'The money's gone': Wirecard collapses owing $4 billion

By Arno Schuetze and John O'Donnell
FRANKFURT (Reuters) - Wirecard collapsed on Thursday because creditors owed nearly $ 4 billion after uncovering a gap in their books that EY auditor said was the result of a sophisticated global fraud.
The payment company filed for bankruptcy at a Munich court, declaring that with 1.3 billion euros ($ 1.5 billion) in loans due within a week, survival as a company is "not guaranteed".
Wirecard's implosion came just seven days after EY, its chartered accountant for more than a decade, refused to sign the 2019 accounts and forced chief executive Markus Braun to admit that $ 2.1 billion of his cash probably didn't exist.
"There is clear evidence that this was an elaborate and sophisticated scam involving multiple parties around the world," EY said in a statement.
EY said it received false trust escrow confirmations while completing the 2019 exam and reported them to the appropriate authorities.
Wirecard declined to comment, according to EY.
The financial technology company is the first member of the renowned German DAX stock index, which goes bankrupt just under two years after gaining a place among the country's 30 listed companies with a market valuation of $ 28 billion.
"The Wirecard case is harming the German company. It should be a wake-up call for reforms," ​​said Volker Potthoff, chairman of the corporate governance think tank ArMID.
The creditors have little hope of getting back the 3.5 billion euros they owe, according to sources familiar with the matter. Wirecard has taken out 1.75 billion loans from 15 banks and issued 500 million bonds.
"The money is gone," said a banker. "We may get a few euros back in a few years, but we will write off the loan now."
'COMPLETE DISASTER'
The collapse of Wirecard, once one of the hottest fintech companies in Europe, puts other German corporate failures in the shade. It shook the country's financial institution with Felix Hufeld, head of the BaFin regulatory authority, and described it as a "total disaster".
Federal Finance Minister Olaf Scholz described the collapse as a "scandal" and admitted that it was time to review the regulation.
"We need to rethink our supervisory structures," said Scholz, adding that he asked his ministry to come up with ideas over the next few days.
"If legal, legislative and regulatory measures are required, we will adopt and implement them," he said. "A scandal like Wirecard is a wake-up call that requires more surveillance and control than we do today," he said.
Wirecard shares that were suspended prior to an earlier announcement to seek bankruptcy protection fell 80% when trading resumed. You have lost 98% since accountant EY questioned its accounts last Thursday.
EY, one of the world's largest accounting and consulting firms, is facing a wave of litigation in a debacle that has been compared to Arthur Andersen's catastrophic oversight of the US energy company Enron.
The German law firm Schirp & Partner announced that Wirecard, after it was effectively removed from the market, would file class actions against EY on behalf of shareholders and bondholders.
"It is terrifying how long Wirecard AG was able to operate without the auditors raising objections," said partner Wolfgang Schirp.
Wirecard's new management had held crisis talks with creditors, but withdrew on Thursday morning "due to impending bankruptcy and over-indebtedness".
The bankruptcy filing did not include the Wirecard Bank subsidiary, which holds an estimated 1.4 billion euros in deposits and is already managed by BaFin in emergencies.
"COMPLETE VINDICATION"
A second source near talks with creditors said that although the company had a healthy core, it faked two-thirds of its sales. This meant that despite all the legal challenges, there was no way to repay all of the debt.
The rise of Wirecard, which was founded in 1999 and is based in a Munich suburb, was followed by allegations from whistleblowers, reporters and speculators that its earnings and profits had been increased through counterfeit transactions.
Braun fended off the critics for years before finally consulting the external auditor KPMG at the end of last year to conduct an independent investigation.
KPMG, which released its results in April, was unable to verify € 1 billion in cash, questioned Wirecard's accounting and said it couldn't trace hundreds of millions of cash advances back to merchants.
"Today is a complete justification for those who have uncovered the fraud," said Fraser Perring, who bet on a decline in Wirecard shares and co-authored a report in 2016 alleging fraud.
The Munich prosecutor's office, which is investigating Braun on suspicion of misrepresenting Wirecard accounts and market manipulation, said: "We will now investigate all possible criminal offenses."
Braun was arrested on Monday and released a day later on bail of 5 million euros. Former chief operating officer Jan Marsalek is also suspected and is said to be in the Philippines, according to judicial officials.
(Additional reporting by Joern Poltz, Hans Seidenstücker, Edward Taylor, Madeline Chambers; writing by Douglas Busvine; editing by Maria Sheahan and David Clarke)

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