German police have arrested Markus Braun, the former chief executive of the Munich-based fintech company Wirecard, for fraud, prosecutors in Munich said on Tuesday.
Braun turned himself in to German authorities on the same day Wirecard admitted that $2.1 billion the company had reported on its balance sheet did not exist. He has since been released on €5 million bail.
That revelation came three days after Braun resigned as the chief executive of the company he led for more than a decade, and four days after Wirecard announced that auditors from Ernst & Young had discovered the $2.1 billion hole in its balance sheet.
Publicly traded since 2005, when it listed on the German stock exchange through a reverse merger with the Berlin-based company InfoGenie, Wirecard was one of the highest-flying fintech companies in Germany. The company managed to attract a $1 billion investment from SoftBank in April 2019 to finance Wirecard’s expansion into Asian markets — even as publications like the Financial Times called the company’s Asian business into question.
SoftBank to invest $1B into German digital payments provider Wirecard in new fintech partnership
Since January 2019, the Financial Times has published a number of blockbuster scoops on Wirecard’s shady business practices.
Now, as the company’s supervisory board deals with addressing the fact “that the bank trust account balances in the amount of €1.9 billion ($2.1 billion) do not exist” within the company’s coffers, SoftBank is being dragged into yet another scandal of someone else’s making.
Wirecard has already fired its chief operating officer, Jan Marsalek, and Braun, who worked at Wirecard since 2002 and served as the company’s chief technology officer and chief executive.
Wirecard’s troubles have been in the spotlight since the Financial Times began its reporting, and last Thursday marks the fourth time that the payments processing company said it would not be able to publish its financials for the 2019 fiscal year after auditors at Ernst & Young revealed accounting irregularities and an independent audit investigation by KPMG also came back inconclusive.
Wirecard’s operations include an Asian business unit based in Singapore, which is what SoftBank’s capital was intended to expand, and U.S. operations through the acquisition of Citigroup’s prepaid card services.
That expansion ballooned the value of Wirecard’s share price and made it a darling of the German tech industry, but unfortunately the paper profits Wirecard reported were more like a work of literary fiction than actual facts.
The company inflated its results by round-tripping transactions, where potentially fraudulent transactions are made across borders to avoid the scrutiny of local auditors and make them appear legitimate. The company also inflated sales and profits at subsidiaries in Dubai and Dublin, according to the Financial Times’ reporting.
All of these revelations have brought the company’s high-flying valuation crashing down. Wirecard, which was once worth as much as $27 billion, is now trading at roughly $1.8 billion on Tuesday.
The collapse of Wirecard is also another blow to the reputation of SoftBank and its leader Masayoshi Son. Although the investment in Wirecard was structured as a convertible note, financed by SoftBank employees and the Abu Dhabi-owned sovereign wealth fund Mubadala, the losses are another misstep for the company.
“Everything about that deal is not what you would call textbook corporate governance,” Justin Tang, head of Asian research at United First Partners in Singapore, told Bloomberg last week. “This is the last thing Son needs now as he deals with the fallout from Vision Fund losses.”
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