Fahmi Quadir started on Wall Street as an equity analyst at Krensavage Asset Management, a hedge fund that specialises in investing in and shorting healthcare companies.
It was here, running Krensavage’s short book, that Quadir shorted Valeant, the acquisitive pharmaceutical company which lost more than 90% of its value between 2015 and 2017 amid allegations of fraud. She appeared in a Netflix documentary, Dirty Money, about the collapse of the firm, alongside John Hempton, chief investment officer of Bronte Capital.
Quadir set up Safkhet Capital in 2017, in her late 20s, naming it after the Egyptian goddess of wisdom and knowledge. Before she founded her firm, Quadir had taken an interest in Wirecard, particularly after it bought a firm in the US.
Though she rarely speaks publicly about her active short positions, she wrote to German regulator BaFin when it banned shorting Wirecard for two months in 2019. In a widely circulated 15 page letter, she wrote: “BaFin’s rationale for the ban is anemic at best, contrived at worst.”
GlobalCapital spoke to Quadir about the treatment of Wirecard's critics over the past few years, what the fate of the company may be, and what she hopes will come out of the situation.
GlobalCapital: When did you first take a look at Wirecard, and what red flags did it raise?
Fahmi Quadir: We began looking at Wirecard in fall 2017.
It’s a natural target for us, since it faced credible, consistent criticism for well over a decade, but effectively evaded it all through narrative and sleights of hand.
Interesting to us was its ‘capstone’ acquisition of Citi North American prepaid cards, ending a many-year deal-making binge. This put them squarely on US soil, subject to US laws and regulations. Consequences to committing fraud matter with what we do, so this was a game changer in our view, given the strength of the US prosecutorial regime, particularly on matters of money laundering. [Wirecard has previously denied allegations of money laundering.]
The US prepaid card business was our starting point and we worked backwards and forwards from there, first trying to understand how prepaid cards [with abnormally high balances] figured into operations.
GlobalCapital: Just how significant is Wirecard’s collapse? Some think it is comparable to Valeant or Enron.
Fahmi Quadir: History is still being written and I generally shy away from these sorts of frivolous comparisons. I think referring to Wirecard as the ‘European Enron’ can inadvertently relegate the story to the box of “accounting fraud”, when accounting shenanigans played into a much broader set of fraudulent — if not incredibly criminal — behaviours.
Wirecard’s collapse will be studied by many different disciplines for many years. Beyond its financials, its rise and fall can be mapped to geopolitical events and the global movement of money. When you consider the size, scale, and global reach that Wirecard had as a platform for moving money, and the despicably poor controls, it really can make you awestruck.
GlobalCapital: Wirecard must have been an expensive short to hold over the years. Did you ever cover your short position? How often did you speak to other short sellers in the past few years about Wirecard?
Fahmi Quadir: I am still short Wirecard, and in fact I shorted more. And for much of the time I was short, I was not paying to borrow, or not paying much. Only in recent months did the borrow cost start to tick higher.
That said, part of being as concentrated as I am, means that I am fairly nimble with my trading and try to be as proactive around expected catalysts as I can be. Concentration and focus mean every bit of data that we come across can help influence my management of the position.
Given we came to this story from a different angle (ie, the US and possible money laundering) we were exploring new questions compared to the great analysts and researchers who came to the scene earlier than we did. I have incredible respect for all of them. I can say from experience, what Wirecard puts its critics through is heinous and everyone involved should be proud that they have made it out in one piece.
GlobalCapital: You wrote a letter to BaFin after the regulator banned short selling on Wirecard. A line that particularly struck me in that was: ‘However, such seemingly unilateral regulatory effort, prompted without sufficient evidentiary disclosure, can create a toxic environment where whistleblowers will avoid coming forward for fear of civil or criminal penalty for telling the truth. BaFin’s actions may set a dangerous precedent for market cosseting and capitulation to corporate influence.’ What were BaFin’s shortcomings through this and what could they have done more? What should the role of a regulator be when confronted with allegations of accounting fraud?
Fahmi Quadir: The decision to ban short sales in a single issuer was unprecedented and generally, as I wrote in the letter, widely seen as a wholly ineffective way to foster market stability. There are also major structural differences between the German enforcement and prosecutorial regime versus the US, which may factor into how allegations are handled and followed through.
However, in the case of such egregious manipulation of facts by the company and the consistency of credible allegations from its critics, BaFin could have and should have undertaken a more thorough and concerted effort to explore those claims and should have called in the Munich prosecutor last year, when BaFin first indicated it would be exploring market manipulation.
GlobalCapital: A lot of criticism has been levelled at Wirecard’s auditors, Ernst & Young. What should auditors do when presented with accounting irregularities? How can auditors conduct better due diligence?
Fahmi Quadir: There is a broader discussion to be had on incentives that auditors have and their role in fraud discovery. Auditors aren’t there to necessarily go out of their way to find fraud and they certainly aren’t incentivised to do so.
“Trust but verify” is a good standard but harder to diligently maintain after an extended relationship, just because we’re all human and susceptible to developing biases.
Auditors should probably be turned over more regularly than they are. EY was with Wirecard for over a decade.
GlobalCapital: A lot of critics faced a barrage of hostility, both from actors around Wirecard — lawyers, public relations people and, allegedly, hackers — but also online on Twitter and other social media. Do you think this was in any way justified? What could you take from this while short the company?
Fahmi Quadir: It’s absolutely never justified. There is something to be said of, ‘the lady doth protest too much’.
GlobalCapital: Are there any broader lessons to learn from this episode, as a short seller?
Fahmi Quadir: When smoke and stench follows a company no matter where it goes, for as long as it’s been in business, all while asphyxiating the peers who came before you, you need to be focused, strategic, and approach the short with the question: what pieces of information do we need to put these guys in jail?
A representative for Wirecard said the company is currently not making any further statements.