German regulators are coming under pressure following the arrest of Markus Braun, the former CEO of Wirecard, previously one of the top 30 companies in Germany. It is very damaging for the German economy and investor confidence when a company becomes wrapped up in allegations of fraud, and with hundreds of millions of euros apparently missing.
Wirecard was founded by Braun in 1999, and last Wednesday the shares were trading on the Deutsche Boerse at a high of €104. On Monday of this week they hit a low of €14. As a result, the company now has a market capitalization of around $1.9 billion, down from a high of $30 billion. The company has filed for insolvency, and a lot of shareholders have lost a lot of money.
It is in fact lost money that has caused this scandal to erupt. Earlier this month, auditor EY refused to agree to the accuracy of the company’s 2019 accounts and finances because it was unable to find $2 billion. Does that figure seem familiar? Now just how does one lose $2 billion? Did you look in the safe (how big is that safe)? Did you check the glove box in the car (I won’t ask how big is that car)?
As it turns out, the money was not lost after all. The funds never existed, according to the management of two banks in the Philippines where the funds were purported to have been deposited. What was Germany’s 30th biggest company doing with $2 billion deposited in banks in the Philippines? Does it not trust German banks?
This story is all about the share price and how it impacts behavior. About 18 months ago, respected media outlets published allegations of accounting irregularities at Wirecard, following the receipt of reports and data from a whistleblower. Pursuant to this, some investors shorted Wirecard shares. In the meantime, executives, managers, and ordinary employees at Wirecard counted their own personal wealth, dreams, and aspirations upon the value of the company’s share price.
A lot of people within the company had a lot to gain or lose based upon the value of the company’s shares. Now add some ego into the equation—My company is bigger than your company—and problems arise.
In a prior life as a private investigator, I examined the Icelandic banking crisis. In his book about various worldwide financial breakdowns, “Boomerang,” Michael Lewis referenced the chart my company produced setting out the Icelandic debt, cross-holdings, share prices, credit default swap (CDS) prices, secondary offerings, and bond sales that ultimately collapsed, causing huge losses to a lot of people.
In this case, too, it was all about the share price. Former banking executives explained how they had conspired with a major German bank to buy their own CDS, which is not allowed, but the executives determined it was necessary to support the share price. The same executives had persuaded bank customers to trade their deposits for shares in the bank. They had loaned significant sums of money to customers, who had pledged bank shares against other holdings. The executives concluded they had to stop margin calls against any of the bank’s securities.
The executives themselves held lots of shares in these banks, and they saw it as their duty to protect all shareholders, by whatever means. So they sought to attract other investors to the banks to support the share price. Ultimately, the banks and the share prices collapsed. Credit must be given to the Icelandic authorities, because they sent some of the bank executives to prison for defrauding the investors.
Now back to Wirecard’s missing $2 billion—this is a huge hole in a firm’s accounts. My friend and fellow whistleblower, Michael Woodford, discovered a similar sum missing in the accounts of digital camera company Olympus. As with Braun, Woodford was the CEO of the company, but in the Olympus case it was Woodford who refused to sign and approve the accounts. He formed the view that investors needed to be protected by revealing the truth, rather than hiding it.
Wirecard may never recover from this scandal, and shareholders may suffer further or even total losses. As indicated above, this is not a new scenario. The big question, then, is what have the authorities in Germany been doing for the past 18 months (when the whistleblower’s allegations were published)?
I have always placed a high value on allegations presented by respected media outlets, and if I do not see litigation from the subject of the allegations, my concerns increase. So take a look around and see what allegations are out there against your clients, your suppliers, your investors, and then look for litigation from the accused/offended party. In the event the latter is missing, I posit there may be a legitimate problem there. Don’t wait 18 months for the worst-case scenario to arise from these allegations, take action.
I advise any of you with concerns to write to such companies and demand answers, explanations, and information about their intended litigation strategy to protect the reputation and share price of the company. Don’t wait too long for an answer, and don’t accept a holding response. Think about it: If allegations presented by a whistleblower through a respected media outlet are false, then those who represent the company have a duty to sue the media outlet and the whistleblower to protect the company and the share price.
Smart investors may have pursued the above strategy some time ago and, absent to litigation from the company, they sold their shares on the basis their confidence had disappeared. There’s no magic here; it is not a case of now you see $2 billion, now you don’t. It’s a matter of logic and common sense. The confidence was once there, it was real, and it has clearly disappeared, whereas the $2 billion never existed. The smoke and mirrors were applied to the share price, and it now appears a confidence trick may have been played out within the company. The lesson here is to never disregard serious allegations about a company made by respected media outlets, especially when those allegations are not met with litigation from the company.