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Case Spotlight: Wirecard (Ernst & Young Action)

CompanyWirecard (Ernst & Young Action)
JurisdictionGermany
ExchangeXetra
IndustryFinancial Technology
ClaimsAccounting Irregularities and compliance failures
Relevant PeriodApril 1, 2012 – June 30, 2020
Participation DeadlineJuly 30, 2021 (soft deadline)

Case Background:
On June 25, 2020, Wirecard AG filed for liquidation in one of Germany’s biggest financial scandals to date. Wirecard was a nearly $6B financial services company. Beginning in May 2019 the Financial Times published a series of articles revealing a history of fraudulent sales, revenue, acquisitions, and profits, which were investigated and confirmed in an April 27, 2020 report by KPMG LLP, an auditor hired by Wirecard to investigate the allegations. The most shocking aspect of the report was that KPMG was unable to substantiate more than half of Wirecard’s reported profits from 2016 through 2018 and Wirecard’s regular auditors, Ernst & Young GmbH (“E&Y”), could not account for €1.9B in reported cash balances. In the wake of this scandal, Wirecard’s share price fell more than 90%, erasing roughly €17B in market capital. On June 5, 2020, criminal charges were brought against Wirecard’s board of directors, including its CEO. On June 25, 2020, Wirecard filed for insolvency after admitting that the nearly €2B in “missing” cash likely never existed.

Potential Precedent-Setting Litigation:

Wirecard’s bankruptcy split recovery efforts into those against Wirecard in its insolvency proceedings and those in German civil courts against others involved in the fraud. Investors are actively pursuing separate actions against: 1) E&Y for wrongful auditing of the company’s false financial statements, 2) the German financial regulatory authority (“BaFin”) for failing to comply with its statutory duties to prevent market manipulation, and 3) Wirecard’s current and former directors and officers (“D&Os”) for misrepresenting Wirecard’s finances in public filings.

This situation is unique for several reasons. German law does not provide for U.S.-style class actions. Instead, cases typically move forward via a KapMuG, a legal mechanism by which courts manage collective claims through model case proceedings in which similar suits are filed together and the court chooses one plaintiff to serve as the model (or lead) plaintiff in the model case. KapMuG proceedings, however, are limited to actions brought under the German Securities Trading Act, which traditionally applies to securities violations by the issuers of securities. Here, because Wirecard is in bankruptcy, a KapMug may not be granted for actions against E&Y or BaFin, which will force these claims to proceed as group direct actions. This will likely complicate the process and slow proceedings and it is unknown what actions, if any, the courts will take to streamline the process.

Another interesting aspect of these cases is that investors have the option to choose which action to take part in – one against E&Y, BaFin, the D&O defendants, or some combination – depending on the organizer. Typically, an organizer files claims against a solvent company, D&O defendants, and other parties in one combined action (and often do not include claims against auditors or regulatory agencies). Wirecard’s insolvency, however, has forced organizers to focus directly on these third parties. Here, they differ in which third parties they are suing, and have chosen to bring separate actions against these entities. Cases against each are pending in separate proceedings in different courts. As a result, investors have more options and can evaluate for themselves which suits are best for them by analyzing the strength and weaknesses of claims against each entity and comparing their damages and potential recoveries in each.

Efforts against E&Y and BaFin will strongly challenge existing German law, which is clearer as to the liability of issuers of securities than it is against auditors or regulators. Cases against auditors and regulators in Germany have been rare and decisions scarce as to their liability. As a result, it will likely be harder to prove liability for such entities than the typical issuer. Nevertheless, E&Y’s alleged behavior in failing to discover the missing €1.9 billion may be so egregious that it will be difficult for them to argue that they acted with sufficient due diligence. Likewise, investigatory reporting has revealed the shocking extent to which BaFin protected Wirecard from scrutiny and investigation. If ever there was a case ripe for holding auditors and regulators accountable and creating new law favorable to plaintiffs, this case is it. FRT will continue to monitor these novel legal issues and analyze how they impact this and other future shareholder cases in Germany.

Determining Eligibility & Costs:
Investors are eligible to participate if they acquired Wirecard shares during the relevant time period. Some organizers are also pursuing claims based on corporate bonds. All organizers will pursue claims against E&Y. Some are also bringing claims against the D&Os and BaFin. Recovery efforts will be funded on a no-win, no-fee basis, advancing all expenses. If successful, the organizers will receive cost reimbursement plus a success fee from the recovery. The organizers will also contractually indemnify claimants against the risk of adverse cost (loser pays) awards by the courts and post any bonds or other surety required by the courts.

Next Steps:
If you have compensable losses and wish to register with the organizers, you must submit a signed funding agreement and other supporting documents. FRT will provide these documents upon request.

 

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Founded in 2008, Financial Recovery Technologies (FRT) is the leading technology-based services firm that helps the investment community identify eligibility, file claims and collect funds made available in securities and other class action settlements. Offering the most comprehensive range of claim filing and monitoring services available, we provide best-in-class eligibility analysis, disbursement auditing and client reporting, and deliver the highest level of accuracy, accountability, and transparency available. For more information, go to www.frtservices.com.

This communication and the content found by following any link herein are being provided to you by Financial Recovery Technologies (FRT) for informational purposes only and does not constitute advice. All material presented herein is believed to be reliable but FRT makes no representation or warranty with respect to this communication or such content and expressly disclaims any implied warranty under law. Opinions expressed in this communication may change without prior notice. Firms should always seek legal and financial advice specific to their unique situation and objectives.

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