(Bloomberg Businessweek) -- The question everyone in the German business world is asking these days is as simple as it is perplexing: How, exactly, do you misplace more than $2 billion? That’s the mystery surrounding Wirecard AG.
The darling of the financial community was founded two decades ago as a processor of payments for porn and gambling websites, but it morphed into a developer of software for online transactions with a roster of A-list customers such as FedEx, Ikea, and Singapore Airlines.
On June 18, Wirecard said auditors couldn’t locate €1.9 billion ($2.1 billion)—about four-fifths of its net cash—that was supposed to be held at a pair of banks in Asia. That spurred a sharp drop in the company’s already battered share price (it’s now down more than 90% from its 2018 peak) and the departure of Markus Braun, the Austrian who’d been chief executive officer since 2002.
In a resignation note, Braun said, “Responsibility for all business transactions lies with the CEO.” On June 22, German prosecutors arrested him on suspicion of accounting fraud and market manipulation, and three days later the company’s new management began insolvency proceedings—effectively acknowledging that it’s too deep in debt to pay its bills.
The sordid tale has become an embarrassment for Germany, which has been a laggard in technology despite its engineering prowess and position as Europe’s biggest and most advanced economy. Wirecard was the financial-tech whiz kid that was supposed to change all that, with internet payment systems, fraud detection software, and an online bank serving both individuals and companies.
Two years ago the interloper elbowed 150-year-old Commerzbank out of Germany’s 30-company DAX stock index, taking a seat alongside titans such as Adidas, BMW, and SAP. But shortly after that milestone, the Financial Times in January 2019 reported irregularities in Wirecard’s accounting, saying Asian units had inflated sales and profits. As the company launched an internal investigation, short sellers—investors who bet that shares will fall—piled in and soon controlled 14% of Wirecard’s stock.
What should have been a warning sign to the management board and regulators was perceived as an affront. Wirecard denied the FT story, and the lead reporter was trolled by shareholders who went into attack mode every time he mentioned the German company on Twitter. Braun denied any culpability and as recently as May 17 tweeted that “when all the noise and dust settles” investors would again recognize Wirecard’s stellar potential.
And crucially, while Germany’s banking watchdog probed whether Wirecard had failed to meet its disclosure obligations, it banned shorting the company’s stock—the first time it had ever taken such a step—and investigated possible market manipulation by short sellers colluding with journalists.
Wirecard’s shares dropped sharply in the wake of the initial FT report, then for more than a year bounced up and down on various allegations of wrongdoing that were inevitably followed by company assurances that all was rosy. Braun even met with Paul Achleitner, the head of Deutsche Bank AG’s supervisory board, to discuss a tieup, and Wirecard executives last fall commissioned a study by consultants at McKinsey & Co. exploring the idea of Wirecard buying Germany’s biggest financial house. “Wirecard wanted to fake it until they made it, and essentially they got caught out,” says Fraser Perring, a founder of Viceroy Research and an early short seller in the German company.
The bottom fell out when Wirecard disclosed the missing €1.9 billion and withdrew its financial results for fiscal 2019 and the first quarter of 2020. At Wirecard’s headquarters in Aschheim, a quiet suburb of Munich, phone lines lit up with customers terminating contracts, and many of the 5,800 employees around the world—blindsided by the news—started sending out their résumés.
The next day, two Philippine banks believed to be holding the cash, the Bank of the Philippine Islands and BDO Unibank, said Wirecard wasn’t a client. The Philippines central bank later said the funds had never entered the country’s financial system, and Wirecard ultimately acknowledged the money probably doesn’t exist. Moody’s Investors Service cut the company’s credit rating six levels, to one step above the lowest tier of junk.
Braun, who owned 7% of Wirecard, was forced to sell shares he had pledged as collateral on a $150 million loan he’d taken out to buy the stock. Felix Hufeld, head of BaFin, Germany’s markets regulator, said in a June 22 panel discussion that it was “one of the most appalling situations I’ve ever seen at a DAX company” and pledged an investigation both of Wirecard and his agency’s missteps in the case. “Once we know the facts,” he said, “we will most certainly sort out potential shortcomings.”
Cleaning up the mess will fall to James Freis, who was named interim CEO. An American who began his career as an attorney at the Federal Reserve Bank of New York, Freis later served as director of the U.S. Treasury Department’s Financial Crimes Enforcement Network. Since 2014 he’s been at Deutsche Börse AG—the Frankfurt stock exchange—most recently as chief compliance officer. In May, Wirecard hired Freis to run a new department called “Integrity, Legal, and Compliance,” a position he was due to begin on July 1.
His first priority had been to work with a consortium of 15 big banks including Commerzbank, ABN Amro, and Barclays to negotiate an extension of almost $2 billion in debt Wirecard had taken out to finance operations. Though the banks have offered some flexibility, the insolvency filing indicates that those talks haven’t gone well. The company has hired investment bank Houlihan Lokey Inc. to develop a financing strategy, and Wirecard has said it’s considering cost reductions and selling off or shuttering business units. In a video released to staff, Freis spoke about restructuring and ways to “trim the fat” but didn’t mention the missing money.
The bigger question is whether Wirecard can—or should—remain in business, says Neil Campling, an analyst at Mirabaud Securities. Payment processing and fraud detection, of course, require the trust of customers, and a company that failed to detect what appears to be a multibillion-dollar scam in its own operations might have difficulty in that line of work. Corporate clients are already jumping ship, and some people with accounts at the bank have rushed to withdraw their funds. “Whether it’s quick or slow, it’s death by a thousand cuts,” Campling says. “Wirecard has no way back.”
©2020 Bloomberg L.P.
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