It is one thing to wake up and find yourself as the lead story on a Sunday morning when the New York Times (NYT) runs a corruption story about your organization above the fold. It is quite another when the world’s top business newspaper, the Financial Times (FT) (sorry Wall Street Journal) absolutely skewers your company in a full column Op-Ed piece. That is what happened in Tuesday’s FT when it wrote about the unfolding financial scandal involving the former German golden child Wirecard, in a piece entitled Lessons from a financial technology scandal.
For anyone returning from a self-isolation on Mars about now, Wirecard is measuring up to be the first great financial scandal of the 2020’s. Living here in Houston, we certainly were the leader in the clubhouse for the biggest scandal of 00’s with Enron, until of course Enron was knocked off the perch by WorldCom. Yet Wirecard will be noteworthy for its audaciousness, hutzpah, disregard of whistleblowers, short sellers sounding the gong that something smells, attacks by the company against all its doubters and utter failure of the regulators to protect the German investing public or to (apparently) even do their job.
The FT Editorial Board came right out of the box not simply swinging but landing body blows on all involved, stating “For 18 months, the Financial Times has reported on whistleblower allegations of accounting fraud at what was once Europe’s most valuable financial technology group: Wirecard. Since last Thursday, when the German payments company revealed auditors could not trace €1.9bn supposedly held in escrow accounts at two Asian banks, its shares have plunged 80 per cent. On Monday, Wirecard acknowledged that this cash probably does “not exist”. It is now clear that this is one of Europe’s biggest corporate frauds of recent years.”
Clearly the fraud perpetrated by Wirecard has been long running. The news late last week that some of its $2 billion in third party payments was missing came like a bombshell to the international financial community. In addition to investors such as SoftBank Group Corp and Credit Suisse who managed to make investments without actually putting up any money by pushing the risks out to wealthy investors. All Wirecard had to do was accomplish three things, according to the WSJ, it had “to get its 2018 financial results signed off by auditor Ernst & Young GmbH, apply successfully for a credit rating, and issue a regular corporate bond that would act as a benchmark for the eventual convertible bond deal. Wirecard accomplished all three.” It was all a massive fraud.
Where were the German regulators you might (rightfully) ask? It was not simply that the German financial regulatory body BaFin was nowhere to be seen. It actually opened an investigation into the FT for reporting that internal whistleblowers who had reported that the company had forged documents in Wirecard’s Asia headquarters to mislead regulators and auditors in Singapore. What was the BaFin response to this reporting? It opened “a probe into the (FT) reporting and whether — as Wirecard alleged — it was an attempt at share price manipulation.” But it did not end there as “After Singapore authorities raided Wirecard’s offices, BaFin imposed a two-month ban on short selling of the company’s shares, citing Wirecard’s “importance for the [German] economy” and the “serious threat to [German] market confidence”. The BaFin circled the collective German regulatory wagons and tried to ward off both the investigative reporters and the short sellers.
The FT Editorial Board dryly noted, “From the outset, the instincts of the German authorities have been to investigate not the alleged transgressor but the messenger, and investors who, suspicious of Wirecard’s model, had shorted its shares. Journalists from this news organisation have faced not just a misinformation campaign from Wirecard but investigations and even criminal allegations from Germany’s financial regulator and prosecutors.” Can you imagine any instance where regulators would seek to investigate those who raise allegations of corruption rather than the allegations themselves? Bill Barr would have been proud.
Corporate scandals can take many shapes, sizes and forms. From the 00’s and Enron and WorldCom to the 10’s and Wells Fargo, FIFA, Volkswagen and Boeing. We sometimes see regulatory neglect but rarely do we see regulators attack those raising legitimate questions. The FT Editorial was scathing throughout their piece but they saved their strongest for the penultimate paragraph when they stated, “Officials and corporate bosses treat the raising of legitimate concerns as an assault on German patriotic interests — in Wirecard’s case blaming Anglo-Saxon speculators — not as a reason to probe and question. The case shows, too, how German capitalism favours corporations over shareholders. Short selling is seen not as a valid part of price discovery but a device for illicit manipulation. Searching questions must be faced, too, by Wirecard’s auditor, EY, over how it failed to spot the cover-up of what now appears a yawning hole in the balance sheet.” [emphasis supplied]
In case you think the English have forgotten the spanking they laid down on the German national soccer team England 5 – Germany 1; take heed they have not. Now the FT Editorial Board has done the same in the world of business journalism.
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