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
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
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,