(June 24): Wirecard AG’s former chief executive officer was detained by Munich prosecutors as the scandal over 1.9 billion euros (S$2.99 billion) that went missing from the German fintech company prompted probes into suspected market manipulation and false accounting.
Markus Braun, who resigned last week, turned himself in Monday evening in Munich as part of a probe into the company’s accounting practices, prosecutors said in an emailed statement. At a hearing Tuesday afternoon, he was granted bail of 5 million euros -- one of the largest amounts ever posted in Germany.
Wirecard faced further investigations as Germany’s top financial regulator BaFin on Tuesday reported the company to the prosecutors for alleged market manipulation. The regulator said a statement by Wirecard on Monday “heightened BaFin’s suspicions” that the presentation of the company’s revenue and assets in its 2016, 2017 and 2018 reports was incorrect.
The company is fighting for survival after acknowledging the missing funds probably don’t exist. The payment processor said it’s in discussions with creditors and is considering a full-scale restructuring after pulling its financial results for fiscal 2019 and the first quarter of 2020.
The scandal has become a national embarrassment for Germany and prompted Finance Minister Olaf Scholz to call for urgent reforms of the country’s financial regulation after BaFin was criticised for not acting on previous allegations of accounting fraud.
“Auditors and regulators don’t seem to have been effective here,” Scholz said Tuesday in comments to Bloomberg that were first reported by the Frankfurter Allgemeine Zeitung newspaper. “We need to quickly clarify how we have to change our regulatory requirements in order to be able to monitor complex corporate networks across the board, promptly and quickly.”
Felix Hufeld, head of BaFin, admitted on Monday that the regulator has made some mistakes. “It’s a complete disaster we’re looking at,” he said at a panel discussion. “It’s a shame that something like that happened.”
In less than a week, the fintech company once hyped as the future of German finance has lost most of its market value.
“It’s a brutal development -- it could hardly have turned out worse,” Oliver Kipper, a defence lawyer who isn’t involved in the case, said before Braun’s arrest. “You should know what happened to 1.9 billion euros of assets you have listed in your books.”
Munich prosecutors said Braun is suspected of inflating Wirecard’s balance sheet and sales volume by faking income from transactions with so-called third-party acquirers, possibly in cooperation with other perpetrators. That would make the company appear financially strong and more attractive for investors and customers.
Braun can be released once he posts the bail and must report to a police station once a week. Officials at Wirecard and Braun’s attorney weren’t immediately available to comment.
On Tuesday, it also emerged in regulatory filings that Braun sold around 155 million euros worth of Wirecard stock due to margin calls on a personal loan that was secured by parts of his stake. Braun previously held 7% of Wirecard’s shares but the steep fall of the stock price in recent days forced him to unwind a large portion of the stake, Bloomberg reported on Sunday. The sale leaves him with a shareholding of around 3%.
Braun’s arrest will come as a further shock to Wirecard employees. Interim Chief Executive Officer James Freis told employees on Monday to expect a major restructuring as it tries to salvage the company, people familiar with the situation said.
In his first message to the company as interim chief, Freis said in a pre-recorded video that management is looking at all options, including selling assets, said the people, asking not to be named as the situation is private.
Wirecard is working with investment bank Houlihan Lokey on a financing strategy, while also considering a broad restructuring to keep its business operations going, the company said on Monday.
Wirecard had been championed by German politicians as their own tech giant. It became a favourite of investors, breaking into Germany’s elite DAX index of the largest companies in 2018, at the expense of the then 148-year-old Commerzbank AG.
The Wirecard saga has been under review for months, but prosecutors’ focus is likely to have changed with last week’s developments.
Initially, authorities looked at media reports that caused the stock to tumble, with Wirecard a potential victim of market manipulation. Then, earlier this month, they began an investigation targeting the management board, over how an internal review by KPMG was communicated to the markets.
The arrest of Braun shows, however, that the probes have come full circle, with the former victims becoming the suspects.
“Given the numbers, it’s certainly the biggest accounting scandal in Germany,” said Katie Schroeder, a criminal defence lawyer in Frankfurt. “You’d have to think pretty hard to find a case of such scope.”
