“Wirecard is our bête noir stock, our biggest loser. A loser on which we were eventually right,” wrote Hempton, along with Bronte’s chief executive Simon Maher, in a letter to investors on the fund’s performance in June which was seen by GlobalCapital. “If our positions were larger, we could have been permanently impaired by a disaster like Wirecard.”
Hempton arrived early to the Wirecard story which, counterintuitively, is not always a good thing for a short seller.
Before its extraordinary collapse in June, Wirecard stock had been flying from its initial share price of €5.22 in November 2006 to a peak of €192.45 in September 2018. Bronte nursed a short position against the company for roughly a decade, when the stock was at roughly €8.00.
“We talk in meetings with clients about frauds on which we are right going from [a price of] 10 to 0 via 100, and unfortunately this discussion is not theoretical,” wrote the pair. “In such cases we are forced to cover to manage our risk, and we will lose money even if we are right.”
Bronte’s position against Wirecard has at several points been its largest short, though the firm rarely holds more than 0.6% of its portfolio against a single company — a conservative figure for a short seller. Headquartered near Bondi Beach in Sydney, Australia, the fund has roughly $600m of assets under management.
Hempton is its chief investment officer, specialising in shorting companies with market capitalisations between $100m and $1bn. He has been short in over 1,100 companies in the past 20 years, including Lernout & Hauspie and Valeant, and within the short-selling world holds a near legendary status for uncovering fraud.
Wirecard first interested Bronte Capital due to its industry — high-risk payments — Hempton told GlobalCapital. Merchant acquiring — processing card payments between buyers and sellers — is a typically low-risk, low-profit business. A credit card transaction would have a fee of roughly 1.8%, and the merchant bank would typically receive roughly 9bp of that as it carries little risk.
But certain industries, such as gambling, prostitution and pornography, have added fraud and regulatory risks, and may pay higher transaction fees as a consequence. According to Hempton, his team looked into whether Wirecard was operating in higher risk fields — as well as other, nefarious spheres — a decade back.
“We proved very easily they were dirty,” said Hempton, “but that didn’t prove they were faking accounts.”
Hempton started looking into Wirecard’s Asian acquisitions, in particular a payments services firm in Jakarta. He roped in his friend Alex Turnbull, son of the former Australian prime minister Malcolm Turnbull, to look into the company when Turnbull was on one of his semi-regular trips to Indonesia.
Turnbull had a hand in exposing the 1MDB scandal. He has previously said that while working at Goldman Sachs he sent an email to colleagues questioning the high pricing on the $600m-odd bond deals for the Malaysian development bank, which was found to be enriching its executives and local government officials, as well as the scant clarity on the use of proceeds.
According to Hempton, Turnbull did not find much in Jakarta. “We found out then that Wirecard was marking fake profits and using that fake cash to buy fake companies,” he said. Though Hempton was later exonerated, it was a costly exercise as Bronte waited for the rest of the world to agree with its assessment.
Though Wirecard is set to become an iconic example in short selling, in important ways it is not unique. As Hempton and Maher have written to their investors, “there is likely another Wirecard somewhere in our collection of 200+ shorts, a position that will cost us (meaning you) decent money but on which we are right. Risk management is key to what we do with shorts. We will not compromise on it”.