Hello and welcome back to Patrick Boyle on Finance. Today's video is all about
wirecard the German payments company that announced that they're filing for
insolvency today. We learn what wire card does and how they became the new Enron.
For the last year or so Dan McCrum at the Financial Times has been reporting
that German FinTech Company wire card was faking some of its revenue and wire
card has been angrily fighting back accusing McCrum of conspiring with
short-sellers to push down its stock. Last week wirecard disclosed that some
of its cash was missing and finally this week they admitted that there is a
prevailing likelihood that the bank trust account balances in which the
amount of 1.9 billion euros is in does not exist. So what is wirecard? it's a
firm launched in the late stages of the dot-com boom in 1999 as a payment
processor helping websites to collect credit card payments from their
customers. They almost went bust in the early 2000s and in 2002 Marcus Braun a
former KPMG consultant took over as the new chief executive. Wirecard went
public in 2002 by taking over the listing of a defunct call center group
and that avoided the scrutiny usually applied to an initial public offering. By
2006 they moved into banking, meaning that they could both issue credit cards
and handle money on behalf of merchants. This was an unusual hybrid of banking
and non banking businesses and that made them difficult to compare with their
peers and helped them to persuade investors to rely on the company's
adjusted versions of financial statements. In the last decade wirecard
went on a shopping spree buying up small payments companies across Asia. In this
series of oddly structured deals in 2015 the Financial Times newspaper began
writing its series of articles raising questions about inconsistencies in the
group's accounts. So how did wire card go from investor darling
to disaster in the span of just one week? well the answer is a good old-fashioned
accounting scandal the likes of which we haven't really seen since the days of
Enron. For those who don't remember, Enron was a high-flying US energy stock in the
late 1990s before it all came crashing down in a 74 billion dollar accounting
scandal that rocked Wall Street. There are a lot of similarities between Enron
and wirecard and all of the ingredients are there for a classic fraud. Number
one a complex corporate structure and dubious accounting practices, Number two
a charismatic self-dealing financial frontman. Number three, constant
complaints about predatory short sellers. The basis of the wirecard fraud was
tied to a small dubai-based third party acquirer called Al-Alam solutions.
Acquirers are the link in the payments chain that collects money from card
issuers and deposits it in store owners accounts. Merchants will usually
negotiate directly with the acquirers to process payments on their behalf. For
each payment that acquirers help merchants route, they charge a fee. So, on
paper al-alam was one of wire cards most valuable assets, processing billions
worth of payments across Europe the Middle East and the United States, yet
when the Financial Times investigated this prized asset they found an
operation with just six or seven full-time employees. When the Financial
Times then reached out to the biggest customers of al-alam, 15 said that they
had never heard of al-alam and eight of them had actually shuttered their
operations a year ago. In 2017 to top it all off neither visa nor mastercard even
had a relationship with al-alam. So, wire card was inflating
revenue by reporting false transactions these false transactions led to
Commission's that were reported and recognized but never truly existed and
were deposited in fake offshore bank accounts over the course of ten years
this led to approximately 2.2 billion dollars that was reported but never
actually existed the Financial Times posted story after story containing
detailed analysis of wire cards financial and accounting inaccuracies
and what happened wire card cried foul they complained publicly and loudly to
anyone who would listen that the FT were conspiring with the evil Schwartz to
bring their stock price down the amazing thing was that it actually worked
Germany's financial regulatory authority actually filed a complaint against the
Financial Times and banned short selling of wire card stock this ban on short
selling was the first time that that regulator had ever banned short sales of
an individual stock to quote Matt Levine from Bloomberg companies that are not
doing fraud when reporters asked if they have faked their revenue usually respond
by explaining where their revenue comes from companies that are doing fraud when
reporters asked if they faked their revenue called the police to try and get
reporters arrested on screen right now you can see an annotated chart of the
wire card stock price over the last two years from the Financial Times in March
this year wire cards auditor was unable to conclude the audit in April their
accounting firm said that they could not verify that arrangements responsible for
the lion's share of wire cards profits reported from 2016 to 2018 were genuine
On June 18th wire card announced that 1.9 billion euros was missing and the
next day Marcus Braun the CEO resigned on June 22nd
why're card announced that the 1.9 billion euros of cash probably does not
exist the next day Marcus Braun was arrested
and today wire card announced that they would file for insolvency. If you found
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