Grenke AG short attack: What does insider transaction and short selling data tell us?

Robert Hable 18 September 2020

Shares in German leasing company Grenke AG (GLJ:GR) have fallen heavily this week following the release of a report on the organization by US short seller Viceroy Research. Viceroy was co-founded by Fraser Perring, who publicized doubts about Wirecard’s accounting as early as 2016.

Viceroy’s report on Grenke, which was released on 14 September and entitled ‘Grenke – For Your Fraud Financing Needs’ accuses the German company of engaging in fraudulent accounting techniques. It also alleges that Grenke swindled small businesses and laundered money for criminals.

Is Grenke the next Wirecard? Right now, it’s too early to say. In these kinds of situations, however, we can get clues from insider transactions and short selling data. This data can provide investors with powerful insights. Recent insider purchases, for example, indicate that insiders expect their company’s stock to rise. So, let’s take a look at the data on Grenke since the short selling report from Viceroy was published.

Grenke 1    Source: 2iQ Research

Viceroy’s Grenke report

Before we analyze the insider transaction and short selling data, it’s worth looking at the accusations from Viceroy. In its report, the short seller does not hold back. It claims that:

  • “Grenke’s global expansion through the purchase of dozens of undisclosed related party franchises is a fraudulent scheme perpetrated on a mass scale, designed to either hide fake cash or siphon off millions of euros to undisclosed related parties, or both.”
  • “Grenke’s banking division has been a conduit for the proceeds of crime and money laundering, and could face the loss of its banking license.”
  • “Grenke’s leasing model facilitates and encourages rampant fraud from resellers, resulting in bad debt, protracted legal disputes and the defrauding of small businesses, the government, and charities. Legitimate leasing of small ticket tech is becoming increasingly redundant, in outdated and fast diminishing business segments.”

Viceroy sums up its research by stating that it believes Grenke AG stock is uninvestable due to “blatant accounting fraud, including dozens of undisclosed related party transactions, and the complete lack of internal controls, right down to individual due diligence on customers.”

It’s worth noting that Viceroy posted two copies of its Grenke report to Germany’s financial regulator, BaFin, before publishing it. The regulator has since announced that it is looking into allegations of market manipulation by Grenke following the critical report. It has also advised that it was investigating possible insider trading at Grenke even before the Viceroy report was published.

Grenke’s reply

Grenke has been quick to reply to Viceroy’s allegations.

On 15 September, the company issued a news release stating that:

  • A central accusation that a substantial portion of the €1,078 million in cash and cash equivalents reported in the 2020 half-year financial report does not exist is “demonstrably false.”
  • The 64-page report from Viceroy contains “numerous other unfounded allegations.” 

Then, on 17 September, Grenke published another news release, stating that:

  • It has convened a task force to deal with the detailed rebuttal of the accusations made against the company by Viceroy Research.
  • Antje Leminsky, Chair of the Board of Directors of Grenke AG, and Sebastian Hirsch, member of the Board of Directors, together with the company founder and Deputy Chair of the Supervisory Board, Wolfgang Grenke, and the Chair of the Supervisory Board, Prof. Dr. Ernst-Moritz Lipp, will comment on all of the topics in writing and in the context of an investor and analyst call on 18 September.
  • The Board of Directors and Supervisory Board continue to regard all the accusations as unfounded.
  • It is considering taking legal action against Viceroy Research.

Fund manager reaction

German fund managers have reacted to the short attack in different ways.

One fund manager that is backing Grenke is Dr Hendrik Leber of Acatis Investment. Acatis is one of Grenke’s largest shareholders. The investment firm has a large allocation to Grenke shares in its Acatis Gané Value Event fund. As of 15 September, Grenke shares made up 4.1% of the fund.

“Acatis has examined the allegations and has so far seen no reliable evidence for the allegations. The allegations do not seem stringent to us and resemble a composite collage,” he said. “We still consider the company and its business model to be solid and currently see no reason to reduce the Grenke positions in our funds. After yesterday's share price plunge, we bought more Grenke shares," he added.

GLJBBG001     Source: Bloomberg

Other fund managers have less confidence in the company. For example, Georg von Wallwitz, managing director and fund manager at the fund provider Eyb & Wallwitz – which currently has no positions in Grenke – advises against making quick judgments in view of the allegations against the business.  

“Fraser Perring is a professional, and when he leans out the window like that, then it's worth listening to. I cannot say whether the allegations are true, only insiders know. Some of the allegations sound more plausible, others less so,” he commented this week. He also said: “Unless there is a very good response from the company to the allegations on Friday, I see no reason for investors to hold the stock. We are investors with a long-term perspective and therefore we like to know what we are investing our money in. A stock that gets caught in such a vortex is for people looking for the thrill that we'd like to avoid.”

Insider transaction data

Looking at insider transaction data, it’s interesting to see that one insider has purchased Grenke shares since the Viceroy report was published.

The insider was Florian Schulte, who sits on Grenke’s Supervisory Board. Schulte – who has a background in corporate finance and strategy – purchased 3,500 shares on 16 September at a price of €35.87 per share. The total cost of the purchase was €125,554.

This insider purchase is an encouraging development. However, it would be nice to see some insider purchases from members of Grenke’s Board of Directors such as Chair of the Board Antje Leminsky and Sebastian Hirsch – who is responsible for Controlling, M&A, Treasury, Legal, Taxes, and Investor Relations. So far, there have been no purchases from the four members of the Board of Directors.

That said, we have observed plenty of buying from members of the Board of Directors in 2020. When equity markets were falling in February and March, Leminsky purchased Grenke stock as did Hirsch and Mark Kindermann. Meanwhile, Gilles Christ – who is responsible for Marketing, Sales and the Franchise system – purchased stock in both June and early September.

GLJ-GY (chart)    Source: 2iQ Research

We will point out that since 14 September, the company has not engaged in any share buyback activity.

Short selling data

Turning to the short selling data, there are currently three active positions in Grenke. Two of these were taken in early September while one was taken in early August.

Those currently shorting Grenke stock include:
  • BlackRock Investment Management
  • Gladstone Capital Management
  • Odey Asset Management
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Grenke AG is the third-highest active short position in Germany by BlackRock Investment Management. 

GLJ-GY (puiechart)                  Source: 2iQ Research

In total, 3.3% of the company's outstanding shares are being shorted. This figure is not particularly high. By contrast, the most shorted German stock right now, Shop Apotheke Europe, has 13.6% short interest at present. It’s worth pointing out that no institutions have taken new short positions since Viceroy’s report was published on 14 September.

Keep an eye on insider purchases

In summary, we can gain some interesting insights from this data. At least one insider is confident that Grenke stock will bounce back. It would be good to see some more insider buying, however. Especially when you consider that the share price is currently well below the level that many insiders were buying at in March. On the short side, there are three funds currently short. However, the overall level of short interest is not particularly high. And no institutions have taken short positions since Viceroy’s report was published.

Going forward, we think it’s worth monitoring the insider transaction data closely. If Grenke insiders are truly confident that the company is in the clear, we would expect to see some more buying activity in the near future.

Disclaimer: Neither 2iQ Research GmbH nor its content providers are responsible for any damages or losses arising from any use of this information.

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