Wirecard’s Riches to Rags Story, a fraud to remember!

German fintech darling, Wirecard AG, recently went from Riches to rags after admitting to a €1.9 billion fraud in its financials. The Company’s share prices went down almost 46% (as on 19 June) post the acceptance of the fraud.

Ongoing criminal investigation for €1.9 billion cash from its balance sheet, led to the arrest of former CEO Markus Braun on 22 June 2020, on charges of fraud. With big investors such as Softbank stands to lose majorly; Wirecard AG fraud has become an example of one of the biggest financial frauds of recent times.

Let’s dig deeper to know how Germany’s fintech darling went from riches to rag.

The fraud

Founded in 1999, Wirecard AG became a prominent fintech player providing a digital platform for cashless payments globally. In 2005, the Company got listed on the German stock exchange based on a reverse merger with InfoGenie, a Berlin based fintech operator.

In 2006, Wirecard purchased a bank and started offering full-service payment solutions electronically. The Company grew inorganically by acquiring various small payment processing businesses including acquisition of 20,000 merchants of Citibank in 2017. In 2018, the Company got added to DAX index. In 2019, SoftBank invested US$1 billion in Wirecard to execute business expansion in Asia.

However, since 2019, Wirecard started experiencing accusations over its Asian and Middle East accounting practices with Financial Times starting a public investigation touting the existence of a financial fraud in the Company. Wirecard was accused of “inventing” sales across Asian operations. The allegations also led to an investigation by the German financial regulator, BaFin.

Name of a firm, Al Alam also surfaced from which €350m worth of transactions had been shown for 34 clients. However, very little information on the same was retrieved.

Wirecard repeatedly denied these accusations and stressed on rigorous compliance issues.

The company's fraudulent activities however came into limelight on 18 June when it failed to report its full year results for 2019 for the fourth time, as auditor EY was not able to give a go-ahead because of inadequate audit evidence regarding an amount of €1.9 billion.

The Company’s Board gave a warning of termination of loan amount of around €2 billion made to Wirecard if its financial report was not released. Next day, on 19 June, Markus Braun resigned from his position of CEO with James Freis appointed as an interim CEO. Also, Markus Braun got arrested shortly on 22 June 2020.

Investor’s Loss

Falling share prices have wiped away colossal amount of profits from its investors. SoftBank, which manages $100 billion Vision Fund, had invested $1 billion investment via convertible bond to be repaid in stock. With share prices trading almost 80% below, since the date of the announcement of fraud, profits have turned to peanuts.

Alexander Darwall’s European Opportunities Trust fund has also been hit hard by the Wirecard fraud exposure. The trust had a portfolio allocation of 10.3% to Wirecard. Mr. Darwall has apologised to their investors by terming the investment as the biggest mistake of his life.

The company has offloaded £80m stake in Wirecard on June 19^th after the fraud got uncovered.

However, Darwall intends to continue supporting the payment firm and expects share price to take positive turn in due course of time with appropriate measures.

Acting CEO, Mr. Freis is currently planning an operational restructuring that may include sale of assets. Currently, the Company facilitates mobile payments, ePoS transactions and other fintech services including risk management. The Company has collaborations with more than 250,000 companies and employs more than 5,300 employees operating from 26 offices worldwide.