this red ringed Interpol Most Wanted poster with a picture of Jan Marsalek on it. And so, he's been peering over my shoulder whilst I've written the book. And in a lot in a large respect, you know, a lot of the book, certainly the wider perspective, is this charismatic, clever, interesting guy, courting disaster and almost destroying the company, and then somehow getting away with it, and finding some way to bumble through to the next thing, and it keeps getting bigger, and bigger. And he becomes this sort of international jet set guy, who's flying around on private planes and dealing with spies and playing sort of games of international intrigue. And so, I'm still and then, at the end, when Wirecard comes crashing down, he disappears. That's one of the most amazing things in the whole story is Wirecard collapses. And on a Thursday, and this guy Jan Marsalek isn't arrested, he just sort of, you know, gently strolls out the building. And the next day, he gets on a private jet to Minsk in Belarus. And he disappears. And he's thought to be in Moscow somewhere now. And so, one of the big mysteries is, well, what was Jan Marsalek really up to? You know, what were his ties to these foreign governments? You know, was he, Was he a spy? Was he just a friend of spies? Who was he really working with, and for? And, you know, it's very convenient for a lot of people that he didn't end up in jail. And so, I think, a lot of the remaining mystery centers on that.

Drew Nicol, AIMA  41:13

I have to say, the big mystery for me going through that book was, how you got some of those details on sort of the other side of what they're up to. And that sort of chapter by chapter, contrast that you did.

The amazing detail that not only does he stroll out the office, but he goes for a nice, slap-up dinner that day, sits out, I can only imagine what that conversation must have been like going to dinner that night, before he vanishes. It's you know, you mentioned today, you sort of give this really neat round up at the end of where everyone's done, but you do keep to the cardinal rule of don't become the story. And you did leave yourself out of that. And so, I decided, just to put the spotlight back on you for a moment. Can you give us just a little insight into what you're working on now? And does it seem incredibly humdrum? Or are you just grateful for maybe a more standard story? I don't know. 

Dan McCrum, Financial Times 42:15

I mean, I'm still incredibly grateful that I just stumbled into this, like, crazy, insane story. And, so I'm not quite done telling it yet. I mean, this is the moment where I get to finally share the whole thing with the world. But no, I mean, if anyone is listening, and has a good story, I'm still part of the Financial Times investigation team. And I'm very much looking for the next big story, be it an accounting fraud, or other forms of bad behaviour. So yeah, I have a few irons and fires, I'm hoping to have some more stories at some point. And, just to see where the Wirecard thing goes as well, there'll be a documentary coming out in the autumn, on a streaming service, you may have heard of.

Tom Kehoe, AIMA  43:03

I mean, your book, as we say, it has all the hallmarks of a classic thriller. So, I'd love to know, have you sold the movie rights, Dan? Who would you want to have play you?

Dan McCrum, Financial Times 43:17

Having learned a small amount about how the movie business works, I would just be stunned and delighted if anyone wants to make this into a movie, or, you know, write 60 episodes, television series. I mean, there's lots of material, there on the cutting floor. But I mean, but we're still in talks about getting the rights for US Publication of the book. So, watch this space on that one as well.

Drew Nicol, AIMA  43:48

Well, Dan, thank you so much for your time. You know, as I mentioned, we're right on the cusp of your book coming out and say, Oh, the other thing as well, is there going to be an audio version as well? I know people are big on that these days. And are you voicing it yourself?

Dan McCrum, Financial Times 44:04

So, I think actually, when the podcast comes out, the book will be available in all good booksellers, Money Men, by Dan McCrum. And the audio book is read by me. I just finished it last week. And it was quite an unusual experience. But it was quite fun, sitting in a booth for three days reading through the book. So yes, very much an audiobook.

Drew Nicol, AIMA  44:29

Excellent. I wanted to ask that as well. I'm big into the audio books, although in this case, I did appreciate having the real thing in front of me. But as I said, I mean that was absolutely fascinating. A particular obsession with mine as well, as this was playing out. So, it was so great to hear from yourself on the front lines throughout this process. Thank you so much and all the best. I assume you will have a whirlwind launch tour and parties and you know, maybe you'll finally get to celebrate with that drink that you didn't get over lockdown.

Dan McCrum, Financial Times 45:03

Absolutely!

Tom Kehoe, AIMA  45:04

Jan Marsalek might just turn up at your party Dan!

Dan McCrum, Financial Times 45:08

Well, that would make for a very interesting party indeed. And thank you so much for having me on. It's been terrific.

Tom Kehoe, AIMA  45:13

Thanks again.

[Interlude] Dawn Angley; AIMA 45:15

AIMA are delighted to host our annual conference dedicated to ESG. This September the 8^th in London. The full day programme will address the basics of ESG integration, the latest developments in investor demands, new trends and themes, and the regulatory updates the firms need to know about. This is a prime opportunity to network with the industry and to hear unparalleled insights from speakers about how to approach responsible investment techniques across a range of strategies. To register, or to find out more, visit the AIMA website. We hope to see you there.

Tom Kehoe, AIMA  45:52

Hello, Jack, you're very welcome back to The Long-Short.

Jack Inglis, CEO, AIMA  45:55

Hello there, Tom.

Drew Nicol, AIMA  45:57

So, we've just heard from Dan about his odyssey in getting to the bottom of Wirecard’s cooked books. What did you make of his story? And in particular, the insight he gave into how investigative journalists and short sellers work in quite a similar fashion to uncover financial malfeasance?

Jack Inglis, CEO, AIMA  46:16

Yeah, you can't make it up, can you? I think it's proof that truth is often stranger than fiction. I loved listening to Dan on that and looking forward very much to reading the book. It's a gripping story, isn't it? And it's one that clearly, thanks to Dan's wonderful investigative work, is going to look very good on the page. There's no doubt about that. I think the one of the key similarities between the sort of investigative work that Dan and fellow journalists do, and that of short sellers, the work that they do is that sort of really deep, and dogeared research and investigative work that they undertake to get really at the heart of the story here. And I think what's very clear with Dan and certainly what I see with short sellers, dedicated short sellers on situations like this, is it really gets under your skin, clearly got under Dan's skin. And I've heard that from so many hedge fund managers who, whether it be here with Wirecard, or with other similar stories, where, you know, they knew through the hard work that something was going wrong, and they dedicated themselves to finding out more, to uncovering the truth. And I think one of the things that Jim Chanos once said, and I think his name was very much associated with the Enron fraud and uncovering of the Enron fraud. Is that, that hedge funds here, short sellers are real time financial detectives, and I think that's exactly what Dan is, as well. So, there's very much a similarity of getting really at the heart of the matter, through hard, hard work.

Tom Kehoe, AIMA  48:09

And Jack, Wirecard is not the only example of such fraudulent activity outed by short sellers. You mentioned Enron is another example. Yet, despite their efforts, the practice of short selling and its reputation isn't very highly regarded at all. I mean, going after short sellers is a recurring theme. In the case of Wirecard. we have policymakers and business leaders describing short selling as being anti-patriotic, and anti-business, and other actions have been tantamount to betting on a company's failure, and it's somehow unjust to short sell. Why do you think this is?

Jack Inglis, CEO, AIMA  48:44

I think that's been around for not just years, but centuries. You go back to 1610, the Dutch authorities ban short selling because of the falling share price of the Dutch East India Company. 200 years later, Napoleon banned short selling in France, describing it as an act of treason, for which you could be imprisoned and potentially have your head lopped off. So, that has been a view as it being unpatriotic throughout the centuries, and we've continued to see that. I think most recently, we saw it in somewhat in Wirecard at the time, when the short sale ban was imposed in 2019. The reasons that were cited by the German authorities, by BaFin, about the damaging effects it had on confidence in the German market. Then, during the start of the pandemic in 2020, we saw short sale bans from France, from Italy from Spain, some other countries, also some countries out in Asia Pacific. And so, it's kind of not new at all. I think one of the things to be aware of here is, A, there are some cultural differences. And by the way, Germany did not impose a short selling ban at the start of the pandemic when markets were roiled by the economic impact of that. But I think there is a cultural difference in countries, which has been fairly lasting, where there is a belief that short selling is somewhat anti-market. Fortunately, that view is changing, and we're seeing that. If you compare the cumulative number of days, that short selling bans were in place during the pandemic, they were about a 10th of that, and even less than a 10^th, of the cumulative number of days of short selling bans that were imposed back in 2008, during the time of the global financial crisis. So, there is definitely a shift in attitude, suddenly, in some major markets and major economies, that it's not really solving what people think it might be solving, I think the other thing I would say is that the corporate lobby can be very powerful at times. And by that, I mean, businesses, who have their companies listed on the stock exchanges, do get listened to by governments. And they will speak up very, very loudly, when they think that their share price is being attacked. It may be justly or unjustly, often they're going to think it's unjustly for obvious reasons. But governments tend to listen more to businesses than necessarily hedge funds who are in the act of short selling.

Drew Nicol, AIMA  52:04

I think you've touched on something really important and interesting there because when I was covering the story, as a journalist, I mostly focused on the role that various regulators in Europe played in, inadvertently shielding Wirecard from the scrutiny of short sellers through the imposition of these bans. I pointed out at the time, some of the shortcomings in the review process that underpins the mechanism of the short selling bans. And as you say that there are other factors in play as to as to why that may have gone through on that particular occasion. And as Dan noted, when he was summarising the sort of the aftermath, he said that there had been somewhat of a period of reflection by these regulatory bodies. That gives me some hope that the Wirecard saga ultimately may be different to other fraud cases, that short sellers have uncovered when it comes to shaping the views of regulators and policymakers. And interesting there, we do have that juxtaposition of Germany did impose a ban on Wirecard for systemic risk issues in pre COVID, but then did not impose a more widespread ban during COVID. And maybe that indicates some lessons learned there, and maybe a shifting of the needle when it comes to perception. But I just wondered if you agreed that something does appear to be fundamentally changing you when we look back from 2009, to 2020, and looking ahead?

Jack Inglis, CEO, AIMA  53:40

I think that there has been, and continues to be, a fundamental shift in the understanding of what short selling is all about, by policymakers and regulators. But I don't think has been a Damascene moment just by what's gone on Wirecard, I think this is something that has evolved over time and will continue to evolve. And there's a really sort of considerable body of academic work and empirical evidence that shows that short selling bans don't work. Indeed, we've heard from regulators in the US, for example, the SEC has publicly regretted the short sale bans it put in place in in 2008 and at the time of the global financial crisis. More recently, BaFin. certainly, their president owned up and apologised for imposing the short ban on Wirecard, and actually went out of his way to pay tribute to both the journalists and the short sellers who dug into the inconsistencies so persistently, to uncover this fraud. So, I think this has really helped a greater understanding that short selling and investigative work that surrounds, it not just by journalists, but by hedge fund sellers coming together around this, that it is actually incredibly valuable. So, I think that change is now being is now in place well understood, and as that data I suggested earlier on, about the number of cumulative days that we saw short selling bans imposed at the time during the pandemic, of this early part of the pandemic, as opposed to the global financial crisis, shows that we've come a long way in the past 15 years or so.

Drew Nicol, AIMA  55:55

And at the time of Wirecard’s collapse, you went on record to say that there is a very powerful message and the value of short selling, and that it takes both bravery and belief to commit to a short position. I think there are many, many examples in Dan's book to really drive that message home. But I just wondered if you could just elaborate on that a little bit for our listeners?

Jack Inglis, CEO, AIMA  56:19

Well, Dan's book, I think, which is describing a very relatable way of what happened. And the story is going to be riveting for anybody who reads it. And indeed, for those people who are coming to the whole saga, for the first time. So, I think he's done a huge service in exposing, not just what was going on at Wirecard, but the value of the investigative work, not just carried out by him, but also alongside him, short sellers. So, I think that in itself is incredibly valuable. Yes, you're right. I did back when, in June 2020, I wrote a blog, which I described as a vindication. The headline was a vindication around short selling, and Wirecard. And it is brave, it is brave to back your research with a large short position against an individual company like that, where the rest of the market is telling you, it's a darling of the stock market, and it's in the DAX30, etc. So really going against popular opinion. And the reason it's so brave is because if you are wrong, the losses can be unlimited. In short selling you, you sell and the share price keeps going up. And it's going to cost you, and it's going to cost you very heavily. And unfortunately, there were a number of hedge funds who got it right, but just couldn't carry on with the pain of carrying that short position as the share price continued to rise. More recently, we've seen in GameStop, short sellers, who really could not understand why Gamestop share price was at the level that it was, given the rather old-fashioned nature of the product that they had. But nevertheless, they came, they came against a concerted effort to squeeze out those shorts. And although their investment thesis was potentially right, definitely, it caused a lot of pain, as the share price was, was pushed to unimaginably high levels. So, it takes courage and the way you sort of get over that, It's not just a leap of faith. It's a leap, built on an enormous amount of work to uncover the rationale, and the reasons why you want to short in the first place, whether that be fraud, or whether it just be a simple overvaluation in a company. So, I think that's right. It's not for the faint-hearted short selling. And there are some people, particularly in these instances who really go that extra mile. But what I did want to say, short selling is not all about to uncover sort of accounting malpractice, or fraud of such nature. It's a very, very small part. Yes, there's been some examples. Enron, we've talked about Wirecard, there are others, but fortunately, they're not everyday occurrences. The main, by far and away the majority of short selling activity in the stock markets is to mitigate risk in the market. So, it's a hedging technique. It is not necessarily an act very seldom employed in situations where there is such a large fraud that is being exposed. So, it's very much part of the everyday market activity. Hedging, a trading strategy, rather than and this is where sometimes the public imagination runs away with itself. Rather than being something to try and forcibly drive share prices down, it's definitely a very, very small part of the overall short selling activity that goes on in markets. And I think it's really important to realise that.

Tom Kehoe, AIMA  1:00:32

Jack, you picked up on a very salient point there it is about educating, and it's specifically educating the wider public policymakers, and the media, about the value of short selling being an essential tool for well-functioning markets. So, what is AIMA doing then to educate the wider public about the value of short selling?

Jack Inglis, CEO, AIMA  1:00:53

Well, if you look back over time, at the reams of stuff that AIMA have written about short selling, and that much of which is available on the public section of our website, really defending short selling, but trying to defend it in a practical way to explain what short selling is, about why it is employed, the various different circumstances in which it is used. And also, as a result of both our own research and indeed, the research I alluded to earlier on from academics and, various other specialists, proving that there is no positive effect from short selling bans. And indeed, also proving that short sales, don't expedite the demise of very healthy companies. So, I think it's very important to show that evidence, to make that available. I think we've been successful with policymakers, and regulators, in helping them understand what is going on here. And I think the results, as I've already described, are plain to see in terms of no knee jerk reactions, or very few knee jerk reactions to market instability by just putting blanket bans on short selling. When it comes to the broader public, you know, how important is it? Yes, we want everyone to fully understand what is going on. But the way that we choose to do that is, hopefully through the media. I mean, Dan's been a great mouthpiece for that. He has a lot of influence, a lot of followers. By him getting his story across, I think is going to be incredibly helpful for anyone who reads it. When it comes to the companies themselves, whose shares are listed, the corporates, it's going to be more difficult. Nobody wants anybody to take a bet against the share price. If you're a chief executive, a chief financial officer of a listed company, you want your share price always to be rising, you always want to have good news that there's going to make it rise further. So, we hope they will understand, and whether the way that we want to get to them is that to try and point out that if somebody takes a short position, on their on their stock, that may not be, and more often than not, is not for nefarious reasons. It can purely be a hedging strategy. Or indeed, if it's convertible arbitrage, they may be long one asset class of that company shares and shorting to protect themselves on the other side by selling the actual listed equity itself. So, a lot more work to be done. But I think we've made a lot of progress. And Dan's book is certainly going to help that further.

Drew Nicol, AIMA  1:04:01

And actually, in the spirit of being, hopefully, useful in providing educational resources, any listeners that could do with brushing up on just the essentials of short selling, and maybe where we are in the current regulatory landscape, because there is a fair amount going on there, especially in the EU and the US. Episode 10 of The Long-Short with Adam Jacobs-Dean does cover some of those highlights for anybody who's looking for somewhere to go after this episode. But Jack, thank you so much for taking the time. It's always a pleasure to talk to you and get your insight and I know this was a topic close to your heart and that you followed very intimately at the time, so we just couldn't help but get you on to hear about it now we're at this next chapter.

Jack Inglis, CEO, AIMA  1:04:43

Good stuff. Thank you very much guys.

Drew Nicol, AIMA  1:04:47

The last show is brought to you by AIMA, The Alternative Investment Management Association, the global representative for the Alternative Investment Industry. As always, you can get the latest episodes by subscribing to The Long-Short on Spotify, Apple podcasts and Google podcasts streaming episodes directly from our website, AIMA.org, thanks for listening.

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