After Collapse, Germany’s Wirecard AG, Former CEO Hit with Securities Class Action

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Germany’s Wirecard AG is among the defendants in a proposed class action that looks to represent securities holders who were injured financially when it was revealed in June 2020 that 1.9 billion euros had vanished from the now-collapsed worldwide electronic payment processor’s balance sheet. 

The 31-page lawsuit, filed in Pennsylvania federal court, looks to cover those who bought or otherwise acquired publicly traded Wirecard securities between August 17, 2015 and June 24, 2020 (the class period).

Since at least August 17, 2015, Wirecard had issued materially false and misleading statements with regard to its total assets, the case says, with the company reporting robust stores of cash for years while guaranteeing in quarterly reports that it continually reviewed and analyzed emerging risks and critical market trends. In its quarterly disclosures, Wirecard also affirmed its financial statements and management reports were prepared in accordance with the German Commercial Code and International Finance Reporting Standards, the lawsuit relays. 

According to the lawsuit, Wirecard and its executives, in the company’s half-year financial reports released in June 2017, 2018 and 2019, assured investors that “there are no risks which could endanger the Group as a going concern.” In the 2019 half-year report, however, Wirecard discussed an investigation in Asia pertaining to “errors” that were “identified in the revenue recognition for the fiscal year 2017 and 2018,” and corrected retrospectively for the first half of 2018, the suit says. 

“There was no mention of errors relating to the Company’s cash,” the complaint states. 

The lawsuit alleges, however, that the statements issued by the Wirecard and its co-defendants, including the company’s executives and external German auditing firm Ernst & Young GmbH, were materially false and/or misleading given they obscured a number of “adverse facts” concerning Wirecard’s business, operations and prospects.

According to the case, the defendants falsely and/or misleadingly failed to disclose that Wirecard had for years overstated its cash balances, falsely claiming to have 1.9 billion euros of cash in a trust account that was missing. Further, Wirecard, the suit alleges, overstated its financial results during the class period, including its revenue and EBITDA (earnings before interest, taxes, depreciation and amortization). 

Still further, Wirecard was not forthcoming with regard to the fact that it did not have in place adequate risk management or countermeasures, the lawsuit claims, and that Ernst & Young had failed to audit the company in accordance with applicable auditing principles. 

As the lawsuit tells it, Wirecard’s financial obfuscation came to a head on June 18, 2020, when the company, before market hours, issued a press release titled “Wirecard AG: Date for publication of annual and consolidated financial statements 2019 delayed due to indications of presentation of spurious balance confirmations.” According to the complaint, Wirecard’s press release stated, in part:

“Wirecard AG’s auditor Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich, informed Wirecard AG that no sufficient audit evidence could be obtained so far of cash balances on trust accounts to be consolidated in the consolidated financial statements in the amount of EUR 1.9 billion (approximately a quarter of the consolidated balance sheet total). 

There are indications that spurious balance confirmations had been provided from the side of the trustee respectively of the trustee’s account holding banks to the auditor in order to deceive the auditor and create a wrong perception of the existence of such cash balances or the holding of the accounts for to the benefit of Wirecard group companies. The Wirecard management board is working intensively together with the auditor towards a clarification of the situation.”

Upon this news, Wirecard’s American depositary receipts fell more than $85, or over 75 percent, the suit says. Matters were revealed to be far worse than previously believed when Wirecard, before market hours on June 22, issued another press release, according to the suit. The release stated, in part: 

“The Management Board of Wirecard assesses on the basis of further examination that there is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion EUR do not exist.”

Upon this news, Wirecard’s American depositary receipts fell even further, the lawsuit says. Amid the fallout, Wirecard’s former CEO was arrested over the “$2.1 billion hole” exposed in the company’s accounts from years of inflating balance sheets and sales numbers, the suit relays.

Dubbed the “Enron of Germany,” Munich-based Wirecard AG reportedly owes creditors 3.5 billion euros, or $3.9 billion, and has filed for insolvency.

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