LESSONS FROM WIRE­CARD

SA’S reg­u­la­tors should see the col­lapse of pay­ments com­pany Wire­card as ev­i­dence of how short sell­ers help, not harm, mar­kets

Financial Mail - - EDITOR’S NOTE - @ro­brose_za roser@fm.co.za by Rob Rose

Al­most an ex­act replica of Stein­hoff — that’s how Wire­card is de­scribed by Cy Ja­cobs, co-founder of 36One As­set Man­age­ment. “For years, Wire­card’s CEO kept say­ing all was fine, even as red flags were be­ing raised all over the place by the me­dia and an­a­lysts. And ul­ti­mately, it all fell over when its au­di­tors re­fused to sign the books, as hap­pened with Stein­hoff.”

There are other su­per­fi­cial echoes too: the mas­ter­mind was CEO Markus Braun, a for­mer KPMG man­age­ment con­sul­tant who hap­pens to share a first name with Stein­hoff’s for­mer leader, while Wire­card’s head of com­pli­ance was, wait for it, a man by the name of Daniel Stein­hoff.

Wire­card, like Stein­hoff, traces its roots to Ger­many, where Braun trans­formed the com­pany he took over in 2002 from be­ing a run-of-the-mill firm pro­cess­ing pay­ments for porn and on­line gam­bling sites to a fast-twitch fin­tech pioneer of a world of cash­less pay­ments.

De­spite the make-up, the model was sim­ple: it pro­cessed pay­ments around the world, buy­ing up a se­ries of firms in Asia do­ing the same thing. By 2018, its value had soared to €24bn, and Wire­card moved into Ger­many’s DAX in­dex of the top 30 com­pa­nies (a club which Stein­hoff nearly cracked af­ter list­ing in Frankfurt in 2015).

But from 2008, awk­ward ques­tions kept crop­ping up about its mer­cu­rial ac­count­ing. In 2016, as an­a­lysts pointed out that some of the Asian op­er­a­tions may not even ex­ist, the Fi­nan­cial Times pub­lished its “House of Wire­card” se­ries claim­ing there was a €250m hole in its ac­counts. That year, Sin­ga­pore author­i­ties opened a crim­i­nal case.

Last Oc­to­ber, un­der pres­sure from in­vestors, Wire­card hired KPMG to un­der­take a “spe­cial in­ves­ti­ga­tion” into its ac­counts, which EY had given a clean bill of health for years. (Again, it was much like how PWC was hired to do a “foren­sic in­ves­ti­ga­tion” of Deloitte’s work at Stein­hoff.)

In April, KPMG said it couldn’t ver­ify if the “lion’s share” of Wire­card’s pro­fits were gen­uine, and the bub­ble burst.

But what re­ally made it fall apart was that EY fi­nally got around to check­ing if €1.9bn, sup­pos­edly kept in two Philip­pines banks — BDO Uni­bank and Bank of the Philip­pine Is­lands — was there. (Spoiler: it wasn’t.)

On June 19, Braun quit, and two days later Wire­card ad­mit­ted it was pos­si­ble that the €1.9bn “does not ex­ist”.

All of which means EY is now in real trouble. For three years, it didn’t check Wire­card’s bank state­ments, re­ly­ing in­stead on screen­shots and doc­u­ments pro­vided by Braun. It was a rookie er­ror: as one au­di­tor put it, check­ing bank state­ments is “day one train­ing at au­dit school”.

But where this gets re­ally in­ter­est­ing is that Wire­card was a thump­ing vin­di­ca­tion for the short sell­ers, who’ve been call­ing it a fraud for years. Short sell­ers profit when a share price col­lapses. In SA, much has been made of one such short seller, Viceroy, which pub­lished re­ports on Capitec Bank (ar­gu­ing its bad loans were un­der­stated by R11bn) and prop­erty com­pany Nepi Rock­cas­tle (ar­gu­ing its pro­fits had been hugely over­stated for three years).

As you can imag­ine, CEOS don’t like be­ing told their com­pa­nies are junk, so they lob­bied SA’S reg­u­la­tor, the Fi­nan­cial Sec­tor Con­duct Author­ity (FSCA), to in­ves­ti­gate Viceroy and founder Fraser Per­ring.

It was the same in Ger­many, where Braun lob­bied Ger­many’s dopey reg­u­la­tor, Bafin, to act against the short sell­ers. Re­mark­ably, Bafin bought his spin: in 2019, it tem­po­rar­ily banned short sell­ing on the stock be­cause of Wire­card’s “im­por­tance for the econ­omy”. Worse, two months later, Bafin brought crim­i­nal charges against two Fi­nan­cial Times jour­nal­ists and 10 short sell­ers for writ­ing about Wire­card’s fishy ac­counts.

There are lessons for SA in this.

As The Econ­o­mist put it, in­stead of tak­ing the short sell­ers se­ri­ously, “Bafin seemed keener to shore up con­fi­dence in Wire­card and at­tack the at­tack­ers”.

While there are cases where short sell­ers use a “short and dis­tort” strat­egy to ben­e­fit from a quick share price fall, more of­ten than not the short sell­ers are on to some­thing. Says The Econ­o­mist: “Had the warn­ings from Cas­san­dras who de­tected a bad smell around Wire­card years ago been heeded, bil­lions of dol­lars of losses, many of them borne by pen­sion fund in­vestors, could have been avoided.”

Per­ring was also one of the few early crit­ics who called Wire­card right. As one of the co-au­thors of a now fa­mous 2016 re­port, he ac­cused Wire­card of all sorts of shenani­gans, in­clud­ing de­fraud­ing Mastercard and Visa. Per­ring says: “I’ve made more money in the past few months from Wire­card than in seven years in this busi­ness.” But it came at a cost: threats, break-ins at his house and hos­til­ity from the Ger­man reg­u­la­tors.

Ja­cobs says Per­ring “went all in on Wire­card” and it paid off spec­tac­u­larly. “The Wire­card case again shows why the reg­u­la­tors should ac­tu­ally be stand­ing up and sup­port­ing the short sell­ers for im­prov­ing the mar­ket, not try­ing to shut them down,” he says.

As the FSCA is busy look­ing at how to reg­u­late short sell­ing, it should bear this im­per­a­tive, as well as the case study of Wire­card, in mind.

Oh yes, there’s an­other big dif­fer­ence with Stein­hoff: Wire­card first ad­mit­ted to the miss­ing €1.9bn on Mon­day June 20, and three days later Braun was ar­rested on sus­pi­cion of in­flat­ing sales through fake trans­ac­tions.

Yet the other Markus, who con­tin­ues to swan around the Cape winelands, hasn’t had so much as a Christ­mas card from SA’S “pri­or­ity crimes unit”, the Hawks.

For three years, EY didn’t check Wire­card’s bank state­ments, re­ly­ing in­stead on screen­shots and doc­u­ments pro­vided by the CEO

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