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Wirecard – The “German Enron”, and a personal history (valueandopportunity.com)
185 points by joydeepdg 14 days ago | hide | past | favorite | 84 comments



> 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.


Enron is one example of how these things can turn out, but Herbalife (HLF) is another. HLF is a multi-level marketing company; they're a shady company in an inherently shady business; they have far-flung operations; they aggressively went after people expressing negative information; they had questionable accounting; and there were eventually regulatory rulings against them. But they also are a profitable business that sells stuff that people want to buy. They started getting a lot of press over being a fraud in 2012, today the stock is 30% higher than the 2012 peak, and Bill Ackman lost around $1B shorting it before he gave up.

"Fake it til you make it" isn't just for tech startups. A lot of companies juice results with a bit of fraud, but eventually get good real results anyway. It's hard to tell the difference between an outright fraud and a healthy company with aggressive accounting.


> they also are a profitable business that sells stuff that people want to buy

[citation needed]

Just like the other MLMs (or rather pyramid schemes, because that's what they really are), they sell a (unprofitable) lifestyle using deceptive marketing. The products are secondary (they're just there to keep regulators at bay) and are always sub-par and inferior to what can be found off-the-shelf.


There’s nothing illegal, or inherently unprofitable (for the business), about selling people a lifestyle. Louis Vuitton sells people a lifestyle. Harley-Davidson sells people a lifestyle. Apple sells people a lifestyle. All of these companies have products, sure, but the products aren’t really the point.


Louis Vuitton, Harley Davidson, etc do not give people the illusion of owning their business and do not encourage them to stockpile garbage products in their garage to keep their "status" in their "business". They do not encourage people to con their friends & family into the scam either.

Furthermore, most of these luxury goods have actual value. Even if you are stupid enough to go into tons of debt and fill your garage with Harleys, there will be plenty of buyers who will be happy to take it from you at a small loss. In comparison, nobody will buy a garage full of Herbalife - the cost of shipping would be more expensive than the market value of the product itself.


It is illegal when the product makes serious health claims not backed by scientific research. The more insidious cases of this relate to cancer or covid 'cures'.


I'm no Bill Ackman but I still do think that Herbalife is a fraud.

It's basically just a better marketed MLM company, I first realised about the MLM part 12 or 13 years ago when I went to one of their presentations in my city (got out as soon as I could), which I guess leaves them with the "better marketing" part, which I admit they're pretty good at (if I'm not mistaken at some point they were sponsoring the football team AC Milan and the football player David Beckham).


The ftalphaville coverage of Herbalife has been consistently interesting, e.g. https://ftalphaville.ft.com/2016/07/18/2169979/herbalife-avo...


The first one really is key here. Exhibit A is "stablecoin" Tether, which has more red flags than a Kremlin May Day parade and steadfastly refuses to get audited, but has nevertheless been puttering away for several years now. When will the penny drop?

https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/


From my experience a fraud is easy to spot with a keen eye. But persuading the public that hot company is a fraud - different matter.


How do you avoid getting audited for several years ?


As a cryptocurrency? You just decide not to get audited.


I'm no expert, but I think what happens is you shop around for an auditor but you somehow can never find one who will sign off on the audit, because they need you to produce some docs that you don't have.


s/don't have/don't want to give/


If you're not a public company then in many/most jurisdictions it's up to the owners/investors to decide whether or not to have audited financials. If they are a 100% legit and have assets to back their tether there really isn't much of a reason not to have that audited and published on a website. For example bullionvault.com publish an audit of physical metal reserves daily.


Another:

* They tie big names into the firm to get credibility. Hire them into the board, or pay them good money for short term consulting gigs.

Examples:

1) Gen. James Mattis was in Theranos board. So was Henry Kissinger and George Shultz.

2) Enron paid Paul Krugman $50,000 to attend at least two times in advisory board meetings, nothing related to Enron business. What Enron really bought was the ability to say Paul Krugman was in the advisory board. https://www.princeton.edu/~pkrugman/enron.html


The book on Theranos (Bad Blood) actually makes the argument that no “real” big names were in Theranos: Kissinger, Mattis and Schultz knew nothing about health care or medicin. They are/were career politicians. The book argues investors with actual experience in the industry staid far away.


None of this went unnoticed as soon as the company came to public attention. One of the first discussions on HN about Theranos had people being impressed with the big names on the board, and other people noting that it lacked connections to the healthcare industry.

> That is a pretty stunning board of directors as well. I don't doubt their CEO can get an introduction to, and lunch with, nearly anyone on the planet.

> This board seems heavily geared to do deals for defense-related applications. That's fine; getting deals with the Armed Forces and VA is feasible and quite rewarding. What they overtly lack is connections to the healthcare world. I'm surprised they aren't publicly roped into Cleveland Clinic, Mayo Clinic or Kaiser, as they to support novel technologies in this space. I suppose you can argue that the business model is fundamentally incompatible, but I've seen Mayo and Kaiser go in anyway; they can acquire these labs and roll them into operations pretty easily.

> That BOD is stunning with heavy national security/ military operations. I almost thought it was a CIA cover company.

> So, it's a health testing company that will keep all my blood-related health information and make it "actionable", with the backing of James Mattis, William Perry and none other than Henry Kissinger. There are more soldiers in that board there than doctors. The only way I'd give them my blood would be to infect them with a disease.

> Wow. She must be a pretty amazing woman to have collected such strong allies. I'd have lunch with her.

[This last one was downvoted, but is probably the sort of reaction Theranos was hoping to engineer.]


Could briefly comment what you think I meant with big name?


Well known, powerful folks but also experts in the field or respected in the specific industry they are investing in / are board members of.


I wrote this here a few days ago:

-------------------------

Wirecard has been accused before of fraud by so called "short sellers". The document published (2 years ago?) showed a tremendous, extraordinary complex network of international corporations. Such complex setups have a very limited purpose. It can basically be only tax "optimization", hide fraud or hide ownership (UBO). After having seen this PDF I would not touch the Wirecard stock.

By the way, I think Alibaba is opening two new corporations. Per day. You may also want to read at Bronte Capital about Alibaba.

-------------------------

"the company is worth ZERO in my opinion)"

This IS a possibility. But the stockmarket exaggerates always in both directions, "like a sausage dog on a leash, sometimes walks in front of you, sometimes behind you but always comes back to you" Kostalany

If you want to make a gamble there could be buying prices now or soon. But it stays a gamble.

"Even a good company can be too expensive" Buffet

"Even a shitty company can be cheap" me


You forgot the two last ones including "The German BAFIN is not very smart and German financial regulation is substandard", which is a pretty big lesson for the biggest economy in Europe.


Makes the chances of Frankfurt being a Candidate for big companies moving staff from the City even less.

I suspect that Alex in the daily telegraph will be commenting on this shortly.


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... has the full details (but paywall)


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.


And sadly that attitude is why you got the Bunga Bunga Parties scandal that VW and IG Metal Where involved in.


Non-paywalled version: https://archive.vn/VAuC7


How many times will we need to learn that the audits and auditors are not always doing a good job?


substitute "not always" with "almost never".

Edit: The problem is that companies get to pick their auditors. Since the auditors sell a homogenous product (it doesnt really matter, who signs off you yearly report), the only way the big four accounting firms can compete is by being cheaper and/or more "favourable" to the customer. Both not that great for the customer (which actually should be the shareholders and in reality its mostly the board).


Shouldn't there be a market for a tough auditor? Now a healthy company has a hard time convincing investors that there are no hidden problems. With a tough auditor, you could gain more trust and thus cheaper interest rates.


If enough of the market is cheating then it puts you at a disadvantage if if you aren’t cheating (the fake market sees your fair baseline as a threat to future cheating)


That would have to be on the investor's side, otherwise the incentives aren't aligned.


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?


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).


It's not vanity, because governments have dugged themselves into a hole where pension funds and others have invested enormous amounts of money in equities (seeing as bond returns are non-existent due to the aforementioned stimulus) as well as venture capital. Allowing the market to reset and recalibrate itself would also mean wiping out a lot of pensions as well as investments from wealthy donors, which is bad for votes.

The sad thing is that this erroneous monetary policy will only stop if politicians and central bankers are willing to stomach a harsh market recalibration, but seeing as they seem to not be willing to do that judging from their recent actions so I fear that this systemic malinvestment and inequality will just get worse and worse until something breaks.


> 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...


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.


I concur with zpeti’s sentiment that “I think the markets have been completely messed up by stimulus since 2008, and it's only getting worse.”

And as you, Qasaur, say: “this erroneous monetary policy will only stop if politicians and central bankers are willing to stomach a harsh market recalibration, but seeing as they seem to not be willing to do that judging from their recent actions so I fear that this systemic malinvestment and inequality will just get worse and worse until something breaks.”

I think society has reached that breaking point and starting to show the cracks. Digging underneath the protests/riots/violence/standoffs in cities like Minneapolis or Seattle, as they have revealed, what you'll find is rooted in socioeconomics.


Honestly, Hertz selling stock didn't seem that crazy to me. "We need more money, or we're going under." They're basically asking for new investors to make the business solvent. How is this any different than a startup asking for more investors prior to closing shop?

Frankly, not unreasonable either. The entire travel industry was destroyed overnight, so it's entirely possible they could emerge from insolvency with an infusion of capital and be just fine. I'm not putting my money on it, but it's not the most outlandish thing I've heard either.


The motivation of your friends to put many in Wirecard stock probably less about investment and more about gamblng. I guess, they didnt invest their life's savings but just some money the had not better use for right now. In these times of zero risk free returns (and even low returns on junk bonds), investing in distressed assets can be a good strategy if you have the stomach to lose it all.


Probably true. But to me that's still disgusting. I belong to a social class, which can put an amount of money you could use to feed a family in the first world for an entire year into a company that's probably a pyramid scheme without even blinking an eye. Just makes you think, what kind of stuff people above us could do.


I mean, yeah, as you point out with TINA, can you really blame them? When the Federal Reserve essentially states that it will engage in any amount of QE to keep equities afloat, how is that not a pyramid scheme?


How do you get that? The FED is mostly just buying our own governments debt through treasury securities and citizens home debt through mortgage back securities [0]. They haven't touched equities and have barely purchased any corporate bonds.

[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm


I never said they were buying equities. Buying bonds and pushing rates to 0 still has an impact on the TINA attitude. of the market. And, in more direct ways, if you buy junk bonds from me, then I go turn around and buy equities, it's just the Fed buying equities with a few more steps in the middle.


Or they could sit on the cash which many people do in a recession. And again, they've barely touched junk bonds. They are mostly just buying our own governments debt through US treasury securities, the same kind that the US government has created and sold 3 trillion dollars worth this year [0], mainly to fund the CARES act.

[0]: https://www.treasurydirect.gov/govt/reports/pd/pd_debttothep...


You're inferring way too much from a couple of failed investments.


Wirecard was the biggest bank of the 4th biggest economy. So I inferred some systemic issues here.


Biggest by market value - and that‘s because it was considered a tech company rather than a bank.


Isn't Deutsche Bank the largest bank in Germany?


Right now it is again. Deutsche Bank has a market cap of around € 17 billion, Wirecard has (as of writing this) around € 3 billion.


for size comparisons: banks are typically compared by the sum of their assets (not market cap)


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.


> 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.


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.


> 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.

I am feeling the same way. Also for me it is not about them being rich or powerful, but more about general lack of accountability throughout the whole system.


> "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.


Founding a business doesn’t necessarily make you rich.


Did you have a point besides stating the obvious?


Wow, that sounds identical to the DC Solar fraud that happened just a few years ago in the US, except with solar generators. Guess history repeats itself in this case:

https://pv-magazine-usa.com/2020/01/25/dc-solar-owners-plead...


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."


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


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.


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.

TIL parts of Anderson were bought...


> 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"?


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.


Arthur Anderson if I’m recalling correctly didn’t go out of business so much as pushed out of business not fairly or completely legally by the feds.

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


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).


One of the big 5 was banned from Uk government work for decades over the Delorean Scandal.


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?


Regular payment processor, payments went through and I didnt hear of customer accounts vanishing or anything. But with abnormally high, unexplained growth and growing rumours of something being wrong over the last 3 years or so. Impressions got worse when required audits didn't pass more than once.


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.


> 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.


Earlier today, WC admited that the money "most likely never existed".


I am looking for the same. Might be too early to tell though. What I got seems to be: WC started out as a payment processor who was not afraid to work with fringe clients, other payment processors wouldnt work with. Then somehow the money volume went up high. Now this extra money is not where it should be.


Seems to me that it's an open question whether that extra money ever existed to begin with.


>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-...

And another from the date of the acquisition: https://www.medianama.com/2015/10/223-wirecard-great-indian-...


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"...


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


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


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


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.


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




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