Wirecard Scandal Risks Ensnaring More People Than Its Fallen CEO

Wirecard AG’s accounting scandal has already led to the fall of its former chief executive officer and threatens consequences for more executives, regulators and banking officials.

After the arrest of disgraced ex-CEO Markus Braun on Monday evening in Munich, here’s other people that could be ensnared in Germany’s largest accounting scandal in years:

Braun’s No. 2

Braun, who had repeatedly rejected allegations of wrongdoing, could be only the first Wirecard executive targeted by authorities, as they delve into Wirecard’s accounts and the missing 1.9 billion euros ($2.1 billion).

Wirecard Scandal Risks Ensnaring More People Than Its Fallen CEO

On Monday, Wirecard fired Chief Operating Officer Jan Marsalek, a key strategist in the company and a close ally of Braun, without giving a reason. He was temporarily suspended by Braun in the immediate aftermath of the revelations.

James Freis, a former financial-crime enforcer at the U.S. Treasury, is a new hire and in position to clean house, but he’ll need to act fast. The company is in talks with lenders and has hired investment bank Houlihan Lokey to come up with a financing strategy, but it’s relatively mum on anything else.

Inattentive Watchdog

As president of Germany’s financial regulator BaFin, Felix Hufeld is on the front lines of questions over how a country that loves order could allow such a scandal to happen.

Wirecard Scandal Risks Ensnaring More People Than Its Fallen CEO

He issued a major apology on Monday, saying that the German financial regulator was among institutions responsible for the “complete disaster” at Wirecard because it didn’t do a good enough job supervising.

BaFin has come under fire for responding to the Financial Times’s allegations on potential fraud early last year and the ensuing stock drop last year by temporarily banning short selling of Wirecard stock, an unprecedented step that seemed to back Wirecard. Hufeld said BaFin was legally obliged to do so after prosecutors said there were indications of possible market manipulation, including insider trading.

While Hufeld promised to sort out any potential shortcomings at the watchdog, he also tried to pass on some of the blame, saying that Wirecard’s top management as well as “scores of auditors” failed to act or realize what’s going on.

Easy Audits

EY’s partners in Germany have been carrying out the audit work on Wirecard for more than a decade -- and didn’t sound the alarm until last week, when they declined to greenlight the company’s 2019 financial report. The company was also responsible for keeping an eye on Wirecard’s operations in Dubai, which were at the heart of fraud accusations.

The auditor was sued over its work for Wirecard in early June, just days after its client’s headquarters were raided as part of a market-manipulation probe. The German lawsuit alleges that EY failed to flag that 1 billion euros in assets were improperly booked in 2018, according to Wolfgang Schirp, a lawyer representing private investors.

EY has said it’s reviewing all new information and will take action “as appropriate.” It declined to comment further, citing confidentiality obligations.

Loose Lending

The hype around Wirecard’s rise to the top ranks of Germany’s listed companies had a lot of bankers eager to get in on the growth, much of which was debt financed.

Some 15 lenders, including Commerzbank AG, ABN Amro Bank NV and ING Groep NV, are in negotiations with the company over extending loans, people familiar with the matter have said. Bank of China Ltd., meanwhile, is considering writing off and terminating its credit line with the company, people have said.

Bondholders are also preparing for restructuring talks or for an “impending insolvency” and hired advisers One Square and Kirkland & Ellis.

Creditors are in a tricky situation. While most of them are said to lean toward extending repayment obligations to better assess the potential impact of a default on their balance sheets, a prolonged extension could be seen as delaying an insolvency -- illegal under German law. They only agree on one thing these days: Not to comment publicly on the matter.

Bullish Analysts

The majority of sell-side analysts rated the stock a buy for most of the past decade. Allegations raised by short-sellers in 2016 and the FT in early 2019 didn’t change that, with 22 of the 35 analysts tracked by Bloomberg keeping their buy rating until early April. Some even attacked critics, calling their findings “fake news” and defending the company in almost religious fashion.

That faith began to disappear after KPMG’s special audit revealed first cracks in Wirecard’s accounting. It vanished following last week’s events, when the number of buy recommendations dropped to zero. A total of 18 analysts have either suspended their coverage or put their rating under review, citing a lack of fundamentals. Most analysts have refrained from acknowledging any mistakes on their end.

©2020 Bloomberg L.P.

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