Wirecard 24 months on……Key Lessons?

It’s two years since Wirecard crashed and burned - what have we learnt??

July 22nd 2020: German prosecutors arrest three Wirecard executives, including CEO Marcus Braun suspected of masterminding fake company’s accounts and defraud creditors of billions of euros, while stock investors lost US$12.5 billion

At the time Wirecard had a plan (supported by some politicians) to merge with Deutsche Bank, if allowed would have covered up Wirecard’s fraud.

Wirecard stock collapsed in June 2020

?Wirecard was pure fraud, as was Ezubao in China in 2017.

?What enabled Wirecard to evade scrutiny for over nine years:

?1.????fawning politicians,

2.????obliging regulators,

3.????stock brokers,

4.????merchant bankers eager to win deals

5.????weak Board, employed ex-politicians/regulators,

6.????dodgy accounting standards,

7.????unsatisfactory audits,

8.????largely compliant media and

9.????Wirecard Execs were masters of PR, spin, bluster and obfuscation.

Beware the cult of the start-up CEO!

German politicians?fanned the flames around the hype - even contemplating?merging Wirecard with Deutsche?Bank, which would?have cemented?the fraud, disguising?the losses forever.

BaFin the regulator had?only 6 staff (according to the FT and the Wirecard podcast) to supervise all none core banks and unsecured lenders- these regulators?only ever reviewed Wirecard's small bank??-?not the total?business?allowing the?accounting?fraud to go unquestioned for 9 years.

Auditors in the gun

EY the auditors were up to their necks in this –

?EY exposure to Fintech’s is wide and other issues are involved – one example is UK Finablr which was caught up in an accounting scandal not picked up costing US$1.4 billion.

?A large?part?of the credit for Wirecard’s fate is several?analysts?who never?wavered?and the Financial Times who were tireless. Both were abused and coerced by Wirecard, their agents and in several instances German regulators.

Are these same factors still at play among any current ‘successful’ Fintechs?

The normally agreed definition for Fintech?is start-ups post 2008 in the banking, payments, insurance funds management, regulation and services space.

What are the losses?

Very hard to tell as most Fintech’s are not public, funded by Venture Capital which is not required to tell anyone anything!?

From the limited number of ‘public’ collapses and scandals Fintech’s have lost US$84 billion so far….

Fairly sobering I think -?

Wirecard fraud lost US$12.5 billion

Ezubao fraud lost US$9.9 billion

Lending Club stock collapse lost US$9.8 billion

Greensill lost US$4.6 billion*

Greensky Inc stock collapse lost US$4.2 billion

On Deck Capital stock collapse lost US$ 1.8 billion

Funding Circle stock collapse lost US$1.5 billion

Finablr stock collapsed losing US$1.4 billion

Other ‘smaller’ collapses have lost US$38.7 billion

Giving US$84.4 billion in losses!!

*Australian owned Greensill was a private company but planed a 2021 IPO worth US$22 billion.

?The FT in this article uses Mirabaud analysts Neil Campling’s excellent 20 points to check -?try this yourself and mark any of the Unicorns or public Fintechs -

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

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.?

START UP FAILURES

Another area is start-up that collapses a very common occurrence – a list completed by CB Insights has 224 which make interesting reading.

“But we’ve also uncovered some more uncommon — and dramatic — causes of failure, including:

· Financial fraud

· Lawsuits

· A most-wanted founder

· A global pandemic

We’ve broken down the companies that failed by the amount of funding they received, starting with those that failed that raised over $100M. (Ouch.) We then highlight discussions about the reasons for failure based on press reports, founder?post-mortems , and company statements” CB Insights