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