Wirecard scandal shows that investment managers need better due diligence processes.
Over the last few days the fintech and investment community has been rocked by a major scandal engulfing German payments processor and financial services provider Wirecard.
A one-time darling of the German fintech/start-up community Wirecard was listed on the Dax 30 index, putting it in an elite club of Germany’s biggest quoted companies, with a valuation of over €20bn. In doing so it knocked out Commerzbank, Germany’s second largest bank, and at one time surpassed the market capitalisation of Deutsche Bank, Germany’s biggest lender.
Today it is a very different picture. Wirecard’s credit rating has been demoted to junk status and the firm’s management board has had to admit that an allegation that €1.9bn of cash was missing from its accounts is true. The company is now fighting for its survival.
What is extraordinary about the story though is how the investment community responded to the initial allegations made by the Financial Times back in January 2019 and how investment decisions about Wirecard ignored mounting evidence.
Responding to the initial Financial Times article Wirecard issued a statement the same day calling the reporting “false, inaccurate, misleading and defamatory”. It was a speedy and strident denial that quickly turned out to be clumsy and careless, and the first in a number of management team missteps.
Already aware of the issue Wirecard had commissioned an external law firm to look in to the matter. They had found “serious offences of forgery and/or falsification of accounts”. A fact that the Financial Times duly published the very next day, undermining Wirecard’s credibility. Two months later, in March 2019, Wirecard were forced to disclose that some of its employees in Singapore “may face criminal liability” relating to what had happened, further eroding its earlier statement.
But such concerns did not worry investors wanting to capitalise on Wirecard’s seemingly stunning success. In April 2019 Japan’s SoftBank decided it was safe to invest €900m in Wirecard. Maybe they were reassured by a Commerzbank analyst report from January 2019 that responded to the Financial Times allegations. It was entitled “More fake news”. Ironically the analyst’s note was the real fake news. There were no apparent attempts to check the allegations made in the media, and Commerzbank later rescinded the note.
The story takes an even weirder turn when in December 2019 when it was uncovered that Wirecard had funded a surveillance operation in London led by a former Libyan intelligence chief targeting those critical of the company. The Financial Times reported that some market speculators who were short-selling Wirecard shares were followed and photographed and that one had even discovered a tracker device placed on his car.
But the final act in this long running and sorry saga involved the auditing firm KPMG who had been asked to investigate the allegation. In March 2020 Wirecard published a statement saying that KPMG “did not find any discrepancies in its audit”. Many thought that this was the end of the matter… an independent auditor vindicating Wirecard and proving the Financial Times wrong is a neat ending to the story. But it was not to be. A month later KPMG released its findings saying it was unable to conclude whether the €1.9bn of cash existed or not. Wirecard’s share price collapsed by 83%. The company later admitted that the €1.9bn in question probably does “not exist”.
Importantly, there was an 18-month period between the original article being published and the admission by the company that it was true. This was a crisis that morphed in to a long running acute issue, and it is clear that throughout that time it was very badly handled. In their audit report KPMG complained of delays accessing material evidence, and difficulty in securing interviews and cooperation with Wirecard employees. The strategy employed by Wirecard seems to have been denial and obfuscation in the hope that the issue will magically go away.
For those who invested in Wirecard the warning signs were there. The behaviour of the company in dealing with the crisis – on top of the original allegations – should have called in to question the judgement and integrity of the management team, but this was not so.
In November 2019 German media reported a “crazy bet” on Wirecard by fund managers at DWS, a subsidiary of Deutsche Bank. Using a range of investment vehicles DWS fund managers upped their average holding of Wirecard stock from 1.4% to 6.42% across their five funds. This represented a €1bn investment in Wirecard during a period of serious public concern.
This raises a serious question for investment decision makers on how to deal with serious allegations made in the media. Obviously, from a financial perspective a crisis is a good opportunity to pick up shares cheaply, but how can they assure themselves that the risk is worthwhile? What if the allegations are true? At what point is failure to undertake proper due diligence professional negligence? And, at what point does that turn in to litigation?
There are two basic indicators in this kind of situation i) the source of the allegations – the Financial Times is not a fly-by-night operation – and ii) how the company responds in dealing with the issue. Hollow denials and misleading responses, a failure to get a grip, and a series of management missteps not only erodes a reputation it shows that an acute issue is not being dealt with properly.
As Wirecard fights for its survival it now faces accountability and blame not only for what happened, but also how they dealt with it. Resignations and lawsuits are inevitable, and undoubtedly investors have been burnt. Their lesson from this saga is that in the future investment managers will need to be able to demonstrate, when scrutinised, that their decision-making is legitimate. For investments involving substantial sums it is only right that proper due diligence is undertaken, that risks are identified, and that investors can assure themselves that these risks are being managed properly.
And when things do go wrong. It is important that you have the right advisors to help you navigate troubled waters in a way that helps resolve the issue and doesn’t compound the problem.
Board Advisor – Strategic Communications
Cross Border Consultancy
Robert Winstanley has over 15 years’ experience of running campaigns on behalf of political parties, companies, and high net worth individuals.
He has extensive experience of strategic communications and lobbying as a former Head of External Relations at the Metropolitan Police Service and as a former Head of Strategic Relationships at Transport for London.
Robert has spent the last five years working internationally as a consultant specialising in crisis, acute issues, and reputation management.
He has advised multinational corporations, Heads of Government, senior ministers, and family offices dealing with difficult and sensitive situations.