Insolvency administrator Michael Jaffé gives shareholders hope

Munich, Düsseldorf There was silence in Room 134 of the Regional Court Munich I when Judge Helmut Krenek raised the floor on Thursday: “If this business did not exist and the balance sheets are not correct, then the annual financial statements are void”.

The presiding judge Krenek showed himself open to this early on in the hearing. Should it be proven that the assets of Wirecard in question never existed, according to Krenek, it is a question of dimensions “which cannot be doubted as to be null and void”.

This shows that Jaffé will be successful in court. And even if it is not directly the subject of the legal proceedings, as the judge emphasized again, the insolvency administrator could thus create the basis for reclaiming wrongly distributed dividends from the shareholders. Jaffé also hopes for repayments from the tax office, which has calculated taxes on the basis of non-existent profits and excessive sales.

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EY is also coming under more pressure with the judge’s course. The auditing company had audited the Wirecard balance sheets for ten years – without restriction. If the 2017 and 2018 annual financial statements were declared incorrect, they should not have been audited.

Jaffé makes no secret of the fact that he is considering a lawsuit for damages against EY. Today’s trial day should serve as the basis for this. Judge Krenek wants to announce a decision in May.

Wirecard collapsed in June 2020 after the Dax group had to admit billions in the billions. Shortly afterwards, the payment service provider from Aschheim filed for bankruptcy. The public prosecutor’s office is investigating fraud and breach of trust, including against Wirecard’s former CEO Markus Braun.

The question of whether the payment service provider held funds in trust accounts – and if so, how much – is central to the invalidity of the annual financial statements. According to the group’s balance sheets, the Singapore-based Citadelle managed almost 713 million euros at the end of 2017, and even more than one billion euros for the company at the end of 2018.

Jaffé is convinced that this money never existed. His lawyers from the law firm Gleiss Lutz now presented account statements for the first time as part of the proceedings from the OCBC Bank in Singapore, where the alleged trust accounts are said to have been kept. Jaffé had won their handover in court, but is only allowed to use the extracts for the proceedings in Munich.

“The bank statements were very interesting, but unfortunately they didn’t show billions,” said Luidger Röckrath from Gleiss Lutz in the negotiation on Thursday. Revenues from the alleged third-party business never arrived in the accounts.

One of the accounts that were kept in the name of the then trustee Citadelle was apparently an expense account through which the trustee paid for fuel bills, purchases at the toy retailer Toys’R’us and visits to a dance bar in Singapore.

The bar is said to have been run by Rajaratnam Shanmugaratnam, the very man who also managed the alleged trust assets of Wirecard in the Citadelle accounts. He is charged with alleged forgery of documents in Singapore. The public prosecutor’s office accuses him of having faked a non-existent property “with fraudulent intent”. According to Google reviews, his bar is now permanently closed.

Braun’s lawyer Bernd-Wilhelm Schmitz raised doubts about Jaffé’s portrayal during the trial. The question is whether the money existed – not in which bank it was. There is still a need for clarification here.

Jaffé’s lawyers argued that the bank statements would refute the 2017 and 2018 EY-certified balance sheets. Because a large part of the sales and profits apparently only existed on paper, the court had to annul the annual financial statements – and the resolutions on the distribution of profits at the respective general meetings.

Wirecard distributed around 22.2 million euros in dividends for the 2017 financial year and 24.7 million euros in the following year. Jaffé is likely to target major shareholders such as ex-CEO Markus Braun, who had secured eight percent of the shares through his MB Beteiligungs GmbH. But it would also make distributions to small investors obsolete. According to Jaffé, however, it is difficult to track down all of the shareholders who have received dividends.

Investors have registered claims amounting to more than 15 billion euros in insolvency proceedings because of their immense price losses. In contrast, there is less than a billion euros that Jaffé has been able to collect so far. In the past, the insolvency administrator gave little hope that anything would be left for the creditors at the end of the proceedings.

Jaffé seems willing to use EY as well. He commissioned the auditing firm Warth & Klein to examine claims for damages against EY. If the auditors come to similar conclusions as his colleague Martin Wambach, who gave the auditors a devastating testimony in his report for the Wirecard investigative committee in the Bundestag, an action by the insolvency administrator against EY is likely.

More on the Wirecard scandal and the role of EY:

EY itself downplays the importance of the proceedings before the Munich Regional Court for possible claims for damages. The company itself is not a party or defendant in the dispute. “The declaration of invalidity says nothing about who is responsible for the shortcomings in the annual financial statements,” said an EY spokesman. Likewise, no decision is made about a possible breach of duty by the auditor involved in the audit of the annual financial statements.

EY is fighting on different fronts. In addition to the insolvency administrator, it is mainly shareholders who want the company’s money. In previous decisions, the Munich regional court saw no causal connection between the EY attestations and the losses of the investors, or no breach of duty by the auditors.

However, the Higher Regional Court (OLG) does not share this view: In the opinion of the Senate, an earlier refusal of the attestation by EY would also have resulted in an earlier application for insolvency by Wirecard AG.

On the basis of this, “general life experience would probably indicate that the investors would not have made the disputed share purchases with knowledge of this,” the OLG announced last week.

EY and Wirecard: Munich Higher Regional Court gives investors hope

There is “no real reason” why EY should not “be liable to all subsequent share buyers” for a possibly false and immoral confirmation of the Wirecard balance sheets in the years before 2020 – at least if, after the usual course of events, a duly audited Wirecard balance sheet went bankrupt earlier and these share purchases would not have even occurred, according to the OLG.

EY is not directly involved in the process relating to the validity of the balance sheets. The company continues to take the position that it has audited to the best of its knowledge and belief and in accordance with the usual standards. The company itself was a victim of fraud. In particular, the auditors had no way of verifying the existence of the trust assets.

EY will not impress the insolvency administrator – and certainly not dissuade them from filing a lawsuit. Jaffé’s ultimate goal is to collect as much money as possible. In addition to EY, he also looks at Wirecard’s organs. First and foremost, it is not about ex-CEO Braun, his former board colleague Jan Marsalek and other accused, who apparently acted with a high level of criminal energy. As a rule, the insurance companies do not pay for deliberate criminal offenses.

Instead, the focus is on Wirecard top managers who may not have acted criminals. In view of the massive number of incorrect bookings, you could have violated your duties. In this case, the insurance pays. There are 150 million euros in the insurance fund, which Jaffé wants to secure.

More: The protocol of failure: The secret report of the special auditor Martin Wambach on the work of EY

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