Wirecard: a giant’s collapse

Updated: Jul 18, 2020

Germany’s embattled fintech behemoth Wirecard AG filed for insolvency with a Munich

district court on 25th June, a week after a whopping $2.1 billion (€1.9 billion) was found

missing from its books, making it the first blue-chip of Germany’s esteemed DAX index

to fail. The unscrupulous skullduggery has left regulators and the market baffled as to

how such a glaring deception was allowed in the first place. The firm’s share price

tanked, reaching €1.28, (at the time of writing) losing about 98% of its value since the

week began. The company’s solitary listed bond plunged to 17 cents on the euro. To

exacerbate, the sudden collapse has left creditors with a hole of 3.5 billion euros ($3.9


The vicious sell-off of the stock came after shares were suspended on the floor of the

Frankfurt Exchange for 60 minutes on Thursday, June 25th, pending announcement of

the company’s insolvency. The announcement leaves the eminent German fintech player

with very few avenues. The resignation, and ensuing arrest (after turning himself in) of

long-serving CEO Markus Braun for false accounting and manipulative business

practices has not helped matters.

The crisis calls into question the authenticity of financial statements, which are the sole

prop buttresses the reliability of the firm, based on which investors, regulators and

creditors take decisions. This mismanagement is reminiscent of the Enron crisis that

shook the USA markets in the early 2000s.

Wirecard’s once-celebrated Ex-CEO Markus Braun. Source: AP

What really transpired?

The spiral commenced when EY (formerly Ernst and Young), the long-time auditor of

Wirecard refused to sign off on the 2019 books of the company on June 18th, claiming a

missing $2.1 billion (€1.9 billion). It was unable to confirm the existence of the amount

in cash balances on trust accounts, conforming to the findings of an external probe by

KPMG in April. EY cited “clear indications that this was an elaborate and sophisticated

fraud, involving multiple parties around the world in different institutions, with a

deliberate aim of deception.” KPMG was unable to verify €1 billion in revenue from

third parties in a six-month long probe. Wirecard insisted that the money was kept in an

escrow account in the Philippines. Chaos ensued, causing the shares to nosedive 80%

over two days of trade and CEO Markus Braun resigning on June 19th. The torrid 48

hours had more to offer- The two banks in which the money was alleged to have been

deposited washed their hands off the situation, with BDO Unibank Inc. (the other one

being the Bank of the Philippine Islands) publicly announcing that Wirecard “is not a

client of the bank” and the documents claiming the existence of a Wirecard account were

in-fact “falsified” and “carried forged signatures of bank officers.”

Matters waned further, with COO Jan Marselak suspended on the 22 nd and CEO Markus

Braun suggesting that Wirecard themselves had been caught up in a fraud of epic

magnitude- “It cannot be ruled out that Wirecard AG has become the aggrieved party in the case of fraud of considerable proportions”. Mr. Braun himself owns 7% of the

company’s stock. The corporation announced that the money “probably does not exist.”

Wirecard also pulled the plug on the release of audited results for the whole year 2019

and the first quarter of 2020, due to be published on the 19th of June. The failure of

publishing the audited accounts has left creditors with the right to terminate €1.75 billion

in a revolving credit facility loans to the company.

The cash-balance’s mysterious ‘disappearance’ has cast aspersions on the regulatory

authorities of Germany, which allowed Wirecard AG (WDI) to trade in the prestigious

Frankfurt DAX index in late 2018. The company soared, reaching a peak worth €25

billion ($28 billion) by market capitalization.

Once regarded as Germany’s hottest fintech prospect, the accounting fraud probe now

leaves the company mired in controversy and uncertainty. The creditors of Wirecard,

including Commerzbank AG and ING face an uphill battle of recouping losses and are in

for long drawn negotiations about clarity post-insolvency with administrators in exchange

for the extension of $2 billion in credit to Wirecard. Visa and Mastercard licenses are also

set to be revoked for the firm if clarity of the missing money isn’t found. Credit Rating’s

agency Moody’s lowered the firm’s rating by 6 levels, putting it just one tier above junk

debt on release of the news.

Markus Braun was replaced by James Freis as interim CEO on June 18th. Mr.Freis was

tipped to join the board as a compliance executive and has previously served as the chief

compliance officer of the German stock exchange. He now faces the prospect of steering

a sinking ship through a regulatory storm, with persecutors, shareholders, and creditors

looming. DWS, the largest stakeholder of Wirecard, is weighing legal steps to take

against the company. It is still unclear whether Wirecard’s subsidiaries (including

Wirecard Bank) will be involved in the regulatory and insolvency proceedings, with the

final say lying with the German financial regulatory body, BaFin (Bundesanstalt für


The payment processing giant has scrambled for a lifeline, appointing investment firm

Houlihan Lokey to find a ‘sustainable financial strategy’ to carry out. Wirecard is in

‘constructive talks’ with major creditors including Commerzbank AG, LBBW and ING.

It is looking for the continuation of business operations and suggested a restructuring of

debt and termination of business outposts.

Stock prices plummeted after the missing balances and insolvency announcements. Source: Google widgets

Wirecard: It all starts with a good intention

Wirecard AG is a relatively unknown online payments processing firm, linking

merchants, banks, and customers, as well as providing related financial services and loans

through its banking wing, Wirecard Bank. Founded in 1999, in a small Munich suburb of

Aschheim with modest origins, Wirecard hopped onto the dotcom bandwagon as a call

center operation and went public in 2000. The Dotcom bubble burst arrived soon enough,

leaving the pioneering business to restructure itself. Morphing into a secure online

payment provider, Wirecard was well received.

After hiring Austrian tech entrepreneur and the now fallen from grace Markus Braun as

CEO in 2002, the company began its remarkable rise into prominence as a payments

processor, one of the largest in Germany. In 2006, Wirecard makes a moved into banking

with the purchase of XCOM, and renaming it as Wirecard Bank, as well as acquiring a

license from Visa and Mastercard. Jan Marsalek, the erstwhile COO, was appointed in

2010. Wirecard straight away announced that the firm will function in English, with an

eye on global domination.

The willing adoption of technology in finance and Ecommerce made it a darling for

investors. In tandem with its mantra of a “cashless society”, Wirecard became one of the first players in the market to adopt the HCE (Host Card Emulation) technology, where a

smartwatch could be used for payments in 2016. Wirecard laid a business model- where

it penetrated young markets to innovate, create new payment methods that allow the fast

adoption of technology. This drive to revolutionize digital payments made Wirecard a

force to be reckoned with.

Under the Austrian’s leadership, Wirecard consolidated its position in the German

market, in as well as dabbling in Asia as a partner to AliPay and Wechat, as well as

linking up with obscure third-party vendors in Dubai, Singapore, and the Philippines.

Between 2014 and 2018, Wirecard made 11 acquisitions worth €1.3 billion, particularly

in the Asia-pacific region, in a set of oddly structured deals, with the abstruse acquisition

of an Indian payments firm in 2015 for €340 million. In 2016, Wirecard took a giant step

into the North American market by buying a prepaid payment business from Citigroup.

In the December of 2017, Markus Braun revealed that the company had received a €150

million loan from an undisclosed lender with his own shares pledged as collateral. The

company peaked in 2017-2018, when it briefly crossed Deutsche Bank on the Tec-DAX

index (with a then valuation of €21 billion ($24 billion), over Deutsche bank’s €20

billion), making it the most valuable financial services provider in Germany, despite

allegations over balance sheet discrepancies. Its revenue reached €1.5 billion, with a

balance sheet value of €5 billion. In 2017, it was proclaimed as one of Germany’s 30

most valuable companies. In 2018, Wirecard reported to have 5000 employees, with

250,000 merchants including over 100 airline companies, and a valuation of more than

“40 times that of next year’s expected earnings”. The fairytale didn’t end there- in 2019,

Wirecard secured an investment of €900 million from Japanese tech-fond conglomerate

Softbank, despite questions being raised over various dealings of the company. The same

year, Wirecard launched an investment grade bond issue worth €500 million, further

taking advantage of the goodwill on its side. Markus Braun seemed to be the beau ideal

leading a colossal fintech firm set to challenge Silicon Valley.

The stellar Y-o-Y figures reported by Wirecard. Source: Wirecard

In essence, the company’s announced profits and stellar growth seemed to make investors

flock at its door. However, this impressive record of accomplishment seemed to good to

be true and was not without its own scars. Despite Mr. Braun’s optimism and glitzy track

record, questions were being raised.

Share performance over 2019-20. Source: Wirecard

BaFin, Financial Times, whistleblowers, and short sellers: the whole kit and caboodle

The sudden demise of June 2020 was long-time coming, given the warning signs. The

first attacks on Wirecard started as early as 2008, where it was accused of balance sheet

irregularities by the head of a German shareholder association, prompting a special audit

by EY. This heralded the start of a long history of association between Wirecard and EY,

with the latter replacing a small Munich firm as its auditor. The critic was subsequently

persecuted by authorities and was handed a prison sentence for ‘price manipulation’.

In 2015, the Financial Times launched its scathing lambaste on Wirecards’s accounting

and disclosure practices through their ‘House of Wirecard’ series, reporting a €250

million hole in the books of the German conglomerate. The Financial Times were

adamant that the corporation had inflated sales and profits in order to seem more

attractive. In response, Wirecard proposed legal action and hired London based PR firm,

FTI consulting to look after its external public relations.

The same year, J Capital Research, an independent research firm registered in Hong

Kong and USA reported (based on primary research) that the Asian side of Wirecard’s

business was more phony than genuine: "Wirecard is ostensibly spending heavily to acquire growth in Asia by buying companies in Vietnam, Laos, Cambodia, Singapore and

India. We visited several of these acquisitions and found either string operations or no

presence at all. We think that fictional assets in Asia may be hiding the uncomfortable

truth that there is no profit." The Research firm also reported that they found “little

evidence of legitimate acquiring volumes”. The report also added- “Wirecard's original

and possibly only market is the online gambling netherworld… the company bears

significant risk of fraud, default, reversed transactions and merchant insolvency”

suggesting an unsavory business model. They signaled that the stock of the company be

shorted. Shorting, or short selling, is when an investor borrows shares and immediately

sells them, hoping he or she can scoop them up later at a lower price, return them to the

lender and pocket the difference.

The Co-founder of J Capital Research Tim Murray decided to “step away” after things

got really murky – “there was speculation about kidnap threats. We were hacked. We

suspected it was probably being used by Russian mafia to launder funds through illegal

gambling.” Wirecard predictably disparaged the report citing that J Capital

“fundamentally misunderstands the Wirecard business model”, while also questioning the

independence of the firm.

This was not the first-time critics have been targets for hacking campaigns. In a report by

the Citizen Lab, a part of the University of Toronto’s Munk School, an India linked

hacker-for-hire group by the name of ‘Dark Basin’, was responsible for 28,000 web

pages created by hackers for personalized “spear phishing” attacks designed to steal

passwords from targets including advocacy groups and journalists, elected and senior

government officials, hedge funds, and multiple industries, in a campaign that has

spanned for years. With regards to Wirecard, the report concluded the “unifying thread

behind this targeting was its aim at individuals who held short positions in Wirecard AG

around the time of the targeting and financial reporters covering the Wirecard AG

case.” The orchestrators of the attacks have not been found to date.

A page from the 'Zatarra Leaks' website, a page produced by hackers. Source: The Citizen Lab

The substantive challenge to Wirecard’s facade of honesty arrived the following year, in

the form of a report by anonymous and low-key Zatarra Research. Incorporated in the

British Virgin island, the company was previously unheard of, making it a ghost entity,

comprising of “investment professionals, analysts and forensic researchers.” It emerged

online just hours on February 24th, before releasing its singeing report. Zatarra Research

vilified Wirecard’s accounting practices and accused the company of “wide scale

corruption and corporate fraud.” Zatarra’s bearish report was filled with incriminatory

evidence, claiming the company was involved in “money laundering and transmitting

illegal monies to the USA”, and that they (Zatarra) aimed to “profit from the fall in the

stock.” The 102-page report connected Wirecard to money laundering for offshore poker

operations. Numerous hedge funds in the UK and the USA were also heavily shorting the

companies’ stocks, making it one of the most shorted stocks on the pan-European Stoxx

600 index, as per Markit data.

The report was met with restraint on the market, but still managed to set the share price

tumbling by 25%. Markus Braun immediately responded to the “slanderous” and

“baseless allegations” and promised legal action. German financial watchdog, BaFin

opened an investigation into Zatarra’s actions for market manipulation in collusion with

short sellers. BaFin did not concern itself with Wirecard and focused “solely” on Zatarra

Research. Zatarra also revealed to Reuters that they were in touch with the United States

Secret Services, while BaFin did not respond to their findings. Mr. Roddy Boyd, the

Editor of Foundation for Financial Journalism, in a study of its Indian dealings, slated Wirecard as a ‘roll-up’. A roll-up is a term used to describe a company primarily built

through the acquisition of smaller companies at a rapid pace. Critics argue that roll-ups

are a way to use generated revenue to mask problems with organic growth.

Meanwhile in the May of 2018, within the Singapore office of the company, an internal

investigation was launched by in-house legal staff, looking into three members of the

finance team after a whistleblower revealed backdated contracts and creative accounting

practices, implicating senior Wirecard official Edo Kurniawan, accusing fraud on a large

scale to “launder money” via third parties. Markus Braun assured the Reuters that the

issue was a “non-event”, despite preliminary evidence from the findings of externally

hired law firm Rajah & Tann suggesting “serious offences of forgery and/or of

falsification of accounts”, according to a Financial Times report released in 2019.

Wirecard called the Financial Times report “inaccurate, misleading and defamatory.” The

Singapore authorities were “looking” into the matter while Munich authorities looked the

other way as the misconduct did not take place on German soil.

In the background, the Company was doing better than ever, with investors and creditors

herding together to fund the company, poised to do better than ever. The company’s

shares peaked to €191 in August 2018, with a wide-spread bullish outlook towards the


Matters came to the fore in the January of 2019, when Financial Times launched a series

of deprecations against the company, backed by the claims from an insider from the

Singapore office. The whistleblower emphasized concern over the lack of actions being

taken against the corporate fraud committed by a blue-chip institution. The Financial

Times report pushed the Singapore authorities to raid Wirecard’s regional office and

seize electronics and laptops. The Financial Times article led to the share dropping 44%

within a week of its publishing.

Wirecard categorically rejected the story, raising “substantial doubts” over the

whistleblower story. The tumble of the stocks urged German regulatory body BaFin to

put a ban on the short selling positions of the stock for two months starting February

2019. This was the first time BaFin had taken such a measure for a single company

outside of the 2008 financial crisis, where it had banned short selling on a cohort of

stocks. It cited Wirecard’s “importance to the economy” and the threat the Financial

Times reports had on “market confidence” as reasons for the ban. In addition, BaFin

announced that it would investigate Financial Times for “market manipulation.” The

BaFin also announced that it would not be looking into Wirecard’s financial reporting, as it was under the purview of the German Financial Reporting Enforcement Panel,

Germany’s quasi-governmental accounting regulator.

In the remainder of 2019, the Financial Times released a series of reports that listed third

parties that processed payments on behalf of Wirecard with offices in the Philippines,

Dubai and Singapore and paid a hefty commission for it to the German firm. This

outsourced business made up a lion’s share of Wirecard’s revenue and subsequent profits.

The Financial Times reports included inflated sales and profit figures, as well as staff

tallying discrepancies, in order to mislead prime auditor EY. In some cases, offices were

understaffed, as seen in Wirecard’s Dublin and Dubai office, while in other cases, there

were no offices present. In an amusing encounter, Financial Times revealed that while

visiting the registered office address in the Philippines, they were instead greeted by a

retired sailor and his family, who were non-privy to the fact that they lived on the

supposed site of an international payments operations setup.

While visiting the offices of Al Alam, a Dubai based third party acquirer’s office, the

Financial Times uncovered a “threadbare” operation, with 6-7 employees, despite the

acquirer generating half of Wirecard’s international profits in 2016. They also reported

that the firm has almost no online presence, despite being a staple in Wirecard’s payment

routing networks. The Financial Times also released further exposés slamming Wirecard

for opacity regarding money from third party processing operations being held in “trustee

accounts.” A trustee account holds pooled money of the beneficiaries- the merchants and

the processors. Any money in the trustee accounts should not be accounted for as cash.

The Financial Times revealed that said money was included in Wirecard’s net cash flow,