Shares of many companies took a beating this year due to numerous scandals that rocked the markets. Others flourished in market conditions that accentuated their own core business thesis – mostly the tech stocks that were able to service millions in a socially distanced environment. Where shares fell, on numerous occasions they fell by more than 60%, and some have since delisted. Where does this leave investors? We take a look at the bad news caused specifically by management misleading and deceiving shareholders, which often is exposed when the business is under significant stress, the type of stress that can be brought about by an event like COVID-19. We will look at the share price impact of this type of news and give you a pointer on how to protect yourself from such risks.
Shares of Wirecard, a German based company who was once widely regarded as a pioneer and innovator in the digital payments industry, plunged as Ernst & Young says they found no evidence for 1.9 billion euros of cash reported on the company’s balance sheet.
The share price tumbled dropping by 66% on the day as markets responded to the latest setback to the troubled firm, which had already delayed its annual report on three previous occasions as allegations about financial impropriety swirled. Wirecard shares are trading at less than 1% of what they were worth before the allegations of fraud surfaced.
In addition, The Telegraph has reported that the company is being investigated for attempting to bribe British journalists to manipulate their share price.
Grenke stock saw their biggest drop in more than three decades in September after short seller, Viceroy Research, accused Grenke of issuing fraudulent financial statements to hide the extent of its problems. The company’s share price dropped as much as 51 percent at one point following the release of the report. The report accuses the company of market manipulation, money laundering and fraud, as well as a host of other allegations it made against the company in a 64-page report.
Established in 1978, Grenke specialises in IT leasing for the B2B sector and provides financial services to IT resellers only. Additionally, it provides resellers with commercial leasing for its customers.
Viceroy Research essentially has accused Grenke of inflating its balance sheet to present exaggerated numbers and cash in hand. It further claims that Grenke has overpriced its acquired companies and related-party franchises by setting high values on the balance sheet.
The DAX-listed company has undergone a major internal investigation. While the share price has not recovered yet, the signs are positive that the company will come through the crisis.
The Chief Operating Officer of Luckin Coffee, a Chinese coffee chain equivalent of Starbucks, was accused by his own company of fabricating much of its reported sales in 2019. The company has since become a global poster child for (alleged) fraud and deceit.
Luckin also said that certain costs and expenses were substantially inflated and advised that investors shouldn’t rely on previous financial statements for the nine months ended Sept. 30.
The stock, which trades on Nasdaq, dropped more than 75%. Muddy Waters Research published a critical report on the company in January describing it as fraud and a “fundamentally broken business.”
The events stemming from the financial misconduct investigation caused the stock to decline by 89% in a three-month period. To add insult to injury, Nasdaq announced they will delist the stock.
A US company that conceptualises zero-emission vehicles since 2016 and plans to produce them in the future. The company’s shares fell more than 14% on the 11th of September 2020 after the electric vehicle company denied fraud allegations made by short-selling firm Hindenburg Research.
Nikola shares ended the day at $32.13, bringing its market capitalization to $11.6 billion after the 14.5% drop. Within a month the share price was down by 35% and volumes were soaring, meaning thousands of investors were selling out and ‘taking their losses’. The stock price has since recovered and is up more than 150% so far this year.
Trevor Milton, Nikola’s founder was accused of making false statements about the company’s technology in order to grow and partner with top automakers by Hindenburg.
The firm announced it has evidence that comprises phone call recordings and text messages that contain false statements. Nikola is also accused of staging a video showing a truck that appeared to be functional. The research firm said the truck was rather “towed to the top of a hill on a remote stretch of road and simply filmed it rolling down the hill.”
The firm said Nikola’s response didn’t address any of its more than 50 questions “after promising a full rebuttal.”
How to protect yourself
Management fraud is a nightmare scenario for shareholders and auditors says Shane Curran, co-founder of InvestSure. If there is collusion, they can be particularly difficult to spot. Only a fraction of corporate executives who manipulate or misrepresent their companies’ performances get exposed by regulators for such misdeeds. One US investor actually messaged InvestSure for the product after losing money in both Luckin Coffee and Nikola. With Nikola, even though the share price recovered, most investors give up on a company and lock in their losses by selling their shares. In other cases, like Luckin Coffee, the share is unlikely to ever recover.
Fortunately for South African investors who have invested in both local and US companies, a world-first product that offers investors insurance cover for a drop in share price due to allegations of fraud, mismanagement or deception by management, exists. Easy to buy, simple to understand, cheap and providing instant protection, InvestSure’s product would have protected investors in all these stocks. Claims are paid in less than a minute of realising the loss.
While all investors want to tell the story of their investment into Apple that is up 300%, no investor wants to tell the story of how they lost all the money they invested in Wirecard. For just 0.6% per annum this risk of loss can be removed.