tougher penalties

Financial Regulator Bares its Teeth

Elisabeth Roegele Bert Bostelmann cut HB
Elisabeth Roegele, head of securities supervision at BaFin, says higher fines are to come.
  • Why it matters

    Why it matters

    Market manipulation is hard to prove and hard to prosecute but German regulator Bafin is determined to go after wrongdoers.

  • Facts

    Facts

    • Bafin is currently investigating a case of possible market manipulation at Wirecard, a company listed on Germany’s technology focused stock exchange TecDAX.
    • A Bafin investigation into market manipulation of VW shares led to the trial of former Porsche Chief Executive Wendelin Wiedeking and his former chief financial officer, Holger Härter.
    • A verdict on the Porsche case is expected Friday.
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    Audio

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German financial regulators will impose larger fines on offenders to comply with European legislation, according to one of Germany’s top regulators.

Elisabeth Roegele, who heads the securities supervision section of the Federal Financial Supervisory Authority, also known as BaFin, told Handelsblatt the upper limit on fines for individuals found guilty of market manipulation would be raised from €1 million, or $1.1 million, to €5 million.

Breaching rules about full disclosure could result in fines of up to €10 million, she said.

Ms. Roegele, a former share trader, added that prison terms for people who manipulate the prices of penny shares, or smaller companies, may also be increased to 10 years, and the number of prosecutions would also increase.

“Last year, for example, we brought nearly 200 cases – so nearly every second misdemeanor case - to completion with a fine.”

Elisabeth Roegeler, Bafin

“Last year, for example, we brought nearly 200 cases – so nearly every second misdemeanor case – to completion with a fine. And the size of the fines imposed also increased steadily. In future, fines will be much higher still, in line with modified European rules regarding guidelines on transparency and market abuse,” she said.

“And don’t underestimate the deterrent effect of our increased possibilities to “name and shame” perpetrators. We will be able to “name names” in the case of misdemeanors – and that is what we will do.”

She said Bafin was increasingly willing to initiate criminal proceedings. “The number of complaints we pass on to the public prosecutors also continues to rise every year: After 160 cases in 2015 we have already reported 27 cases of manipulation to them this year,” Ms. Roegeler said.

Bafin is currently investigating a case of possible market manipulation at Wirecard, a company listed on Germany’s technology focused stock exchange TecDAX. In late February, a study by a previously unknown analysis firm, which leveled accusations of money laundering and set a “target price of zero,” sent Wirecard shares plummeting. Shareholders in the online payment processor suffered a total loss of €1.3 billion in a single day of trading. So-called short sellers, who make money when share prices fall, were quickly suspected of being behind the losses.

“We are in the process of looking at this case. We are analyzing if somebody consciously manipulated the stock price of Wirecard by giving incorrect or misleading details,” said Ms. Roegeler

But fewer than  3 percent of investigated cases lead to convictions. And prosecution is a lengthy process. In the summer of 2009, the Stuttgart public prosecutor’s office, acting on information from BaFin, launched an investigation into suspected market manipulation with Volkswagen shares. The investigation led to an indictment. Former Porsche Chief Executive Wendelin Wiedeking and his former chief financial officer, Holger Härter, have been on trial since last October.

The prosecutors believe there is proof that the two men tried to deceive investors in 2008 and wanted to influence the VW share price. The case revolved around the attempt by Porsche SE to take over VW, which was ultimately unsuccessful. In 2008, Porsche spent about half a year denying that such a plan existed, but then suddenly disclosed that it did. The share price shot up, and investors who had bet on falling prices suffered a total loss in the billions.

Nevertheless, experts believe that the two men may well be acquitted when the court delivers its verdict this Friday, as the evidence has been scant. Prosecutors are calling for jail terms and a €1 million fine.

Bafin is also under pressure to offer more protection to small investors, like those who lost out through the collapse of wind farm company Prokon, but Ms. Roegeler warns that no regulator offers ongoing, constant protection against investment risk.

“With or without the law to protect small investors, one thing always applies: In this market segment we do not carry out continuous  company supervision. Not with a listed DAX company, nor with a small issuer of investment properties. Investors who buy into a company, for example, in the form of bonds or profit participation certificates, always have to remember that there is no state authority which checks the business models of companies for them,” she said. But she added that it was now easier for investors to at least obtain accurate information.

“In terms of transparency, we have certainly made a quantum leap with the law to protect small investors. Prospectuses for securities and investments have become more comprehensive and meaningful. And that applies to both the opportunities and risks involved. Another new development for us is the possibility to limit or prohibit products or their distribution,” Ms. Roegeler said.

She added that new investment companies, including fin tech companies, would be subject to the same scrutiny as more established financial institutions.

“It is a major issue for us, and one to which we have devoted a whole project group. The message is clear: No one will receive either preferential or discriminatory treatment,” she said.

 

Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. Handelsblatt’s Peter Köhler reports on banks, private equity firms, venture capital and corporate funding. Georgios Kokologiannis is an editor with Handelsblatt’s finance desk in Frankfurt. Frank Wiebe is a New York correspondent covering finance policy. To contact the authors:   Kokologiannis@handelsblatt.com,  drost@handelsblatt.com,  wiebe@handelsblatt.com and koehler@handelsblatt.com 

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