
Wirecard – The “German Enron”, and a personal history - joydeepdg
https://valueandopportunity.com/2020/06/19/wirecard-the-german-enron-a-very-personal-history-2008-2020/
======
chewz
> Lessons to be learned

* even a pretty obvious fraud can go on much longer than one would think if the organizers are ruthless enough. My original short position would have gone against me 25x over 12 years and the share price even after today’s disaster would be higher than back in 2008 (just to be clear: the company is worth ZERO in my opinion)

* a company that goes against people who write negative articles as aggressively as Wirecard has something to hide

* if the profitability of a business can not be explained by its business model, then most likely something is very wrong (greetings Bernie Madoff)

* 99% of professional investors and analysts don’t care about these things even if you tell them. A lot of people knew that the company was fishy but hey thought they can make money anyway and a lot of people made a lot of money over the years

* Small companies with far flung operations in difficult geographies should be avoided (see Globo Plc) as this makes fraud difficult to detect for auditors

* A big 4 Audit firm is no proof of quality.

~~~
blibble
amusingly: back in 2019, when journalists pointed out irregularaties in the
company's accounts, the German Financial regulator's reaction was to ban short
selling of their shares... and then issue legal proceedings against the
journalists

> On Monday, BaFin banned further short selling of shares in Wirecard, the
> Dax-listed payments services group. The stock has dropped steeply after FT
> reports raised questions over the validity of accounts. The German financial
> regulator said its first ever ban on shorting a single stock was needed to
> prevent a loss of confidence in financial markets.

[https://www.ft.com/content/f04793df-43a2-4d69-a39f-e04dac36c...](https://www.ft.com/content/f04793df-43a2-4d69-a39f-e04dac36ce8e)
has the full details (but paywall)

~~~
Kalium
Governments and regulators don't always act in a clear-headed way when a
company seen as a national champion is involved. Often the fear of bringing
down political wrath, making a mess of national prestige, and more crop up
even when explicit political meddling is absent.

A company that understands it's in such a position is, IMO, more likely to
misbehave because they know the odds of there being consequences are much
lower.

------
allendoerfer
I personally know people, who invested considerable amounts of money into
Wirecard after the COVID-19 crash and even one, who invested last week on the
day the stock took its first dip.

At the first point in time the shortselling, the FT articles and the ongoing
BAFIN investigation were known. At the second point in time it was known, that
they hired there buddies from KPMG, who could not find anything wrong, but
even they were critizising the quality of their report, EY could not find the
missing money and the public prosecutor in Munich started a criminal
investigation.

They still invested. One of them is a computer scientist and CEO of a small
business, the other one has a PHD in business administration and works at a
big three consulting firm.

Even highly educated people seem think of investments inherently as pyramid
schemes. "It fell, so it has to go up again next!" "It cannot rise further,
it's already at its all-time-high." No consideration for the actual value
being created. At some level, you cannot blame them, TINA and monetary policy
actually make it true. Auditing and rating companies, who are supposed to help
here are a joke, making it all seem like a game.

It digusts me. On one end of the spectrum, money is something real and
valuable. It decides, for how long you have to work, whether you have to live
in your car or what you can afford to eat that day. On the other end, it's a a
surreal thing. The direction it goes is controlled by private (!) instutions
with enourmous amounts of power.

I hope that more people, who did not need the money lost it, than those who
needed it. I also hope, that not only Wirecard staff will get prosecuted, but
auditors have to pay for this in some way.

Why do we allow auditors to be private institutions with a profit motive, who
are also doing business consulting on top of it?

~~~
zpeti
Unfortunately the same reasoning could be applied to Hertz selling stock in a
bankrupt company, which would have been impossible 5-10 years ago, but maybe
even a few months ago.

I think the markets have been completely messed up by stimulus since 2008, and
it's only getting worse. Governments are buying company bonds for gods sake.
Stocks aren't about market pricing any more. They are some vanity metric that
governments are obsessed about now to keep from falling (just like house
prices).

~~~
bildung
_> I think the markets have been completely messed up by stimulus since 2008_

Maybe, but OTOH the stock market returns are actually no different from pre
2008 (S&P500 in this case):
[https://www.macrotrends.net/2526/sp-500-historical-annual-
re...](https://www.macrotrends.net/2526/sp-500-historical-annual-returns)

~~~
fennecfoxen
That's a symptom of the problem GP is alleging, though: of companies obtaining
returns by mooching off the free capital provided at taxpayer expense to grow
your market share at the expense of others... rather earning them them by
doing hard work to build businesses that earn their profits, while paying the
real costs that your unsubsidized competitors have to pay themselves.

There's been real disruption since 2008. Stock market returns don't show it,
and they should. The efficient allocation of society's capital depends on
honesty and fairness here, and instead this gap is papered over by government
intervention, meant first and foremost to prop up politicians' careers, in an
unsustainable sham. It will go better for society if we are honest about it
than if we wait for everything to collapse when we are truly put to a test and
find there is nothing to our prosperity but a mirage.

------
ThePhysicist
It might still not be the biggest scandal in the recent history of Germany:
From 1993-1999 a company named Flowtex caused 4.2 BN Mark (roughly 2.1 BN € or
even 3 BN if adjusted for inflation) of damages with a remarkably simple fraud
scheme: They would claim to produce horizontal drilling machines (which allow
you to e.g. put in tubing for cables without completely opening up roads) that
they would sell to leasing companies they controlled themselves. Those
companies would then lease back the machines to FlowTex, which would
supposedly provide them to construction companies. The lease-back of the
machines allowed the leasing companies to get bank loans to fund the buying of
the machines. That alone would be legitimate, the problem was only that most
of the machines existed only on paper, FlowTex simply sold the same machines
over and over by just changing the serial number plates on them. So overall a
pretty simple pyramid scheme which required FlowTex to sell more and more non-
existant machines to cover the leasing costs it paid. When it eventually
collapsed the scheme had caused a massive amount of damage to banks and the
state. One of the reasons it could go on for such a long time was that FlowTex
had good connections to the state government and the CEO Manfred Schmider and
his company became so famous that they were considered "too big to fail" by
banks and even the tax authorities, so they didn't act for a long time even
though it was apparent quite early that something couldn't be right. In the
end the Portugese authorities tipped off an investigation when they discovered
FlowTex had supposedly bought drilling machines from a company in Portugal
that went bankrupt a long time ago.

And while Manfred Schmider went to jail for a couple of years he apparently
still managed to move a lot of his assets overseas and comfortably lives on
Mallorca today. I'd not be surprised if Wirecard turns out to be a similar
case, it's just hard to imagine that they really got defrauded by their
banking partners and that a company of this size would simply entrust 1.9 BN €
to some random lawyer based on the Philippines, this is almost certainly a
cover-up story.

~~~
MrBuddyCasino
> And while Manfred Schmider went to jail for a couple of years he apparently
> still managed to move a lot of his assets overseas and comfortably lives on
> Mallorca today.

This stuff makes my blood boil. I continue to be astounded that this seems to
be the default.

~~~
piva00
It signals to a lot of us that there are very different rules when playing on
the "elite" level of the economy. When you amass power enough through capital
our current system definitely tips over to be lenient against them, and the
longer I live the more I feel it's not necessarily by design but definitely
this hole is left open in the capitalist system on purpose.

This is one of the reasons why I feel that over time I got very much
supportive to "eating the rich", their power to skirt the law is way overdue
to be corrected.

~~~
MrBuddyCasino
> "eating the rich"

Thats an unfortunate side-effect of a weak justice system. I believe the
"eating the rich" attitude is very unhelpful. We need entrepreneurs, we need
startups. If rich people are the problem, that would mean that every time a
new business is founded, the world becomes a little worse. This is obviously
not the case.

~~~
ves
Founding a business doesn’t necessarily make you rich.

~~~
MrBuddyCasino
Did you have a point besides stating the obvious?

------
stargazer-3
It's easy to miss that the article is published under the same username as the
one described as an "anonymous source", in, for example "... Wirecard
desperately wanted to know who this memyselfandi007 was to sue the shxx out of
him, but the police didn’t pass on the real identity."

~~~
FabHK
Yes, the author writing about themselves in the third person is really
misleading/annoying.

------
IMTDb
After the Enron scandal, the auditor (Andersen) was dismanteled. The german
branch of Andersen was bought by no other than Ernst & Young, the auditor of
Wirecard.

~~~
skinnymuch
The US govt did a lot of shady stuff with dismantling Anderson (a not so
uncommon theme) and broke several laws. By the time judges scolded the govt
etc, it was too late. Arthur Anderson was done for.

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luckylion
> In 2019, the boss of the supervisory board hired KPMG mainly to
> independently confirm that everything is splendid at Wirecard (E&Y is the
> auditor of Wirecard).

So, will anything happen to E&Y, or do they just get to say "we didn't know
that was fraudulent, we just did what we got paid to do"?

~~~
bradleyjg
Arthur Andersen went out of business after Enron and the big five became the
big four. Maybe that was a good outcome in terms of accountability but there
needs to be some effective process for promoting new members if we are going
to keep culling this club.

~~~
9nGQluzmnq3M
They didn't go entirely out of business: their consulting arm is now known as
Accenture.

~~~
kevindkeogh
The split happened prior to the Enron bankruptcy and was the result of a
decade of litigation (Andersen consulting partners weren't happy with the
profit-splitting with the audit partners).

------
pjc50
Is there a good summary of Wirecard for those of us who haven't been paying
attention? Was it an inherently fraudulent business, or a regular payment
processor whose managers were skimming, or what?

~~~
onli
Unknown. The company now claims they got defrauded themselves, but like the OP
says, that's weak sauce. It looks like the company was completely fradulent
forever. Interesting and more clear cut is the role of the German financial
authorities, as they protected that companies for all those years they either
are either completely incompetent or completely corrupt.

~~~
corty
> either completely incompetent or completely corrupt.

Both. German financial regulation is kept intentionally incompetent to not
annoy the bosses and their politician friends. It is corruption hidden and
performed by incompetence imho.

------
captn3m0
>My personal highlight of the report was an M&A transaction where Wirecard
bought a company in India from an SPV for 300 mn USD that was acquired just
one month before for 30 mn USD. Wirecard claimed that they didn’t know who the
ultimate beneficiary of the sales price was. If I ever have seen something
looking like explicit money laundering at a DAX company then it was this
transaction.

Found a report that covers this:
[https://www.asianage.com/metros/delhi/180319/acquisition-
of-...](https://www.asianage.com/metros/delhi/180319/acquisition-of-chennai-
firm-at-centre-of-fraud-investigation.html)

And another from the date of the acquisition:
[https://www.medianama.com/2015/10/223-wirecard-great-
indian-...](https://www.medianama.com/2015/10/223-wirecard-great-indian-
retail-group/)

------
netsharc
I know German but never heard of "Bumsbude" before. It got a chuckle out of
me.

The literal meaning (to use similar English words) would be "Shag shack", aka
"brothel"...

~~~
Havoc
Never heard it either. I guess we don't roll with the right crowd lol

------
haakonhr
Crazy story and a good example on that the market can stay irrational/be wrong
longer than you can stay liquid.

~~~
tarsinge
And that the market nowadays has nearly 0 predicting power and live in the
very short term/present, contrary to the priced in belief.

------
muro
I worked for 10tacle some 13 years ago - the company mentioned as a warning
flag. The whole operating mode of the company was to buy up companies with
borrowed money and run for more investment. There was no will to launch
products. Good riddance to them.

------
Havoc
They announced a clean audit before the auditors were anywhere near
concluding? Wow that's bold even by fraudster standards

