Investors Beware-WireCard Fiasco

The Economist Wirecard “The demise of a Wunderkind”. Berlin “How a fintech star fooled most of the people all the time”.




Interesting detail on the fall of Wirecard.

What

WireCard listed on the German DAX rose to a market capitalization of $28B but in 2016 “short sellers released a report accusing Wirecard of corruption, fraud and weak money laundering controls, which the company denied”. In 2019, “the Financial Times (FT) published an investigation into Wirecard’s dubious accounting practices”. Wirecard founded in 1999 became so successful on paper that it’s value rivaled SAP Germany’s most valued company. “After taking the helm in 2002, CEO Markus Braun transformed the startup into a pioneer of processing digital payments, offering its services to porn sites and online-gambling sites….”. Later they attracted “hundreds of thousands” more legitimate businesses including supermarkets and airlines.

When

June 18th 2020 Wirecard’s auditor announced that $2.1B, about a quarter of the balance sheet, was missing, “that was meant to be held in escrow accounts in the Philippines”. “Insolvency proceedings” began on June 25th after the stock had rapidly lost more than 80% between June 18th and June 22nd. “Later that day [June 22nd] Mr. Braun was arrested on suspicion of using fraudulent accounting practices to inflate reported revenues”.



FT.com


How

Auditor, a firm named EY, failed in due diligence. It seems “The members of both Wirecard’s management and its supervisory board lacked the competence to lead a multinational tech firm says Bernd Ziesemer, chairman of the Cologne School of Journalists”. Three of four board members were from Austria-“like Mr. Braun, inviting comparisons of board meetings to a Brettljuase, a hearty snack break with mates on an Alpine peak”.

BaFin, Germany’s “Upper Bavarian” financial regulator, “was woefully ill-suited to oversee a global fintech firm”. BaFin demonstrated complete incompetence being unable to find the truth it made-matters-worse by filing criminal complaints against the Short Sellers and FT journalists and prohibiting further Short Selling of WireCard.

Notes About Short Selling

Short sellers realize that shares generally rise unless there are substantial reasons causing the market value of a stock to fall. Finding fault is difficult and detailed due diligence large part forensic accounting and some part sleuthing. Difficult because outsiders must rely heavily on published financials and other available information. In any case, launching doubt, in a significant way, is obviously not the work of amateurs.


What is short selling? To sell short, an investor "borrows shares at today’s market price" agreeing to replace that number of shares later-at a defined contract date. Good, if you "borrow shares" valued at $100 and later replace at a lower price, $80 for example. Bad, if the replacement shares on the contract date are valued higher, $120 for example. This is managed indirectly through buying “Put” options. As you can conclude there are winners and losers. See your investment firm to know more.


Historically, stock markets and listed companies loath short sellers. Some seek to prohibit them as the case of WireCard illustrates. Note, parenthetically, as Chinese firms delist from American exchanges, short selling is prohibited in China. Had board members, auditors and regulators been competent and/or not complicit they could have intervened sooner saving WireCard and investors-pensions etc. Investors, risking their funds, rely on accurate financial reporting. The WireCard case illuminates how short sellers can police markets by exposing firms that are overvalued because of anticipated changes in markets, company strategy or outright fraud.

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