The Wirecard Accounting Scandal in Germany, and How the Financial Industry Failed to Spot It

• Author: Thomas M.J. Mo¨ llers
• Pages: 325-360

The Wirecard Accounting Scandal in Germany,

and How the Financial Industry Failed to Spot

It

T

HOMAS

M.J. M

¨

OLLERS

I. Wirecard as an ‘Insolvency With Notice’, and the Failure of

the Entire Financial Industry to Spot It

“Wirecard – a scandal for Germany” was how it was summed up by Felix

Hufeld, the President of the German Federal Financial Supervisory

Authority (BaFin).

1

The first insolvency of a company listed on the German

DAX index has had an enormous impact. The scandal is to be investigated

by an investigatory committee of the German Bundestag; and the first

lawsuits have been filed.

2

The unravelling what happened will occupy the

legislature, judiciary and academia for years. As a first step, the article aims

to demonstrate why there has been a failure of the entire financial industry if

not a single one of the players intervene, even though all market participants

are aware of the allegations of inaccurate accounting. The causes lie in

behavioural finance, but also the inadequate state of German and European

capital markets law. There is insufficient consideration of individual duties

(Part I). A system will then be set out that is more responsive to the validity

of information, and more strongly clarifies the obligations with which

market participants must respond to unproven information (Part II).

Finally, we look at law enforcment and its complex questions about the

correct level of regulation, and the intradisciplinary interaction of criminal,

private and public law (Part III).

A. T

HE

W

IRECARD

S

TORY FROM

A

PRIL

2015

TO

J

UNE

2020

1. The Apparent Success of Wirecard

To summarise the facts of the Wirecard scandal goes beyond the scope of

an academic article. Extensive factual hermeneutics are required,

3

as the

1. These were the exact words used at the Frankfurt Finance Summit conference, see Hanno

Mubler, Henning Peitsmeier & Manfred Sch¨afers, “Schande f¨ur Deutschland”, F

RANKFURTER

A

LLGEMEINE

Z

EITUNG

[FAZ] June 23, 2020, at 15. Hufeld has since been dismissed.

2. For this see also the information on the website of the Bundestag, available at: https://www.

bundestag.de/ausschuesse/untersuchungsausschuesse/3untersuchungsausschuss, last accessed

Feb. 2, 2021; Benedikt Becker, Das Polittheater, W

IRTSCHAFTSWOCHE

, July 24, 2020, at 30 et

seqq.

3. For this legal technique see Thomas M.J. M ¨ollers, L

EGAL

M

ETHODS

§ 14 mn. 11 et seqq.

(2020).

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA INTERNATIONAL LAW SECTION

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW

326 THE INTERNATIONAL LAWYER [VOL. 54, NO. 3

individual market participants report from their respective individual

perspectives:

4

and thus only the most important key facts are mentioned

here.

5

Wirecard AG was one of the few German success stories in the New

Economy. Founded in 1999 as a payment processing company, the company

based in Aschheim near Munich had been posting revenue and profit

increases of thirty percent and more for years, with forecasts being increased

several times a year.

6

The group had over fifty subsidiaries, and the most

profitable were those operating in Singapore, India, and other Asian

countries. Wirecard’s clients included Visa, Mastercard and Paypal, as well

as retail groups like Aldi or Ikea.

7

The auditing firm EY audited the single-

entity annual financial statements of Wirecard AG, and those of the

Wirecard Group, for the years 2009 to 2018, and in each case issued them

with an unqualified audit opinion.

2. A Decade of Accusations About False Accounting

However, the company hit headwinds at an early stage. In 2008 there was

the first short-sell attack and allegations of falsified accounting by a board

member of the German Retail Investors’ Association (SdK). At that time,

participants of the SdK were convicted of market manipulation because they

had bet on falling share prices without declaring this conflict of interest.

8

For a five-year period from April 2015, the reporters Dan McCrum and Paul

Murphy of the Financial Times (FT) published more than sixteen articles in

which they meticulously exposed untraceable payment flows and balance

sheet entries at various Asian subsidiaries in the expos´e they called The House

of Wirecard.

9

Their information was supported by whistleblowers at

4. For example, KMPG, Sonderbericht ¨uber die unabh¨angige Sonderuntersuchung, W

IRECARD

AG (Apr. 27, 2020), https://www.wirecard.com/uploads/Bericht_Sonderpruefung_KPMG.pdf,

last accessed Feb. 2, 2021 or Bundesministerium der Finanzen [BMF], Aufzeichnung f¨ur den

Finanzausschuss des Deutschen Bundestags. Sachstandsbericht und Chronologie Wirecard vom

16.7.2020, 1 et seqq., https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/

Themen/Internationales_Finanzmarkt, last accessed Feb. 2, 2021.

5. The facts were supplemented with further references to national newspapers.

6. This was especially evident in the annual financial statements of 2016/2018 and several ad

hoc disclosures of 2018 and 2019. In their five-year plan Wirecard was aiming to multiply their

market value by five until 2023, see for example Investor presentation Wirecard of April 2018

and Aug. 7, 2018, available at www.wirecard.de, last accessed Feb. 2, 2021.

7. See for example Investor presentation Wirecard Nov. 6, 2019, 8.

8. For an extensive overview see Thomas M.J. M ¨ollers & Sabrina Hailer, Systembr¨uche bei der

Anwendung strafrechtlicher Grundprinzipien auf das kapitalmarktrechtliche

Marktmanipulationsverbot, in F

ESTSCHRIFT F ¨

UR

U

WE

H. S

CHNEIDER ZUM

70. G

EBURTSTAG

831 et seqq. (Ulrich Burgard et al. eds., 2011); see also Martin Hesse, Wette auf den Absturz, 18

D

ER

S

PIEGEL

65 et seqq. (2016); Ren´e Bender, Marktmanipulation: Erstes Urteil in SdK-Aff¨are

und weiteres Gest¨andnis,

JUVE

N

ACHRICHTEN

, https://www.juve.de/nachrichten/verfahren/2012/

01/marktmanipulation-prozess-in-sdk-affare-gestartet-erster-angeklagter-kundigt-gestandnis-

an, last accessed Feb. 2, 2021.

9. Listed in detail in KMPG, supra note 4, at 11 et seqq.

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA INTERNATIONAL LAW SECTION

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW

2021] WIRECARD ACCOUNTING SCANDAL 327

Wirecard,

10

and German national magazines also reported on the issue.

11

Other actors also warned of incorrect accounting, such as in the 100-page

Zatarra Report

12

, but that stated demonstrably incorrect facts and was also

unlawful because the authorship remained hidden.

13

Numerous short sellers

repeatedly raked in high profits when the share price plummeted.

14

As the

rumours of false financial entries did not cease, in 2018 Wirecard appointed

the law firm Rajah & Tann in Singapore to check the accounting. They

found a few individual deficiencies, but in the opinion of Wirecard these did

not have a material effect on the annual financial statements.

15

After the

Financial Times had uncovered further inconsistencies, and in response to

pressure from investors and the public, Wirecard commissioned the auditing

firm KPMG to carry out a ‘special investigation’ in mid-October 2019.

16

On

27 April 2020, KPMG found that numerous financial entries could not be

confirmed because documents were not provided, or were not provided in

original form.

17

As a result, the planned publication date of the 2019 annual

financial statements was postponed. On 18 June 2020, EY refused to certify

the Wirecard accounts with the finding that $1.9 billion in trustee accounts

of two Asian banks could not be found.

18

Just one week later, on 25 June

2020, Wirecard AG filed for insolvency and published this information by

means of an ad-hoc notification.

19

The share price had reached a peak of

almost $200 in 2018, remained at around $100 until the refusal of the

auditors to certify the accounts on 18 June 2020, and then collapsed to below

$2 within a few days.

20

10. Tim Bartz & Martin Hesse, FT Reporter on the Downfall of Wirecard Head, S

PIEGEL

I

NTERNATIONAL

, Nov. 5, 2020.

11. Henning Jauernig, Das steckt hinter dem B¨orsenstar Wirecard, 18 D

ER

S

PIEGEL

65 (2018).

12. Zatarra Research & Investigations, Wirecard AG (Feb. 2016), 1, https://www.heibel-

unplugged.de/wp-content/uploads/2020/06/Zatarra-research-Wirecard-PDF.pdf, last accessed

Feb. 2, 2021.

13. As a violation of Commission Delegated Regulation 2016/958, art. 2 (1), 2016 O.J. (L 160)

15 (EU). Thomas M.J. M¨ollers, Marktmanipulationen durch Leerverkaufsattacken und irref¨uhrende

Finanzanalysen, N

EUE

Z

EITSCHRIFT F ¨

UR

G

ESELLSCHAFTSRECHT

[NZG] 649, 652 (2018).

14. On this Id. at 649 et seq.; Peter O. M ¨ulbert & Alexander Sajnovits, Short-Seller-Attacken

2.0: der Fall Wirecard, Z

EITSCHRIFT F ¨

UR

B

ANK

-

UND

K

APITALMARKTRECHT

[BKR] 313 et seqq.

(2019); Martin Schockenhoff, Schutzlos gegen Short-Seller-Attacken?, Z

EITSCHRIFT F ¨

UR

W

IRTSCHAFTS

-

UND

B

ANKRECHT

[WM] 1341 et seqq. (2020); D¨orte Poelzig, Shortseller-

Attacken im Aufsichts- und Zivilrecht, 184 Z

EITSCHRIFT F ¨

UR DAS GESAMTE

H

ANDELSRECHT UND

W

IRTSCHAFTSRECHT

[ZHR] 697 et seqq. (2020).

15. W

IRECARD

, Ad hoc disclosure (Mar. 26, 2019).

16. The special audit is regulated in A

KTIENGESETZ

[A

KT

G] [S

TOCK

C

ORPORATION

A

CT

]

Sec. 258 et seqq. and can be enforced judicially by a group of shareholders if necessary.

However, Wirecard assigned KPMG to conduct a special investigation, which does not have to

comply with the requirements of A

KT

G Sec. 258 et seqq., see KPMG, supra note 4, at 1.

17. Id., at 12 et seq.

18. W

IRECARD

, Ad hoc disclosure (June 18, 2020), www.wirecard.de, last accessed Feb. 2, 2021;

Henning Peitsmeier, Kriminalfall Wirecard, FAZ, June 19, 2020, at 17.

19. W

IRECARD

, Ad hoc disclosure (June 25, 2020).

20. https://www.boerse.de/aktien/Wirecard-Aktie/DE0007472060, last accessed Feb. 2, 2021.

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA INTERNATIONAL LAW SECTION

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW