Who’s going to be the next Wirecard?

FINANCIAL TIMES By: Jemima Kelly

Now that Wirecard has been proven once and for all to be a massive fraud and is rapidly dying away into oblivion, many of us — and you, we’re sure — have been thinking about where the next big corporate scandal might come from.

Mirabaud Securities, the equity research house whose analyst Neil Campling stood out for being the only person to put a price target of zero on the German payments processor, have been thinking about this too.

They’ve come up with 20 warning signs that they are looking out for in trying to determine the next “Big Disaster”.

They are as follows:

1. Massively promotional CEO who actively looks for publicity and spends a lot of time courting Wall Street/investors etc and is very media savvy

2. Huge CEO/Senior Management compensation package NOT tied to cash flow or Earnings but just to Sales and/or the stock price, creating the possibility of egregious wealth creation if the stock goes up a lot. Huge pledging of collateral by the CEO in return for margin loans to fund a billionaire lifestyle.

3. Management compensation generally way out of line with peers despite notably less profitability.

4. Glossy future projections that have a habit over a long period of being proven to be too optimistic.

5. Questionable product quality, ie defects (boon??) or debatable technological leads over similar products.

6. Some evidence of self certifying, whether it be through strange international subsidiaries or not having an Auditor or experiencing unusual and slightly sudden end of quarter surges in revenues, up to and including the last day.

7. Unusual or unverified and large Receivables in a business where the product is exchanged for cash up front.

8. Evidence that the company is existing on a shoestring, not paying Suppliers, Employees, Landlords etc

9. Unusual margin progression, with SG +A going down over time despite a rising global footprint, or GM's staying flat despite much lower ASP's over time, for instance. 

10. High levels of Gross Debt. Cash balances not matched by notable Interest Income thereby suggesting they are fraudulent.

11. High employee turnover, especially in the LEGAL and FINANCE areas. Co-founders or Board members leaving.

 12. Aggressive pursuit via paid third parties and/or “heavies” of any critics or people who have too many questions, which in any case are “boring”

13. Dislike of Hedge Funds ( and short sellers)

14. Possible Narcissistic Personality Disorder on the part of the CEO. Additional points if he/she uses Twitter a lot.

15. Large cabal of outcasts/weirdos/bloggers/Twitter groups who have been saying for years that everything is amiss but just get a lot of criticism because the stock keeps going up ergo they must be idiots.

16. Slowing top line growth rate despite all the hoopla and supposed “growth stock” status. Evidence of competitors rapidly eroding unsustainably high market share. 

17. Loss making. Ideally never made a profit but likes to pretend it did or failing that, that it will for sure in 2-3 years due to highly questionable new products. But the 2-3 years gets pushed out constantly.

18. Extensive use/exclusive use of NON-GAAP Accounting and occasional bridging to get from a Net Loss to a (small) Net Profit via poorly explained one-offs/Other Items/unusually large Credits of some kind in a desperate attempt to get into an Index by illicit means.

19. Weak Board, preferably also small and ideally in hock in some way to the CEO, who therefore do his/her bidding. Helps if some of them are related physically to the CEO.

20. Gullible media, gullible analysts and dozens of paid bloggers who produce Price Targets out of nowhere based on “Option Value” or put another way products that are at least 5 years away from having any material impact. 

We’re having some trouble here. We kind of have the feeling that Mirabaud has someone in mind, but we can’t for the life of us think of a large listed company that ticks these boxes.

We are stumped. 

The Deutsche/Wirecard tap

JUNE 24 2020  FINANCIAL TIMES By: Paul Murphy

Four news releases from Wirecard were pinged out by the clunky DGAP German regulatory announcement feed at the close of play on Tuesday.

Together they show how the stock that now-departed chief executive Markus Braun lodged as collateral with Deutsche Bank back in 2017 for a €150m loan has been sold to cover the debt.

The detail here is quite interesting — and likely to get lost in the rush of news around the implosion of this once high-flying fintech. So let’s take a look . . .

It’s unclear whether Deutsche was still holding the collateral when the proverbial hit, but whoever did began selling just before 2pm last Thursday. The Wirecard share price had cracked earlier after its board revealed that EY would not be signing off on those pesky accounts, which caused the stock to fall like a stone from the low €100s.

Using market prices as guide, it seems just under €45m of stock was offloaded in the space of 90 minutes at an average price of €36.97:

A separate block worth €45m was then sold off-market that day at €31.57.

The next morning, Friday, Deutsche or whoever managed to get just €21.88 a share for another €51m block and then a slightly improved €26.64 for a final block worth €14m.

So, in round numbers that looks like just over 5.5m shares sold at a tad over €28 apiece, raising €155m.

That stock was worth a billion euros at the peak in August 2018.

One small thing to note: in late 2017, when Braun drew down the €150m, a regulatory announcement mentioned just 4.2m shares pledged as collateral, not 5.5m. So it looks like he got margin called at some point since and, if so, Wirecard didn’t inform the market.

But then we know now there’s lots of things Wirecard probably didn’t inform the market about!

The collateral sales will almost certainly have gone to hedge funds that were short, covering their positions. But when the end finally arrived for Braun, about 28m shares were flagged short, according to the ever-helpful Ihor Dusaniwsky. So there’s lots of position closing still to happen.

Also note that hedge funds, led by Coatue Management, actually hiked their short positions as the truth tumbled out at the end of last week.

Would small speculators, knife-catching as the price dropped, like to have known earlier that a collatoral holder was the one doing the fire-selling and that the stock they were maybe buying was Braun’s? Probably.

Feeling just a little sorry for the ex-billionaire? Do remember he’s still got the €150m he borrowed from Deutsche. Unless he’s spent it.

And he still has circa 3.2m shares, worth another €55m at Monday’s close, just above €17.

A few lawyers (both claimant and defence) will have their eye on that.

______

Note 25/6: This post has been tweaked to reflect the fact that Deutsche may have off-loaded this director loan, passing the collateral on to a hapless counterparty.

Also, those 3.2m shares still in Braun’s hands are now worthless.