 Hey guys, Eddie here. Happy Saturday and welcome to another video today. We're gonna be discussing the German payment processing company Wirecard, okay, and explaining the 15 year long accounting fraud and this is the biggest Accounting scandal in post-war German history. Okay, we're going to discuss how their CEO Ended up arrested and all the parties involved. So first of all, who are they? They're essentially this German fintech company So when you buy something from a merchant online, someone who's selling a product They essentially collect your payment details and provide it to the issuer and the money flows From the credit card issuer To this fintech company called Wirecard. Okay, and they were growing extremely quickly Just like all the other technology companies at the moment that seem to be around like zoom and Similar to how we saw with zoom and not an accounting fraud but a privacy issue Okay with China all these companies that tend to grow very quickly They tend to skip a few things and let their standards slip Somewhat and hope that they don't get exposed before they can fix it essentially But essentially Wirecard were putting out these numbers that essentially didn't make sense And it led to essentially 1.9 billion euros in cash Not a small amount by any means Being unable to be located and short sellers like chain os actually said that it's very unlikely that the 1.9 billion euros was ever there. It was meant to be held in these accounts called escrow accounts third-party trust accounts That were obviously governed by the trustees But essentially this ended up never Existing okay, so it had these third-party companies in Dubai in the Philippines in Singapore In countries where it didn't have licenses and it was sending payment processing to these businesses and essentially receiving commission From those third-party companies that it owned And this kind of feels like I you know other scandals like Enron And laymen brothers right so Enron if you weren't aware it was a Houston based commodity energy and service corporation And essentially this led to 74 billion in shareholder value being lost thousands of employees And investors lost their accounts and huge unemployment When many of their employees lost their jobs, how did they do it? They kept huge debts off their balance sheet so different to what Wirecard did They basically said there was more cash on their balance sheet than there was Enron said that there was Basically less debts than they really had and the fun fact about Enron was it was fortune magazines Most innovative company in America six years in a row prior to the scandal Another one you may have heard of a little bank called laymen brothers in 2008 a global financial security firm They hid over 50 billion in loans disguised as disguised as sales and essentially the main players were the laymen executives and again the auditors and who was the auditor of laymen brothers when they went bust EY Ernst & Young Okay, and how did they do it? They allegedly sold these toxic assets to the Cayman Island banks with understanding that they would be bought back eventually Okay, and this created the impression that laymen brothers essentially had 50 million more cash 50 billion less toxic assets than it really did and the fun fact about laymen brothers They were ranked the number one most admired security firm by again fortune magazines And of course in terms of sheer scale of these two scandals the collapse of Enron and laymen brothers was much bigger than Wirecard and Wirecard has actually slid into insolvency since then So this is what it looks like from a time frame perspective the FT started running these ingest Investigative journalism pieces essentially in this at the start of 2019 and there were warning signs and essentially Auditors could not obtain the original documents from the banks and the banks in the Philippines They confirmed the documents provided by wirecard to the accounting firm EY And they were of spurious nature is the quote. Okay, so they were they were forging documents. So fortunately It's not for EY that is it's not the only company that or party in this transaction That failed to adequately monitor wirecard as a company. Germany's barfin. They obviously bear tremendous responsibility For this letting this kind of take place on their own turf turf And this obviously has is a German embarrassment and any companies looking to do business in Germany, of course This is what they're concerned about now in terms of the reputation or damage, but as you can see Wirecard is now trading a very attractive one euros and if you loved it a hundred euros in June Chances are you'll love it a lot more today And shorts made a killing. Okay, so short sellers profited 2.6 billion Almost or more than the cash that was supposedly there from wirecard's drop And of course short selling is capped a hundred percent without leverage But those that took advantage of the five-year CDS spike Okay, that essentially blew out From 500 bits to around 8,600 bits at the end of last week essentially benefited greatly and Jim chainos Like I referred to early in the in the video. He was the biggest short position and obviously profited greatly from this Going to near zero But he claims that that 2 billion in cash was never really there and of course who are the Guilty parties apart from wire wirecard EY have been sued now and they essentially failed to ask for key financial statements for three years Okay, so you wouldn't really expect, you know in order to audit things or companies, right? You would right but it turns out over the three years they didn't Okay, so they were requesting this crucial Account information from the Singapore Bank where wirecard essentially claimed it had up to 1 billion in cash And this is a routine audit procedure that would have uncovered the vast fraud, but it turns out they didn't request this Okay, so the big question is you know, why did they sign off on these accounts? Okay, if you're a if you've got exposure to wirecard if you're an investor if you're a credit holder You'd be thinking to yourself. How did EY sign off on these financial statements that were missing crucial Accounting information. Okay, and this is the problem the CEO has obviously been arrested And in Munich on Monday and prosecutors were essentially investigating the rest of the management board again They did things like failing to disclose minutes from the from the meetings as well as everything so it was very very fishy From the start and obviously someone should have should have caught this He ended up posting 5 billion euros in bail after spending one night in police custody And now they fired from it for insolvency They had 2 billion in loans that needed to be paid and they've actually breached the covenants Okay, so on Thursday they collapsed and obviously it once was this high-flying German payment service provider But now it's filing for insolvency, but they have won a brief reprieve from from the creditors Postponing by a few days a decision whether to terminate the 2 billion loans So they're going through now a restructuring Just like companies that filed a chapter 11 like hurts Okay, so essentially They're being restructured By banks like hula hand Loki That they're now going to sale have a fire sale of the assets close their operations and cut jobs And this obviously will result in a much smaller wire card than the 100 euro Giant that operated in the german DAX Bank of america have got a very nice price target of one euros for wire card um From there from their analyst and that easily Has been achieved Unfortunately and just another party to look at similar to the films that you've seen that i'm not going to name in the subprime mortgage crisis where credit rating agencies were Mentioned in the film were almost as guilty as the auditors as they rate their credit, of course and Moody's actually rated wire cards bonds investment grade until last friday Okay, so they've just downgraded wire card to the lowest level of junk And actually withdrew the credit rating All together So essentially the auditors didn't spot this and neither did the credit rating agencies and of course neither did the equity Investors so it leaves to question Is there any other companies in this fintech space as we've seen this era of Software companies rallying dramatically, you know, what else is going behind on behind the scenes at these kind of software companies so, yeah interesting times For wire card and not very interesting time for their equity and debt holders But I hope you enjoyed this shorter video I'm more focused. I hope you have a lovely weekend and take care