Crisis of Wire card
German payments company Wire card was hit by a scandal after it said that 1.9 billion euros ($2.1 billion) had been missing from its accounts is the main reason for the scandal.
Wire card Chief Executive Officer (CEO) Markus Braun resigned on June 18 after the search for the missing money had hit a dead end in the Philippines, and James Fries was appointed as an interim CEO.
The company said it was working on a deal with its creditors. Wire card is also exploring measures such as cost reductions, restructuring, disposal or termination of business units, Reuters reported. Wire card is staring at a cash crunch since it has outstanding loans worth $2 billion.
When did the crisis begin?
Wire card, once considered a success story in Germany’s technology space, announced that the amount was missing on June 18 after EY had refused to sign off the company’s accounts.
The missing money accounted for roughly one-fourth of the company’s balance sheet.
The company subsequently withdrew its full-year 2019 and first quarter 2020 financial results.
Two Philippine banks, BPI and BDO, said Wire card was not a client of theirs and alleged that documents had been falsified, Reuters reported.
On June 21, the central bank of the Philippines said none of the missing money had entered the country’s financial system. Wire card then made a statement saying there was a likelihood that the missing money did not exist.
How did the Wire card stock react after the news?
The Wire card stock has lost 85 per cent since June 17, the day before the news of the missing money was made public, Bloomberg reported.
The company lost nearly 90 per cent of its market value in less than a week, the report added.
Moody’s cut Wire card’s rating to junk after the news of the missing money.
“The downgrade of Wire card’s ratings and review for further downgrade reflects the accounting irregularities and related implications on the company’s liquidity and financial profile following its failure to publish the already postponed audited consolidated accounts for 2019,” Moody’s said on June 19.
The German government response was that it was the statement coming under from the finance minister Olaf Scholz, on June 22, said regulatory authorities did their job.
“I think the supervisory institutions worked very hard and they did their job – this is what we see today,” Scholz said, as quoted by Reuters.
Former Wire card CEO Markus Braun has been arrested on charges of inflating the company’s balance sheet, prosecutors in Munich said on Tuesday.
Braun resigned on Friday after the German payment service provider said auditors at EY couldn’t locate 1.9 billion euros ($2.1 billion) of cash on its balance sheet. On Monday, the company said it was likely that those funds do not exist.
Prosecutors said that Braun turned himself in on Monday evening after a warrant was issued for his arrest. On Tuesday, prosecutors said he would be released from custody as soon as he has posted 5 million euros in bail. He would have to report to police weekly, they added.
When contacted by CNBC Tuesday, a spokesperson for Wire card said it was “currently not making any further statements.”
Braun is accused of having inflated Wire card’s total assets and sales volume through “feigned income” from transactions with third parties to make the company appear more attractive to investors and customers, prosecutors said.
They are investigating a 1.9 billion-euro black hole in the company’s balance sheet after its search to find the missing funds appeared to hit a dead-end last week.
Two Philippine banks alleged to be holding the funds both denied any business relationship with Wire card and said rogue employees had falsified documents linking them with the company. The Philippines’ central bank also said Sunday that the money hadn’t entered the country’s financial system.
As the accounting crisis deepens, Wire card is now fighting for its survival. The company said Monday that it was in talks with lenders on continued access to credit and has hired an investment bank, Houlihan Lokey, to come up with a “sustainable” financing strategy. It is also looking at a potential restructuring that could see some business units terminated.
Felix Huffed, president of German financial regulator Baffin, said Monday the Wire card situation was a “scandal” and a “total disaster.”
On Tuesday, the watchdog filed an updated case against the company looking at “suspected market manipulation.” Baffin said Wire card’s admission that the missing cash flagged by EY likely does not exist had “heightened” its suspicions that the company’s accounts for 2016, 2017 and 2018 were “incorrect.”
“This has also strengthened Baffin’s suspicion that, in these annual financial reports, the company disseminated information that gave false signals concerning the share price of Wire card AG and that the company thus violated the prohibition of market manipulation,” Baffin said in a statement.
The watchdog has come under fire over its decision last year to temporarily ban short-selling in Wire card shares.
Wire card shares have crashed more than 80% since Wednesday as a result of the crisis. They moved about 16% higher in Tuesday’s session following news of Braun’s arrest.
The founder and chief executive of scandal-hit Wire card resigned on Friday after the German payment’s provider was hit with fresh fraud allegations that have left it struggling for survival.
Markus Braun “resigned today with immediate effect”, the firm said in a statement, adding that the decision was made “in mutual consent with the supervisory board”.
The 51-year-old Austrian will be replaced on an interim basis by US manager James Frei’s.
The bombshell comes a day after auditors from Ernst & Young said 1.9 billion euros ($2.1 billion) were missing from Wire card’s accounts, intensifying a months-long crisis in the company.
The news prompted investors to abandon the once-popular fintech company in droves, sending Wire card’s share price into a tailspin.
The stock, which had plunged more than 60 per cent in Frankfurt on Thursday, lost another 35.3 per cent Friday to close at 25.82 euros.
It marks a stunning fall from grace for the Bavarian start-up, set up in 1999 and once seen as a darling of the fintech scene thanks to the global increase in electronic payments.
The firm entered Germany’s prestigious DAX 30 index with great fanfare in 2018 after nudging out traditional lender Commerzbank. But since then Wire card has been dogged by a series of articles in the Financial Times alleging accounting irregularities in its Asian operations.
The company’s four board members — including Braun — have been under investigation since early June by Munich prosecutors for “market manipulation”, and Wire card’s headquarters were searched as part of the probe.
The scandal deepened on Thursday when the firm was forced to delay the publication of its 2019 results for a fourth time.
Instead, Wire card said in a statement that auditors Ernst & Young had identified “spurious balance confirmations” relating to “cash balances on trust accounts”.
The auditors’ red flag was raised over escrow accounts at two Asian banks, which were supposed to hold 1.9 billion euros to manage risk for merchants using Wire card’s payment services.
Wire card said there were “indications” that the balances had been falsified ” to deceive the auditor”.
The two Philippine banks that were supposed to hold the cash denied having a relationship with Wire card.
“The document claiming the existence of a Wire card account with BDO is a falsified document and carries forged signatures of bank officers,” the Philippines’ largest bank told AFP.
Wire card’s board responded by filing a legal complaint against “unknown persons”, saying they could have fallen victim to a vast fraud.
“It is currently unclear whether fraudulent transactions to the detriment of Wire card AG have occurred,” Braun said on Thursday.
Meanwhile, German financial markets watchdog Baffin said the latest information would flow into its probe that prompted prosecutors’ investigation of the board.
But the clock is ticking for Wire card, as two billion euros of credit could be withdrawn if it is unable to publish its results for last year by Friday.
Wire card said Friday it was in “constructive talks with its creditor banks” to avoid that scenario.
This week had brought “the worst-case scenario” for the company, CMC Markets analyst Jochen Stanzel said.
“Customers have to do their due diligence processes, and if this kind of ‘red flag’ and doubts show up, Wire card could lose a lot of them.”
According to preliminary figures, the group said it had processed 173 billion euros of transactions in 2019, up 38.5 per cent.
Revenues grew 37.5 per cent to 2.8 billion euros, while net profits climbed 39 per cent to 482 million, Wire card said.
The CEO of one firm I previously worked for told me I was wired differently than others. The fact is we are all different and therefore all wired differently, but there are some common characteristics to some roles. That said, most of my compliance friends also tell me I am wired differently. Earlier this month, a man wired differently to the CEOs of most regulated financial service businesses was promoted from the role of a chief compliance officer to interim CEO at a company you might have seen in the news recently—Wire card.
James H. Fries Jr.
James H. Fries Jr. is a former director of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and is now trying to salvage what he can for the beleaguered creditors and shareholders of Wire card. Earlier this month, former CEO Markus Braun was arrested on suspicion of fraud; there is approximately $2 billion missing from the company’s accounts.
Wire card announced the appointment of Fries as CCO in May, and he was scheduled to take on the role on July 1. Given the arrest of Braun, he has started somewhat earlier than originally planned. Clearly, as a new, external appointment, he has no loyalties or potential conflicts within Wire card, but his new role is now far bigger than he had originally envisaged.
So how does a compliance-wired CCO take over the role of CEO? What is expected of him and how are his possible conflicts managed? Frei’s has an outstanding reputation, built in the public and private sectors across several jurisdictions and disciplines. Thus, his appointment is a smart move by a board of directors of an embattled company, but these are substantially the same directors who worked alongside the former CEO and consequently, are potentially connected to the scandal of the missing money, by either their actions or inaction.
It has been reported that Wire card’s auditor, EY, failed to examine the bank accounts where the $2 billion was purportedly held, but surely this applies equally to members of the board. It should be clear to everyone that Fries will act for and on behalf of the creditors and shareholders, not the directors. The company has filed for insolvency will not be saved by the appointment of Fries, but potential buyers of the business will undoubtedly be encouraged by the appointment. It must be expected that he will act in a way that meets with the approval and expectations of shareholders, regulators, creditors, and customers.
Managing communication will be critical to his success. Equally, he will need to ensure all staff and fellow directors understand their duties and loyalties are to the shareholders, creditors, and the company, and not themselves, friends, or former colleagues. It is a big ask to change the culture, which has undoubtedly contributed to this scandal and governance failure.
It may be that the directors trusted the numbers, the CEO, the CFO, and others, but what we compliance officers learned a long time ago is that trust is not an acceptable control. It is the role of directors to validate and ensure figures, facts, and forecasts are accurate. Undoubtedly this failed at Wire card, and as such Frei’s may be well-advised to trust no one and demand evidence to validate every number that gets put on his desk.
Frei’s has put his reputation on the line in accepting this appointment, and his background suggests he is not the kind of person to act in a way that will threaten his integrity. His appointment has elevated the status and importance of all compliance officers because boards and shareholders often seek the assistance of the differently wired compliance department at a time of crisis. We should all wish Frei’s well because in some ways he is also carrying our reputations into the battle he has taken on.