Updated June 27, 2020, 9:45 a.m.
The Wirecard case is one of the biggest investor scandals in the history of the stock exchange. How could it come to this? And what role did banks, auditors and the banking supervision Bafin play?
Wirecard boss Markus Braun celebrates his greatest triumph in September 2018. Commerzbank flies out of the most important German stock exchange index DAX after decades. Braun’s Wirecard company replaces the banking house.
The change of staff in the Börsenliga could not be more symbolic: vision and contactless payments cut lending and savings. The dusty business of the traditional house bank is a thing of the past, near field communication and credit cards are the future. With the rise of the payment service provider, a hint of Silicon Valley is blowing around the DAX.
Two years later, on June 23, 2020, Markus Braun, accompanied by two lawyers, stepped over the threshold of the Munich I public prosecutor’s office at 7:30 p.m. to be arrested. The company he manages is said to have falsified balance sheets, misled investors and linked authorities. It is the end of a rushing stock market. Rise and failure can be close together.
Benefited from the shopping boom
Wirecard AG knew only one direction for many years: upwards. The company from Aschheim near Munich benefited from the shopping boom like no other company. At the turn of the millennium, even smaller amounts of porn and gambling sites were processed, and Wirecard’s most recent portfolio included customers such as the KLM airline, the credit card provider Visa and the Orange telephone company.
The principle is as simple as it is ingenious. Wirecard takes care of the technical handling of payment transactions. Instead of having to conclude contracts with each individual provider for payment by credit card, direct debit or PayPal, Wirecard bundles this process with a worldwide system. The company receives a commission for every sneaker purchase, flight trip or cash-free taxi ride.
Accumulated, this is huge business – and it is far from exhausted. Whole continents are just waiting to be hit by the online shopping boom. Wirecard wanted to collect these fruits.
Group leader Braun avoided the limelight on the one hand and on the other hand tweeted his messages more aggressively than almost any other DAX boss in the world. When he communicated, he provided the keywords that you would like to hear on the stock exchange: data, artificial intelligence, Internet of Things. He underpinned his bold visions with grandiose growth.
The company’s own forecast of 30 percent was exceeded year after year, and the stock market thanked them with regular price jumps. In New York, where traditional German stock market values such as Lufthansa, Deutsche Bank or the Post are otherwise ridiculed, Wirecard is seen alongside SAP as the only competitor for Silicon Valley.
All warnings ignored
The beautiful growth story got its first spots when economic reporters from the “Financial Times” Wirecard accused money laundering, manipulation and bad accounts in around 40 articles last year. Aschheim reacted aggressively to the allegations and even had individual reporters monitored by detectives. The newspaper was publicly accused of cooperating with so-called short sellers who are betting on falling prices and deliberately depressing the share price.
Advocates for this version were found at the German banking regulator Bafin. The agency, with around 2,700 employees, implemented a temporary ban on short sales and filed a complaint against journalists and investors involved. The accusation: market manipulation.
But with the entry of the major investor Softbank, the pressure on Wirecard increased. The Chinese demanded more transparency. The management board then hired around 40 experts from the KPMG auditing firm, who forensically examined the consolidated financial statements from 2016 to 2018. The hope: KPMG confirms that everything is in order in the balance sheets.
The opposite happened. In a devastating report, the auditors wrote that Wirecard had only issued a lot of documents late or not at all, and that cash flows in business with third parties were incomprehensible. The 74-page result was a disaster.
At the same time, EY’s auditors, who have worked for Wirecard for more than a decade, examined the consolidated financial statements of the past financial year. They asked two banks in the Philippines to confirm that there were 1.9 billion euros in Wirecard accounts. But the accounts apparently did not exist.
When Wirecard canceled the balance sheet presentation last Thursday, a real exodus began with investors, customers and lending banks.
Seven billion euros in stock market value destroyed
Within a day, the Wirecard share price dropped almost 75 percent, and with it around seven billion euros in stock market value. Wirecard boss Markus Braun resigned shortly thereafter. He and his board colleague Jan Marsalek were sought with an arrest warrant.
While Braun has surrendered, Marsalek is said to be currently in the Philippine capital of Manila, where he is allegedly looking for the missing billions. In the meantime, Wirecard AG has filed for bankruptcy. The bank, which is only part of the company, was placed under regulatory supervision, but is not affected by the bankruptcy application.
With the collapse of Wirecard, Braun faces the shards of his life’s work – and his existence. The industrial engineer was the largest single shareholder with around seven percent. The explosion in the stock market had made him a billionaire. After the crash, Braun had to sell a large part of its shares at a loss.
In addition to Braun, a whole range of other actors are at the center of the affair, above all the banking regulator Bafin. Until recently, the authority had refrained from classifying Wirecard Holding as a financial institution and subjecting Wirecard to a special audit. It was not until six weeks after the disastrous KPMG report appeared that the decision to put Wirecard under full supervision was reached.
By then it was too late. Authorities chief Felix Hufeld has meanwhile described the events as “total disaster”. Politicians have signaled that they want to reform banking supervision. And the finance committee in the German Bundestag wants to launch an investigation before the summer break.
Process avalanche is imminent
A process avalanche could also roll over to EY’s auditors in the coming months, from investors claiming compensation for their losses. The auditors had been auditing the consolidated financial statements for a decade and were particularly responsible for the company’s Dubai business, which is at the heart of the affair.
Last but not least, the banks have not given a good picture. With increasingly ambitious price targets, analysts had driven small investors in particular and sprayed optimism without critically considering the allegations of short sellers and journalists in their analyzes.
On May 26, just a few weeks before the balance sheet presentation had burst, Baader Bank set a target price of EUR 240 and made a buy recommendation. The rating agency Moody’s did not withdraw its credit rating from Wirecard until the catastrophe was already perfect.
The biggest damage to this scandal is the German savers. The Wirecard case has destroyed a lot of trust. Political attempts to establish equity culture as a solid pillar for old-age provision may have been set back for many years.
Sources used:
- Der Spiegel: “Scholz announces reform of Bafin”
- Handelsblatt: “How Markus Braun drove Wirecard into bankruptcy”
- SZ: “The House of Cards”
- FT: “Wirecard Stream”
After the billion-dollar balance sheet scandal, the company applied to the Munich District Court to open insolvency proceedings.
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