Wirecard was once a shining star in the European tech industry, offering innovative payment processing and financial services to customers around the world. Founded in 1999, it quickly became one of Europe’s most sought-after technology investments, providing electronic payment transaction and risk management services, as well as physical card processing and issuance. Its subsidiary, Wirecard Bank AG, was licensed to conduct banking activities and had agreements with numerous international financial institutions.
Wirecard’s success was evident in 2005 when it got listed on the Frankfurt Stock Exchange. By 2018, it had joined the prestigious Dax 30 index of Germany’s leading blue-chip companies, overtaking Commerzbank in the process. The company’s value soared to an impressive €24bn, and its shares peaked at €140 (£120).
Wirecard’s remarkable rise led to its recognition as a German success story. Even Angela Merkel, the then Chancellor of Germany, supported the company during a visit to China in 2019, where Wirecard was looking for an acquisition. However, what followed was a catastrophic fall from grace.
From Tech Star to Corporate Scandal: The Fall
The company’s fortunes took a drastic turn following the publication of a Financial Times article in January 2019. The article exposed Wirecard’s alleged corrupt business practices and fraudulent financial reporting, causing short interest in the company’s shares to skyrocket. Despite the global pandemic, the Wirecard scandal continued to dominate headlines as it unfolded, revealing a web of deceit and corruption that ultimately led to the company’s insolvency. In 2021, Wirecard collapsed in what has been deemed as Germany’s largest post-war fraud scandal, shaking the finance world to its core.
Exploring the Allegations Behind the Wirecard Scandal
Wirecard had long been the subject of allegations of accounting malpractices, dating as far back as its early days of incorporation in 1999. These allegations peaked in 2019, following a series of investigations published by the Financial Times, which were supported by whistleblower complaints and internal documents. There were also whispers of wrongdoing dating back to 2008, including suggestions of balance sheet irregularities and a dossier of money laundering allegations.
In 2016, Zatarra, the US financial investigative research firm, published a scathing report on Wirecard, accusing senior executives of fraudulent activities, such as money laundering and fraudulent use of Mastercard and Visa. Despite these allegations, Wirecard continued to thrive for the next three years until the Financial Times picked up on the scandal in 2019.
Despite the mounting accusations of fraudulent activities, Wirecard was able to deflect criticism from investors and journalists, with the support of German financial authorities. Rather than investigating the allegations, Germany’s BaFin financial regulator chose to investigate the journalists reporting on the scandal and barred investors from short-selling, causing the share price to drop by more than 40%. To add to the confusion, in 2019, Wirecard received a cash injection of €900m from SoftBank and had their 2018 accounts approved by auditor EY, further giving the company a semblance of legitimacy.
The Shocking Findings by Financial Times
Throughout the Wirecard scandal, the Financial Times remained a vigilant watchdog, closely monitoring the company’s activities. In late 2019, the newspaper published documents indicating that profits at Wirecard’s units in Dublin and Dubai had been fraudulently inflated. Although Wirecard vehemently denied these accusations, they eventually appointed KPMG to conduct a special audit.
Originally scheduled to end in March 2020, the publication of the KPMG report and EY’s full-year results were postponed. When the report was finally released in April, KPMG revealed that they could not verify the genuineness of the arrangements responsible for the majority of profits reported by Wirecard from 2016 to 2018. Additionally, they raised questions about the €1bn in cash balances that were supposedly held in two banks in the Philippines, evidence for which was provided by a trustee who had severed ties with Wirecard at the time of the special audit. Despite these findings, investors were told that EY was satisfied with the 2019 audit and was prepared to sign off on it.
As the world began to emerge from lockdown, Wirecard was hit with yet another blow. Munich prosecutors launched an investigation into the company’s CEO, Markus Braun, and three other executive board members. The Philippine banks BPI and BDO informed EY a few weeks later that the documents providing details of the €1.9 billion in balances were “spurious,” adding to suspicions about the accounting methods used by the company.
Then, on June 18, Wirecard shocked the world when they announced that they were missing €1.6bn. This news was a bombshell that sent shockwaves throughout the financial industry and led to increased scrutiny of Wirecard’s financial reporting.
Wirecard Files for Insolvency
In 2020, Wirecard filed for insolvency after admitting that €1.9bn, which was supposed to be in its accounts, likely never existed. This admission followed a 72% drop in the company’s shares after the announcement of the missing cash. Despite claims that two banks in the Philippines held the money, they denied being Wirecard clients, leading the company to seek protection from its creditors. In the eyes of the regulator, the situation regarding Germany’s once-beloved tech company has become a complete disgrace and disaster.
Prosecutors detained former CEO Markus Braun on allegations of falsely inflating Wirecard’s balance sheet and revenues to deceive customers and investors. They accused him of knowingly signing off on inaccurate financial reports and faking documents to show the company had money that it did not possess.
Wirecard Faces Class Action Lawsuit
In the aftermath of Wirecard’s downfall, US shareholders launched what is believed to be the first proposed securities fraud class action against the company and its auditor. The suit pertained to the missing $2 billion in assets and alleged wrongdoing by Wirecard AG. Simultaneously, investor groups in Germany also filed securities litigation against the company.
According to the complaint, the former CEO Markus Braun, as well as the company’s former CFOs and other corporate officers, were involved in creating false and misleading statements about Wirecard’s financial status. These individuals allegedly played a role in the production, drafting, review, and dissemination of these statements. The complaint also included Ernst & Young GmbH, the company’s German auditor, as a defendant.
The plaintiffs in the securities fraud class action claimed that Wirecard, a company that provided online payment and processing services, inflated its cash balances by falsely representing $2.1 billion in a trust account, which amounted to about 25% of its consolidated balance sheet. However, on June 18, Wirecard announced that it couldn’t obtain sufficient audit evidence of the cash balances on trust accounts. This announcement caused the company’s stock prices to plummet, and within a week, it filed for insolvency protection, and its CEO was arrested.
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Recent Developments Following the Lawsuit
Following the unfortunate collapse of Wirecard, various investigations were launched by concerned authorities to uncover the root causes of the unfortunate incident and to ensure that those responsible are held accountable for their actions. The incident sparked a significant scandal in the German stock market, as many investors had previously placed their trust in the company and invested heavily in its shares. Despite the regrettable situation, it’s worth noting that Wirecard had initially enjoyed a positive reputation within the industry, and many investors relied on its services for their financial transactions. The incident also drew attention to the German financial regulator, BaFin, which faced criticism for its handling of the matter and was accused of being too lenient towards Wirecard.
As a result of Wirecard’s downfall, there have been growing demands for more rigorous audit supervision in Europe, and regulators in the UK are reviewing measures to end the perceived close ties between auditors and their clients, as well as to boost competition among major firms. In response to the scandal, the German government has implemented reforms to enhance corporate governance and prevent similar incidents from occurring in the future. Additionally, BaFin has undergone reforms and has been granted greater authority to investigate and penalize companies. Despite the unfortunate circumstances surrounding Wirecard’s collapse, the incident has spurred positive changes and progress in the financial industry.
Wirecard- The Legacy Continues Despite the Fall
Despite its collapse, Wirecard’s legacy continues to reverberate through the financial world. A nine-month inquiry by German lawmakers revealed multiple failings, including by auditors Ernst and Young, who had signed off on the company’s accounts. Many investors have taken legal action against EY, seeking at least partial compensation. Meanwhile, Wirecard’s former CEO Markus Braun and two other managers are facing fraud and market manipulation charges that could result in up to 15 years of imprisonment for each of them if found guilty. While the trial is expected to continue well into 2024, the German government and regulators have introduced reforms aimed at improving corporate governance and preventing future scandals.
Despite the challenges, Wirecard’s impact on the financial world serves as a cautionary tale about the importance of transparency, accountability, and strong regulatory oversight.
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