Wirecard: Lawyers are planning lawsuits towards EY overseas

I.In the fraud scandal at the Dax group Wirecard, pressure is growing on Ernst & Young’s (EY) auditors. On the one hand, the investigations by the authorities are now coming closer to possible errors by the auditors, on the other hand, investor lawyers are looking for starting points to claim as much damage as possible from EY.

In doing so, they primarily aim to extend the possible liability beyond the German national company of EY. “We are planning to sue other EY companies abroad,” announced Berlin lawyer Marc Liebscher, who, together with his colleague Wolfgang Schirp, filed a lawsuit against EY in Stuttgart before Wirecard went bankrupt.

In fact, EY subsidiaries may have been involved in on-site audits of the balance sheets in Great Britain, Singapore or the USA, for example. If lawsuits against them could be realized, the scandal for EY would grow from a local problem in Germany to a worldwide one.

The fact that the auditors played an inglorious role in the Wirecard case has been evident since the company’s bankruptcy at the latest. In mid-June, the Dax Group had to admit that there were no 1.9 billion euros in the balance sheet.

For years, the invented invoice items at the payment service provider had grown steadily, the group had faked high profits. And the auditors had always approved Wirecard’s balance sheets – obviously without verifying the existence of the credits at the relevant banks.

Meanwhile, the Munich public prosecutor’s office is investigating current and former managers of the company on charges of commercial gang fraud, three men are in custody in Munich. The essential question in the criminal proceedings against the long-time Wirecard boss Markus Braun and the other accused will be: Who was part of the gang, who was only a helper and who did the fraudsters fool with their air bookings?

The EY inspectors, who have checked Wirecard’s figures since 2009, count themselves among the third group. “Conspiracy fraud aimed at deceiving investors and the public is often accompanied by extensive efforts to systematically and on a large scale falsify documents,” says the company’s official statement.

“Even with extensively expanded audit procedures, it may not be possible to uncover this type of conspiratorial fraud.” The financial supervisory authority Bafin and the independent auditor supervision body Apas are now investigating whether this general statement also applies to the Wirecard case.

Apas checks whether the test itself has met the legal and professional requirements. According to the Federal Ministry of Economics, she has been conducting formal occupational supervision proceedings in the case since May. If it detects breaches of duty, it can impose reprimands, fines, bans on activities and professions or even exclude them from the profession.

Financial Times already expressed doubts a year and a half ago

According to a government paper from which the “Handelsblatt” quotes, Apas is currently examining all annual and consolidated financial statements audits at Wirecard from 2015. The public prosecutor’s office is also focusing on this period in its investigations.

Bafin is now checking the Wirecard balance sheets from 2017 to 2019 for accuracy. The fact that these controls are only beginning now, one and a half years after the British “Financial Times” reported considerable doubts about the veracity of the Wirecard figures is due to the cumbersome German supervisory system.

First of all, the German Audit Office for Accounting (DPR) is responsible for checking possible balance sheet violations. The order only goes to the Bafin if the test fails. That is now the case, it says in a message published in the Federal Gazette: because the company refuses to participate or does not agree with the test results.

Opinions differ as to how Wirecard should be rated after the scandal

Contrary to popular belief, the DPR is by no means a “balance police”, but merely an institution that, in cooperation with the companies, goes through their figures again. Now the Bafin determines “based on the existing legal basis … the scope and scope of the tests to be carried out,” said a spokeswoman.

The results of the state investigations and the criminal proceedings to be expected will have an impact on civil lawsuits regarding compensation payments to Wirecard victims. Shareholders have three years to file their claims. That is the limitation period. Nevertheless, various investor plaintiffs are already massively campaigning for participation in corresponding lawsuits.

The auditor’s liability to the company is limited to four million euros according to the German Civil Code. Investors’ lawyers also see EY as a duty.

“In our view, EY has violated its auditing obligations massively, so that we believe that there is liability towards investors based on tort law in accordance with Section 826 of the German Civil Code”, says the Tübingen-based Tilp Rechtsanwaltsgesellschaft, which wants to contest a model investor procedure in the Wirecard case and alongside that Group and the responsible managers also sued EY and Bafin.

The theoretically most solvent opponent in this series is by far the Bafin, i.e. the Federal Republic of Germany. However, the law on the basis of which the authority was established excludes official liability.

A procedure would therefore have to go through the European Court of Justice, which would have to override this regulation. It is uncertain whether investors will receive any compensation.

“The problem is the quality of the answers”

In the scandal surrounding the payment service provider Wirecard, much is still unclear. Federal Finance Minister Olaf Scholz answered the questions of the MPs in the Bundestag’s Finance Committee. For FDP politician Katja Hessel, however, his answers were too vague.

The lawsuit against EY is considered more obvious. The consolidated balance sheet of the German national company for 2018/19 shows equity of 35 million euros, plus reserves of 1.6 billion euros.

They are planned for other purposes, especially for pensions. Compared to the damage in the Wirecard case, the company’s capital base is therefore relatively small.

Marc Tüngler, chief executive of the German Association for the Protection of Securities (DSW), roughly estimates the damage for shareholders alone at ten billion euros. Then there are the losses of bond and derivative owners. The DSW is also preparing lawsuits against EY, but has not yet filed them.

“We consciously rely on alternative solutions,” says Tüngler. “If the claims were all enforced in court, EY Germany would be insolvent. However, the international group will have an increased interest in ensuring that this does not happen. ”For example, a company fund from which the investors are compensated would be conceivable.

EY could expect three billion euros in damages

The four major accounting firms are structured in such a way that they do not have to be liable as a global corporation for misconduct in one country. For her, this was a consequence of the decline of her competitor Arthur Andersen after the bankruptcy of the US energy trader Enron in 2002.

For example, Europa-Gesellschaft only has a symbolic amount of EUR 100 in the share capital of EY Deutschland GmbH. In contrast, ten million euros are distributed between the Ernst & Young Foundation and a local German company.

Based on its annual turnover of around two billion euros, EY Germany could be fined around 1.5 billion euros in damages, lawyer Liebscher estimates. “But we know that the global EY network will not drop society in Germany. That’s why we calculate a total of about three billion euros that EY could pay as compensation. “

Until recently, Markus Braun was CEO of Wirecard.  In the meantime he had to resign

The cheated shareholders can hardly expect much more money. Insolvency administrator Michael Jaffé is very optimistic that he can sell the valuable Wirecard remnants to investors.

But from this income he will have to serve the lenders first, then it will be the bond owners’ turn and at the very end the shareholders – if there is still money left. The market does not appear to assume this. The outstanding Wirecard bond with a volume of EUR 500 million is listed at a price of 13.8 percent.

That means: on the stock exchange, less than 70 million euros are expected to be repaid for the bondholders from the bankruptcy estate. After this calculation, there would be nothing left for the shareholders.