ColdFusion - The Wirecard Fraud - How One Man Fooled all of Germany

Starting point is 00:00:00 Hi, welcome to another Cold Fusion video. Wirecard was once the model of tech startups in Germany. Last year, they were listed on the German equivalent of the Dow Jones among the top 30 companies. Wirecard wasn't just big. They were also innovators. The company had been dubbed among the top 100 most innovative growth companies by Forbes, and the company's promotional material wanted you to know that. Buzzwords like reimagining, reinventing and innovation were often used.

Starting point is 00:00:29 So how, in the space of just nine days, did Wirecard's share price go from €100 euros a share to less than €2 a share? And how did the company end up in a place where they're filing for insolvency and owe creditors $4 billion US dollars? The answer lies in the fact that $2 billion is missing, the equivalent of the entire company's operating profit. Wirecard hit the fraud from financial and regulatory institutions, auditors and the government.

Starting point is 00:00:58 This was a tale of lies, accounting manipulation, hacking attacks on journalists, an arrested former CEO and a missing executive. In this episode, we'll take a look at the Enron of Europe, Wirecard. You are watching Tell Fusion TV. Wirecard was founded in 1999 in a suburb in Munich, Germany. The firm provided online payment services, acting as an intermediary between consumers and producers online. The money transfers were fast, safe and convenient. Writing off the back of the e-commerce boom, the company became a giant.

Starting point is 00:01:42 In the space of five years, they saw its share price increased tenfold. CEO at the time, Marcus Braun, became a billionaire by owning 7% of the shares. By 2005, they had developed a core business in managing the payments of online gambling and adult content. Despite shady beginnings, through a series of acquisitions, they moved into back. banking and were even issuing their own credit cards. After taking over the reins in 2002, only three years after the company was founded, Marcus Braun had global ambitions for the company. In a company Christmas party in 2009, he stated that English would now become the company's

Starting point is 00:02:23 official language. This was to reflect its global ambitions. However, according to a former staff member, this drew awkward reactions as only half of the staff at the time spoke English, and many of them couldn't understand what Braun was even same. As the company became more successful, Braun edged billionaire status. He appeared to exhibit the image of what a tech leader should look like. Speaking at tech conferences, he began sporting the classic black turtleneck. After the Theranos episode, I find it funny how it's becoming a theme for frauds to try and imitate Steve Jobs. Regardless, Braun had every reason...

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Starting point is 00:04:00 To believe that he was on the same trajectory as jobs, having grown the company to a top 30 stock in Germany, it made Wirecard a rare European tech success story. However, Braun himself seemed to be somewhat disjointed from the rest of the company. He created a barrier between himself and most of the company. He worked on a floor only accessible by senior members. Leaving work meant getting on an elevator directly to a car park where a chauffeur waited for him in a Mercedes. He would be driven away to a building where he owned two apartments and had, on occasion, told

Starting point is 00:04:35 his neighbours about his plans to buy their apartments too. By 2015, Wirecard now owned a bank in Munich and was transacting millions of online credit card payments. Braun was the face of the company, speaking with investors while his protege, Jean Marseleck, was jetting around the world closing business deals. Many saw Braun as a tech visionary. Analysts and investors truly believed that this was a newfound, German fintech version of Steve Jobs. They praised him as, quote, the innovative spirit of Wirecard and a, quote, mastermind. However, not everyone was believing the hype. Toby Clothier, head of Mirrorboard Security Strategy Team, recalls his impressions of Braun to the financial times.

Starting point is 00:05:26 Quote, the thing we found odd was his obsession with certain words. His old-time favorite word was strong. We know because we counted. Other favorites were machine learning and ecosystem. If you were very gullible, then you might say he's a tech visionary, but if you look closer, it was all gobbledygook." In 2017, Braun had told investors that the latest artificial intelligence was being used to process and analyze data in wirecard systems.

Starting point is 00:05:57 However, it's been reported by the Financial Times that behind the scenes, wirecard staff were merely using Excel spreadsheets to organize the information. Another skeptic, Henrik Lieber, had met Braun at an event organized by Goldman Sachs. Upon asking about the strategy and technology of his company, Lieber receive what to be considered, abstract and evasive answers, almost as if they were being pre-written or being read out by a machine. Hendrik knew that this was a bad sign, and his fund sold all of their Y-card shares several weeks after the pair met. From time to time, Braun liked to remind people of his power, all coming from his seven,

Starting point is 00:06:37 7% share in his company. It's reported that Braun often checked the share price on his phone and would give verbal blast to senior management if the price fell, demanding that they fix it. He would even take out large loans using the 7% share as collateral. So you can imagine how Braun felt when KPMG released a scathing report on Wirecard's financials in April of 2020. At a recorded town hall meeting, Braun can be seen fuming with rage. But before we get to this moment. Let's figure out how the company got there. On the one hand, you have 23 buy ratings from analysts out of the 29 that I counted on the Bloomberg today. On the other hand, there seems to be a non-stop controversy coming from the Financial Times, SIRF, and a number

Starting point is 00:07:27 of other places that create the kind of volatility I don't think German investors are used to. Why is there so much controversy surrounding your company? I think we have had tremendous growth development before us. We have big innovations before us. So this is what we concentrate on. I do not too much look into controversies, but my message is I think we have a very strong year before us. We are concentrated on technology innovations.

Starting point is 00:07:56 The first time that Wirecard faced scrutiny was back in 2008. Financial auditors from the firm Ernst & Young were called to review allegations in the company's balance sheets. However, strangely, on this occasion, the two men that had blown the whistle were prosecuted by German authorities due to undisclosed stock positions. Under the eyes of Barfin, the German Financial Supervision Authority, we saw the biggest stock market scandal in recent German history. And as you have explained to your listeners, Barthin was more busy with the presumed journalists who wrote about the dodgy business. practices of Wirecard. The reasoning was these two men would write bad about Wirecard and then bet on the price going down before the news breaks in order to make some money. This is called short-selling.

Starting point is 00:08:49 It would be the same claims of short-selling that Wirecard would use a decade later to defend itself against claims coming from investigative journalists at the Financial Times. As Wirecard stock grew, so did the questions. Reports of financial irregularities surfaced, and there were claims that the company's operations were far smaller than what they appeared on paper. It also seemed, no matter how the economy was doing, Wirecard was always thriving. In 2015, it was reported that there was a 250 million euro gap in the company's balance sheet, the equivalent of three years of profit for the company. Wirecard dismissed this as short-seller-backed propaganda, and analysts agreed.

Starting point is 00:09:32 Merely a year later in 2016, claims surfaced again that the company, company was involved in money laundering. Again, Wirecard denied all of the allegations, but this drew investigations from both the German financial watchdog and private agencies. Then something strange happened. Over the next few years, journalists and short sellers who had spoken negatively about Wirecard's operations began to systematically receive fishing emails designed to compromise their company. My name is Peter Parker, but I'm also Spider-Man. This July

Starting point is 00:10:06 We're faced with a threat I can be anyone The world may have forgotten Peter Parker I'm just a neighbor Friendly neighbor But he hasn't forgotten them Sometimes Spider Man has to do the hard thing That's my responsibility

Starting point is 00:10:19 Talk to Banner I didn't know you could get that big Spider-Man brand new day In theaters July 31st Peters However It hasn't been completely verified That Wirecard was responsible

Starting point is 00:10:35 In 2018, the company pushed into the DAX 30 index. This meant that Wirecard became an automatic stock in the portfolio of countless German pension funds. They were now partnering with German stores such as Audi and almost 100 airlines. At their peak, the company was worth $28 billion, but it was the start of 2019 when things started to escalate. There was an internal investigation at Wirecard Singapore office over fraud. money had supposedly been sent to India and back in order to falsely increase the number of transactions. This was to make it look like the company was doing more business than it actually was. In order to process payments in countries where Wirecard didn't have a license,

Starting point is 00:11:23 they would use third-party companies. Some of these were in Singapore, Dubai, but most importantly, the Philippines. Strangely, the Philippines office was shared with a bus company, perhaps a sign that things weren't as they seemed. Since Wirecard didn't have an operating license in these regions, the idea was that these foreign companies would do the payment processing for Wirecard and Wirecard would receive a commission. This ended up being a huge part of Wirecard's business, pretty much all of its profit. 1.9 billion euros or 2 billion US dollars worth. Investigators found that there was no money coming into Wirecard Munich Bank.

Starting point is 00:12:01 It was curious, but Wirecard explained it away to the auditors that there was actually a set of accounts managed at two banks in the Philips. So, the investigators went to the Philippines. Upon arriving to visit Y-Card's partner company in the Philippines, the Financial Times reported having found a retired man and his family who was surprised to find out that their home was supposedly a branch of a multinational company. At this point, Yacard were furious and sued the Financial Times for, quote, misuse of trade secrets. A month later in a strange vote of confidence, SoftBank invested a further 900,000. million euros into Wirecard. It just seems like SoftBank can't get a break.

Starting point is 00:12:44 I think SoftBank shares with us the vision that the area of digital payments in combination with analytics, artificial intelligence, innovative financial services on one platform is one of the most interesting growth areas in the next 10 years. Regardless, towards the end of 2019, among mounting investor pressure, Wirecard appoints the accounting company, KPMG, to perform an audit, it was going to prove that all the allegations against Wirecard were groundless. Six months later in early 2020, KPMG reports it cannot verify, quote, the lion's share of Wirecard's profits over the last two years. Wirecar's CEO Marcus Braun vigorously denied all claims of hear that it's your money calling it wants a promotion elevate your savings with the scotia high-interest

Starting point is 00:13:40 savings account always earn high regular interest rates that grow the more you save and invest conditions apply visit scotia bank dot com slash h-i-sa to learn more scotia bank you're richer than you think i'm doing and then in early june german police rated the munich headquarters what why had claimed the whole time was that they were using third parties to process payments. These third parties would then give wire card a commission, netting them $2 billion and the majority of their profit. The reality was, it all appears to be an accounting sham. The $2 billion wasn't in the Philippines.

Starting point is 00:14:24 The banks that were supposed to be holding the wire card money told investigators that they had no idea what they were talking about. The bank stated that this money simply didn't exist. No money. none of wire cards missing 2.1 billion ever entered into the Philippines. And we're hearing from Wirecard itself that they now believe that the $2.1 billion probably does not exist. Now, as you may recall, on Friday, BPI and BDO, the two top Philippine banks had but revealed that they did not have any relationship with Wirecard. and it is now indicated that the documents that indicate the presence of some funds in those banks were bogus.

Starting point is 00:15:09 Over the next week, Marcus Braun resigns and he's arrested shortly after. Marcus Brown has been arrested. Now this is obviously a scandal that is becoming or is deepening. It is no longer only about missing money. Wirecard is saying that potentially up to 1.9 billion euros, could be missing. It's now also obviously a criminal investigation and one that is serious enough for the prosecutors to take this step and actually arrest and detain the former CEO. Wirecard then makes a statement. They admit that the money probably never existed in the first

Starting point is 00:15:48 place. Shortly after, they file for insolvency. Jan Marstlech, Wirecard's former chief operating officer and Marcus's right-hand man, has vanished. German newspapers report that he fled to Russia or Belarus. There has been ripple effects from the collapse. German pensioners have lost money. Other payment companies owned by Wirecard were thrown into chaos. For example, the firm, Pocket has had to freeze funds for its UK clients, leaving some in danger of having no hot water or gas.

Starting point is 00:16:24 And with that, that is the end of the Wirecard saga. It's how a company went from a small startup to superstardom in the Euro. European tech world to losing 99% of its share price in just over a week. The story raises questions of the effectiveness of regulators, auditors, rating agencies, and financial watchdogs who all let it happen right under their noses. Was there corruption involved to have this go on for over a decade? Perhaps time will tell. When the Financial Times was starting to report.

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Starting point is 00:17:46 So today, and also already it started yesterday, there's a huge discussion in Germany whether or not everybody was far too lenient on the country. because nobody apparently looked really into the business model, neither the regulator nor also the analyst. At some point in time, one analyst from a very well-known bank here in Germany called the reporting from the financial times fake news. Apparently, Wirecard was always shielded somewhat as the poster child of being a tech company in Germany, which we don't have too many of. While the story isn't over just yet, it seems like the company itself. the company itself might be. Thanks for watching. In case you missed the last episode on the greatest phone failures in mobile history, be sure to check that out. A lot of people were saying that they didn't see it in their subscription box. I think it's fascinating some of

Starting point is 00:18:39 the crazy ideas and stories that happened during the earlier days of the mobile industry. And lastly, a serious thank you to all of your support of comments on the very personal video I made before the last one. I seriously wasn't expecting at all. And I seriously wasn't expecting at all, and was very encouraging. Anyway, if you're new here and want to see anything on science, technology, business or history, be sure to subscribe to Cold Fusion. This has been Dago and you've been watching Cold Fusion and I'll catch you again soon for the next video. Cheers guys. Have a good one.

ColdFusion - The Wirecard Fraud - How One Man Fooled all of Germany

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