Why Germany’s Wirecard Is No Stranger to Controversy

(Bloomberg) -- German payments company Wirecard AG has been a hot growth story since Chief Executive Officer Markus Braun masterminded a string of acquisitions that doubled its revenue. Then its shares plunged more than 40% in early 2019 after allegations of accounting fraud surfaced. Though an internal investigation found only minor irregularities, the company has hired KPMG to conduct an independent audit to put aside additional concerns. From its start, the company has drawn unusual scrutiny.

1. What is Wirecard and what does it do?

Wirecard is a developer of software and systems for online payments and fraud protection used across the internet. Its technology helps process smartphone payment transactions, issue credit cards and detect suspicious activity. The firm’s revenue soared to 2.1 billion euros ($2.3 billion) in 2018 after it bought at least 18 companies over the space of several years. In September 2018, Wirecard replaced Commerzbank AG in Germany’s 30-company DAX stock index alongside titans such as Volkswagen AG, Siemens AG, and Deutsche Bank AG.

2. Why has Wirecard been controversial?

The company got its start in 1999 as a provider of financial services to the gambling and adult entertainment industries, operating in murky waters. While it’s now focused on more mainstream clients, Wirecard’s business model remains complex and it has had to defend its reputation repeatedly. The shares dropped after claims were made in 2008 about accounting irregularities and again in 2016 amid fraud allegations, both of which Wirecard rebutted. Those accusations led to a market manipulation conviction against a journalist in 2012 and a fine against one of the suspects behind the 2016 report. Wirecard’s share price rose nearly five-fold between the start of 2017 and its peak in September 2018.

3. What are the claims against Wirecard?

In a series of articles starting on Jan. 30, the Financial Times reported allegations of accounting fraud at the company’s units in Singapore and other Asian countries. The stories cited a preliminary report from Singapore law firm Rajah & Tann, which Wirecard had hired to look into the matter. Germany’s financial regulator temporarily halted short sales of Wirecard’s shares in February after trading volumes spiked following the stories. The FT then reported in October that payments processed by a Dubai-based partner company in 2016 and 2017 may not have taken place.

4. What is the company’s response?

Wirecard fiercely denied the earlier claims, saying they were baseless and possibly brought forward to damage the company or profit from short sales. While a final report by Rajah & Tann in March 2019 acknowledged accounting oversights and potential criminal liability among some Singapore staff, it didn’t find evidence of criminal activity linked to Wirecard’s German headquarters. The company argued as well that the sums involved were not material. Pledges to improve financial controls and a $1 billion investment from Japan’s SoftBank Group Co. calmed nerves until the FT’s October story, which knocked 23% off Wirecard’s shares. The company called the allegations “total nonsense” and announced a $223 million share buyback. But with investors demanding a more authoritative response, Wirecard turned to KPMG for an audit.

5. Why is Wirecard being watched so closely?

Concerns about the company have taken on increased urgency since it joined Germany’s benchmark DAX, an index that’s tracked by everyone from large pension funds to private investors. When German financial regulator BaFin banned short sales of Wirecard for two months starting in February, it said the affair posed a serious threat to market trust in Germany. The ban ended April 19, but BaFin has asked Munich prosecutors to investigate short sellers over suspicions of market manipulation. Wirecard has also been drawn into a London lawsuit between former minority shareholders of an Indian business it bought in 2015.

The Reference Shelf

• Bloomberg: Buyback can’t stop stock drop amid accounting concerns.
• Wirecard CEO Markus Braun in the spotlight over fraud allegations.
• Braun defended his company in a February 2019 interview with Bloomberg and spoke to Bloomberg TV after the Rajah & Tann report in March.
• Read Wirecard’s statements on its investor website.
• Chris Hughes writes in Bloomberg Opinion that Wirecard is treating its investors badly.

--With assistance from Karin Matussek, Nicholas Comfort and Jan-Patrick Barnert.

To contact the reporter on this story: Stefan Nicola in Berlin at snicola2@bloomberg.net

To contact the editors responsible for this story: Giles Turner at gturner35@bloomberg.net, Chris Reiter, Andy Reinhardt

©2019 Bloomberg L.P.