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‘Why Wirecard had more red flags than a communist rally’

Wirecard the Germany payments outfit and DAX 30 constituent last week announced that its thrice delayed 2019 Annual Report could still not be published as its auditor could not verify previously reported cash balances of €1.9bn. Before subsequently resigning its long-standing CEO, Marcus Braun, claimed that the company was itself a victim of fraud and that the cash had been deposited in the Philippines. This has been rejected by Filipino authorities and Wirecard has since acknowledged that the cash balances do not exist. In the absence of audited accounts, an outstanding revolving credit facility of €1.75bn, already understood to be 90% drawn down, could now be terminated forthwith by Wirecard’s lenders, rendering the company insolvent. We have been amazed how the Wirecard share price has been so impervious for so long to cumulative substantiated accusations of wrongdoing which waved more red flags than you might witness at a communist rally.

I concluded that Wirecard was probably a fraud on March 7th, 2018. That day I met Burkhard Ley, a former Wirecard CFO, but then a kind of company consigliere. There was immediately something odd: his presentation had more Venn diagrams than numbers, which was unusual in the investment industry. Burkhard gave a highly polished pitch about how the payments industry was digitising but he was noticeably uncomfortable being interrupted and having to answer basic questions like “what exactly set the company apart from peers” and “precisely from what activities did they generate revenue?” It became clear that Burkhard either did not know or more likely did not want to tell. He also disclosed that none of the management team apart from CEO Marcus Braun owned any Wirecard shares; instead they were all paid an annual cash bonus based solely on share price performance. If you were designing an incentive structure for a Ponzi scheme this was it. When pressed for a specific response on how much of the company’s revenues came from online pornography and illegal casino, Burkhard claimed ignorance and just grinned, like a well-coiffed cat who not only had just had the cream but who had also just eaten the family pet hamster.

After the meeting I sent some follow up questions to the company and did not receive a reply. I was obviously not the kind of investor they were looking for. Nevertheless, later that year I met Wirecard again at an investor conference: this time it was Iris Stoeckl, Head of Investor Relations, and enthusiastic rising star Susanne Steidl, Chief Product Officer. During group investor meetings it is considered polite to let others ask their own questions, which in this case were alarmingly non-forensic and along the lines of “what is the secret of your great success”? I noticed a hedge fund friend at the other end of the table and cheekily texted him to ask whether he was enjoying the lack of penetrating questions and general poor standard of debate? “Sheep who love a rising share price, just embarrassing”, was his response. That same month I was asked by a representative of my Prime Broker to stop using Wirecard as a short stock example in my own client pitches as it was upsetting some of her more important clients who were long the stock. I ignored the request. It was clear, however, that in an industry as hot as digital payments, supposedly sophisticated investors who claimed to have their own research process never asked difficult questions: Wirecard could get away with the investment equivalent of murder. This presented a dilemma in terms of timing and sizing our short position: we might sustain significant losses before ultimately being proved correct.

In January 2019, the Financial Times published allegations that a senior Wirecard senior executive in Singapore was suspected of falsifying accounts and money laundering. Wirecard at first dismissed the allegations, then backtracked, but nevertheless responded with a lawsuit against the newspaper, which was subsequently dismissed. Inexplicably, the German financial regulator BAFIN banned new short sales of Wirecard, as if the finding out the truth was somehow against the German national interest. Wirecard then pulled a rabbit from the hat with the announcement of a commercial alliance with Japanese technology investor Softbank, who would take a strategic stake in the company. Subsequently, it became clear that Softbank’s commitment to Wirecard was somewhat lukewarm: they structured their investment as a convertible bond; clipped the coupon and flipped the equity component into a special purpose vehicle with third party financing, leaving them with no underlying economic exposure at all. This was hardly the commercial endorsement that Wirecard management were keen to portray.

Suspecting wrongdoing is easy; proving fraud when you are not an insider is incredibly difficult. Subsequently in October 2019, the Financial Times published documents claiming to be internal accounting spreadsheets from Wirecard’s Dubai subsidiary, which was the main contributor to the reported profit of the German parent company. The documents showed that the clients of the subsidiary either no longer existed or after investigation claimed to have never had any dealings with Wirecard. In response to the allegations of purely fictitious business activity Wirecard suggested that the misunderstanding was a result of the local management using “codenames” for actual clients. It was such a cockamamie defence that I burst out into a fit of giggles. The Wirecard Supervisory Board first dismissed calls for an independent audit of the company and then reluctantly agreed.

E&Y audited the accounts of the German parent company (AG). KMPG would be responsible for this additional special audit, which in May 2020 reported they were unable to satisfactorily conclude. The Dubai entities, which the FT claimed accounted for over half of group profits were, according to Wirecard’s 2019 bond prospectus, in fact not audited in either 2017 or 2018. This was a blatant contradiction of ongoing reassuring statements by Wirecard CEO, Marcus Braun. It was also suspicious that in Germany Wirecard regularly failed to make the top 10 in surveys of market share amongst merchant acquirers. This led me to suspect that the Wirecard German parent company profit was in fact signed off by E&Y based on fictitious profit from non-audited overseas subsidiary accounts. When in November 2019, Wirecard announced the acquisition of Chinese payments solution outfit Allscore (which MCA-Mathematik highlighted had 120 outstanding lawsuits and record fines from the Chinese regulator for pre-existing fraud) it seemed all too obvious that China would be the new source of unaudited and unbelievable profit contribution to the German AG.

Following a scheduled meeting which Wirecard cancelled in December 2019 (presumably as I was not a trusted existing investor) I met Iris Stoeckl again in February 2020. She bore an uncanny resemblance to “From Russia with Love” villain Colonel Rosa Klebb, a counter-intelligent agent who attempted to poison James Bond with a venom-laced blade hidden in her shoe. She launched into a tirade against the Financial Times and short sellers, arguing that the allegations against the company were a conspiracy. She also claimed that the KPMG investigation would exonerate Wirecard of any wrongdoing, though what its remit was and how she knew this was unclear. I then asked Stoeckl what I thought was a very simple question: why did Wirecard need to raise so much debt? The company had very high profit margins, limited capital expenditure, and paid only a meagre dividend, and whilst it might need some incremental working capital, in addition to the €900m raised through the controversial Softbank convertible, the company had also just issued a €500m bond. Wirecard’s gross debt had spiked from €2.3bn to €3.7bn, but most investors were not concerned about this as net cash was reported to have risen to €2bn (from €700m) giving the general impression of cash accumulating on the balance sheet for shareholders. It was my experience dating back to the Parmalat bankruptcy of 2003 that companies with significant demands for issuance of gross debt usually have funding issues and that offsetting cash deposits (as with NMC Hospitals) can in fact be purely fictitious and often have been siphoned off by company management. She asked to get back to me, but our follow-up conference calls were repeatedly postponed. Just as Burkhard Ley couldn’t answer a simple question on where Wirecard generated its revenues, Stoeckl couldn’t tell me why such a theoretically highly profitable and cash generative company suddenly needed such sizeable access to the debt capital markets.

Once again short sellers have played the unpopular role of market vigilante in unmasking a deceit. Sadly, some deluded investors still think that their Wirecard losses are a result of a hedge fund conspiracy and would have preferred the perpetuation of an audacious multi-billion Euro management fraud. It is time to recognise that without short sellers we would inevitably have a more dishonest stock market and that would lead to a higher cost of capital and lower long-term economic growth.

Barry Norris
Argonaut Capital
June 2020