When even the New York Times not only publishes news agency releases about the Wirecard stock but also writes articles on the accounting scandal, then the last investor should have understood that something historic is happening. And that’s exactly the case. We can take it as a fact that the company’s balance sheet shows almost EUR 2 billion (one-quarter of total assets), which in reality does not exist. The fact that the company is also listed in the blue-chip stock exchange index (DAX) only makes things worse. Of course, all sorts of people are now speaking out on this subject. As a lawyer (and especially as a person who studied law and holds a doctorate in philosophy of law), I see it as my duty to write a few admonishing words here.
For the sake of disclosure
Only to play with open cards from the beginning. I also hold shares in Wirecard. I put some shares into my portfolio at the end of last year and documented the decision and its reasons on Seeking Alpha. To sum it up, it was a bet, and that’s what I saw in the investment:
Wirecard also fulfills enough conditions to put such accusations on fertile ground: rapid growth, a complicated network of subsidiaries with a complicated business model. With such a combination, even small inconsistencies in the balance sheet that can quickly have an impact on the stock market are sufficient. So that’s the bet and the risky part every investor needs to know. A bet on the fact that in the end there were some mistakes that do not affect the fundamental position of the company.
I still hold the shares and am accordingly about 80 percent in the red. I will not sell the shares either but will keep them for the time being. But this is a subject I do not want to deal with here today.
What touched me so much about dealing with the accounting scandal
A few things have shocked or surprised me in the way many people have dealt with the scandal. I will list the most important ones for me below.
Anyone who said they knew it before didn’t understand the game
The day the bomb exploded, the Internet was full of people and commentators who had known from the beginning that Wirecard would go down. It was an ugly mixture of gloating and bragging that rolled down my news feed on Twitter or Facebook. Of course, one could say that whoever did not buy the stock based on the reports and accusations published in the “Financial Times“ was right. But in the end, and as I said before, these people just have won a bet (congrats for that but as a funny side note: apart from the short-sellers, these people didn’t even make a profit with their bet (they didn’t have a stake, though)).
From my perspective, the situation is somewhat different. We can think of the situation as a poker game where all but one card is exposed. Like the poker players who do not know the last uncovered card, no private investor had a unique opportunity to obtain more information than other investors. The individual facts simply contradicted each other, like the possibilities that the last card is a jack or a queen.
If you want to sum things up, you could say that every potential investor had to ask the same thing: “Are the accounts correctly audited, or is the ‘Financial Times’ right?” or “Is it a jack or a queen”. It was, therefore, never a question of the correct factual basis, but of concluding the contradictory facts. So it was never a question of proper due diligence, but a question of the risk/reward ratio and the risk tolerance of each investor.
Investing is not a gamble of the greedy
My next point is closely related to my statement above. Some media or commentators now say that many investors were far too greedy and closed their eyes to the risks and accusations against Wirecard. Indeed, there were individual funds such as DWS and Alken that held many Wirecard shares at the end of May. In some cases, Wirecard accounted for 10 percent of these funds:
One fund manager who held many Wirecard shares in May was Nicolas Walewski, the founder of Alken Asset Management. He graduated from the famous Paris Ecole Polytechnique. Another glamorous personality is Tim Albrecht, who manages the funds at DWS. DWS is an asset manager belonging to Deutsche Bank. Both managers have an excellent track record. And both were terribly off track with their Wirecard investments.
But were these managers and all the others too greedy? I think that’s a little short-thought. Investors such as Nicolas Walewski or Tim Albrecht were aware of the risk because the problems and allegations were public all the time (see above). The problem probably lay more in the weighing up of opportunities and risks. But this does not necessarily have anything to do with greed. More important than greed might have been the following aspects. I rather see naivety as the decisive element. Of course, you can criticize that too. But the accusation then goes in a completely different direction. I’ll show you what I mean in the following points.
We play the investing game because we assume that everyone plays by the rules
Many people who are considered greedy took an absolute matter, of course, for granted. The problem, however, was that this matter was not given at Wirecard. I am referring to the fact that investment takes place in a space defined by rules. We have a system of order that only works as long as everyone involved sticks to it. Mutual trust and a clear arrangement of cause and effect only prevail as long as the order is maintained.
Think back to the poker game comparison from above. The players assume that both the dealer and the other players are not cheating. On this basis, they make the decision how much to invest, i.e., whether to raise or leave the game. Now Wirecard was already confronted with first suspicions and allegations. A spectator from outside (the honorable Financial Times) shouted into the crowd several times that the dealer was not playing fair. There were indications and reasonable arguments that led to individual players leaving the game (the Wirecard share price had already collapsed by 50 percent).
The players who remained at the table continued to have confidence that the dealer dealt the cards fairly. It’s naive, but it has nothing to do with greed. Greed is by its very nature to want to achieve a specific goal at the price of morality. In the case of Wirecard, investors could have played the game somewhere else, but they didn’t do so because they trusted that in the end, everyone would play by the rules or that there would only be minor violations.
Confusion between offender and victim
The next point that extremely disturbed me was the reflexive confusion of the offender and the victim. There is a simple principle in criminal law. We must protect from fraud precisely those who are particularly vulnerable because of their lack of insight or naivety.
But we often see the opposite case in the public. You may have heard things like this: “Why does the old lady have to be on such a dark street with so much cash at this time of night?”. These are typical social reflexes that can be found repeatedly in dealing with criminal law. The intention is to make the victims complicit in the crimes they have suffered, which is a gross error of judgment. It indicates that the rules we play by no longer apply. We can only blame the lady if we have to assume that nobody follows the rules anymore anyway. When we have reached such a state in the stock markets, then you should sell all your stocks, because then the chaos will reign.
But of course, we are not that far. So far, it hasn’t been decided who the victim and who the offender is. I, therefore, consider it wrong at this time to accuse the German financial regulator BaFin or the auditing firm Ernst & Young of having acted with gross negligence. Just a reminder: Gross negligence means causing damage, although the occurrence of the damage was or would have been recognizable to the injuring party. Besides, the infringer must also have accepted the damage at the time of the act.
All of these are aspects that we do not know at all. Just because the Financial Times has already done extensive research and published indications of balance sheet fraud does not necessarily mean that BaFin or Ernst & Young have been asleep the whole time. As a legal professional, I can tell you that it is easy to raise the suspicion of fraud, but it is more difficult to prove it. It must be investigated who has acted negligently here and who may have been the victim of fraud themselves. Before doing so, we should not confuse the offender and the victim or hastily throw them together.
Confusing the principle with the exception
If we now call for consequences too quickly, we may destroy a well-functioning system. Because one thing is sure: Wirecard is the absolute exception. In most of the cases, the control and security mechanisms are effective. We should, therefore, not confuse the exception to a principle with the principle itself. This could have negative consequences. For example, a higher level of control could make it more difficult for smaller companies or fast-growing enterprises to concentrate on their operational business. There must be a balance between controlling supervision and excessive bureaucracy.
In the end, we see at Wirecard what we have already seen before. Nobody is safe from fraud. In case of doubt, auditors or the authorities can also be fooled with fake documents etc. This means that the offenders responsible must be caught and the crime fully solved.
Only then can we analyze which control mechanisms have failed and then take targeted action. However, it is equally essential that the victims of the crime have sufficient possibilities to claim compensation. There must be an easy way for plaintiffs to join forces and file suit together. We should give the authorities time to investigate the case. That may take a while. Maybe it will never be possible to shed full light on the matter. But let us all remain humble and not speak as if we were experts. Because we’re not.
If you don’t want to miss any new articles, you can easily follow me on
Sharing Is Caring
Your thoughts are too valuable to keep them to yourself. Make them available to the world and the community by sharing them with us. All you have to do is leave a comment after reading the posts on the blog. Just use clear writing and clear thoughts. You can also share this post with your favorite network: