Thousands of Wirecard investors are preparing to sue the German state for billions of euros over its alleged failure to pre-empt the worst accounting scandal in the history of its premier share index, the Dax.
Two separate class actions will accuse the financial watchdogs of negligence after it emerged that they had assigned only one full-time worker to investigate claims of a complex €1.9 billion fraud at Wirecard last year.
The collapse of the digital payments company is threatening to severely damage Germany’s reputation for thorough and dependable regulation.
Wirecard, which entered the Dax less than two years ago, filed for insolvency last week and Markus Braun, its former chief executive, was arrested and charged with market manipulation. The missing €1.9 billion was supposedly held by Wirecard’s Asian arm in two Filipino bank accounts but the board has concluded that the money probably did not exist.
Many shareholders blame the Federal Institute for Financial Services Supervision (Bafin) and EY, the company’s auditors, for not spotting problems much earlier. Suspicions about Wirecard’s accounting were raised in 2008 but it was only in February 2019 that Bafin began investigating claims that the group falsified its balance sheet.
The regulator handed the job to a smaller organisation, the Financial Reporting Enforcement Panel (Frep), the “accounting police”, which had only a single employee dedicated to the case.
Dr Späth & Partners, a Berlin law firm, and the Association for the Protection of Capital Investors, (SdK), one of the country’s largest shareholder groups, are drawing up a class action that could involve more than 6,000 Wirecard investors. “More investors are joining every day, so we will ultimately be seeking a sum of several billion euros,” Marc Liebscher, the senior lawyer involved, told The Times.
The lawsuit will concentrate on mistakes by Bafin, whose president, Felix Hufeld, last week admitted that the regulator had failed to exercise proper oversight of Wirecard, and Frep. It may also censure the state prosecutors in Bavaria, where Wirecard is headquartered, for not stepping in sooner.
“The damage to trust is massive,” Dr Liebscher said. “Clearly the system of auditors, regulatory authorities and criminal prosecutors has failed. An accounting scandal of historical proportions went undiscovered and Wirecard was able to march all the way up to the Dax, even though allegations had already been levelled against it as early as 2008, including by the SdK.”
A second lawsuit involving up to 600 investors, including a large asset management company from Hong Kong, is being assembled by Michael Leipold, a finance lawyer based in Hamburg. Both groups are also planning to sue EY.
“People are aghast,” Mr Leipold said. “This is a company in the Dax: you rely on the fact that Bafin will examine everything properly and that the auditors will do their job properly too. [But] at the end of the day you can see it was all for nothing. The money’s gone.”
The political dimension of the Wirecard affair is beginning to reach the highest levels of the government.
Olaf Scholz, the finance minister, broke his silence on Thursday to warn that the “unparalleled” scandal had to be a spur to reform Germany’s financial regulation system. The ministry is expected to strip Frep of its powers and hand them to Bafin instead.
Robert Habeck, leader of the Green party, has pressured Mr Scholz to explain why his department had taken so long to get to grips with the problem.
“The warning lights had already been flashing for so long,” Mr Habeck told the German Press Agency. “In the context of financial services and technical regulation, there must at least have been questions and instructions from [the ministry’s] upper echelons and from the finance minister. Anything else would have been irresponsible.”