Wirecard's former CEO Markus Braun arrested after $2 billion scandal explodes

Wirecard has acknowledged that $2.1 billion its auditors were unable to locate probably never existed, deepening a crisis at the German digital payments company. Dan McCrum, a reporter at the Financial Times, explains how the scandal unraveled.

Posted: Jun 23, 2020 9:21 AM
Updated: Jun 23, 2020 9:21 AM

Markus Braun, the Austrian tech entrepreneur who built Wirecard into one of Germany's biggest companies, has been arrested after a $2.1 billion hole exploded in its accounts.

Munich prosecutors confirmed Tuesday that Braun, Wirecard's former CEO, was arrested on suspicion of having inflated the digital payment company's balance sheet and sales through fake transactions in order to make it more attractive to investors and customers. Prosecutors said that Braun may have acted in cooperation with other perpetrators.

Wirecard acknowledged on Monday that €1.9 billion ($2.1 billion) in cash included in financial statements — or roughly a quarter of its assets — probably never existed in the first place. The company withdrew its preliminary results for 2019, the first quarter of 2020 and its profit forecast for 2020.

The scandal erupted last week when Wirecard said that its auditor, EY, could not locate the funds in trust accounts and refused to sign off on the company's financial results.

Braun resigned as CEO on Friday, suggesting the company may have been the victim of a massive fraud. Jan Marsalek, a board member and chief operating officer at Wirecard, was fired on Monday.

Founded in 1999, Wirecard was once considered one of the most promising tech firms in Europe. It processes payments for consumers and businesses, and sells data analytics services. The company has nearly 6,000 employees in 26 countries around the world.

Braun, an Austrian who also served as Wirecard's chief technology officer, had led the company since 2002. The former KPMG consultant is the company's largest shareholder, with holdings of just over 7%, according to data from Refinitiv.

Wirecard grew quickly with Braun at the helm. The company reported revenues of over €2 billion ($2.2 billion) in 2018, or more than four times the figure from 2013. Shares hit an all-time high above €190 ($213) in September 2018, the same month Wirecard replaced Commerzbank in Germany's list of top 30 companies. At that point, it was worth more than €24 billion ($26.9 billion).

The company now faces an existential crisis. A frantic search for the missing money ran into a dead end over the weekend in the Philippines, where the central bank denied the cash had entered the country's financial system. The company's shares plummeted on Monday, extending a crash that wiped 85% off its share price over three trading sessions. Wirecard ended the day with a market value of €1.7 billion ($1.9 billion).

Wirecard is scrambling to keep creditors at bay, a task that could be complicated by the arrest of its former CEO. The company said late Friday that it had hired investment bank Houlihan Lokey to come up with a new financing strategy.

The implosion follows a tumultuous 18 months for the company punctuated by allegations of fraud, attacks by short sellers and questions over its accounting practices.

The success story began to unravel in January 2019, when the Financial Times reported that Wirecard forged and backdated contracts in a string of suspicious transactions in Singapore. The company denied the report, which was produced with the help of a whistleblower, but its shares plummeted. In February 2019, authorities in Singapore said they would investigate.

Another blow landed late last year, when the FT published a report and company documents suggesting that profits and sales had been inflated at Wirecard outposts in Dubai and Ireland. Wirecard again denied the allegations. But an investigation by KPMG published in April found the company had not provided enough information to fully explain issues raised by the FT.

Braun reported to prosecutors on Monday evening after a warrant was issued for his arrest. According to prosecutors, a judge will decide later Tuesday whether he should remain in custody. The former CEO explained his decision to quit last week in a letter to employees and shareholders.

"The confidence of the capital market in the company I have been managing for 18 years has been deeply shaken ... I respect the fact that responsibility for all business transactions lies with the CEO," said Braun.

— Mark Thompson contributed reporting.

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