File “W“ – some insights, before our lesson starts

We had not intended to write about Wirecard until the dust has settled and more is known about the background of the fraud. In addition, our piece will be more about investors’ psychology. This is also insightful as the stock was owned/shorted by a variety of investors with differing goals (hedge funds, mutual funds, institutional funds, passive investors, retail investors, German and foreign investors).

However, most of the news stories and blogs in the aftermath are superficial in their interpretation of events. We have no inside knowledge, but have followed the company since its beginnings 15 years ago. We have collected a mosaic piece by piece over the years. Putting them together gives the following picture:

• The collapse of the company was not caused by fraud from its 3rd party partners.

• Wirecard has been systematically defrauded from within.

• Ranging from its origin of inflated take-rates from “redlight” online businesses to its rapid global expansion by acquisitions, all the elements of an Enron-like fraud scheme were in place.

• As part of inflating revenues, it may also well turn out to become the largest private(!) company, money laundering scheme.

• Responsibility of the CEO: We strongly believe in “innocent until proven guilty”. If a company’s accounting is systematically inflated over long time periods, the CEO is certainly the first point of responsibility, no matter whether he designed it from the outset or tolerated it or ignored it. It therefore seems that a bail of €5million is not nearly enough in comparison to the over €10 billion in wealth already destroyed.

• We do think there is value to Wirecard’s business as much of it was similar to what Adyen is offering. Our rough estimate is around €2 billion or €16/share, but only if it is sold now before clients jump ship. Current shareholders however, may not see any return of their investment when external lawsuits are accounted for, which would explain why some shortsellers increased their shorts even after the initial 60% selloff.

• EY could face what happened to Arthur Andersen, then a global top 5 auditor, after Enron: inundated by lawsuits, they were forced to dissolve.

Finally, although we Germans do try hard, we are well off the peak. The largest accounting frauds were American. Even after 20 years, Enron is still the biggest accounting fraud scandal ever on Wall Street and their USD63 billion in market capitalization that went to zero was almost 5 times Wirecard’s.

Once nerves have calmed down, our lesson will follow.

The HanseaticHunter

#wirecard #accountingfraud #enron