Fraud can happen on the stock exchange

Wirecard case: what happens to my shares in the event of bankruptcy?

The main witness came through the back entrance: Last Thursday, plainclothes police paved the way for Markus Braun to the room in which the Bundestag investigative committee is trying to clear up the Wirecard scandal. Braun is the company's former CEO. He is considered to be one of the main people responsible in the fraud and lost billions proceedings at the former payment service provider.

At Wirecard, air bookings and a financial gap of 1.9 billion euros appeared in the summer. The public prosecutor accuses Braun of being the head of a commercial fraud gang. Before the committee of inquiry, however, Braun should above all report on his relationships with representatives of the authorities and politics. The committee wants to find out whether mistakes were made in the way public authorities deal with the scandalous company.

But the ex-boss only read an opening statement. He was not aware of "that authorities, supervisory bodies or politicians had behaved unfairly," it said. Braun added that he wanted to comment on the matter to the public prosecutor as soon as possible. He then did not answer a single question asked by the committee members - except for those about his date of birth. He also had nothing to say to the Wirecard employees and cheated investors: Here too, he relied on his right to refuse to provide information.

Employees, creditors and shareholders will have taken note of it. The insolvency proceedings are currently running for the former Dax group. Thousands of creditors have already filed their claims. And many shareholders also hope to get compensation through lawsuits. It is the first time that a company from the German Stock Index has gone bankrupt. But it wasn't the first bankruptcy scandal - and it won't be the last either.

Since when have such bankruptcies existed?

They existed more than 500 years ago. In 1494, for example, the Banco Medici in Florence had to be wound up. After all, the banking house had looked after the papal finances and was the economic pillar of Florence. In 1799 the Dutch East India Company was nationalized, or rather its remaining assets and debts after bankruptcy. In 1931 Danatbank, the second largest German bank at the time, went bankrupt in connection with a balance sheet fraud scandal.

The biggest economic scandal in German post-war history at the time occurred in 1988: The retail company co op AG was smashed. The reason was balance sheet manipulation and asset shifts of the equivalent of 4.5 billion euros today. The board of directors had defrauded several banks by two billion D-Marks.

In 1995, Barings Bank, the UK's oldest investment bank, lost $ 1.4 billion in losses speculated by derivatives trader Nick Leeson. The ING Groep took over Barings for a symbolic pound. In 2001, the energy company Enron caused one of the biggest economic scandals in the USA - extensive balance sheet falsifications led to bankruptcy and destroyed the market value of 60 billion US dollars.

What scandals have there been since 2000?

In 2002 it became known that 95 percent of the stated sales of the telematics company Comroad were fictitious - one of the best-known companies in the New Market. The founder was sentenced to seven years in prison for course fraud, insider trading and commercial fraud. Then 2008 was the year of the real estate crisis in the USA. It is linked to the name Lehman Brothers.

The investment bank had to file for bankruptcy because, unlike Bear Stearns, Fannie Mae and Freddie Mac, the US government was no longer willing to bail out the company. As a result of the Lehman bankruptcy, interbank trading collapsed. This also triggered a crisis at the German Hypo Real Estate. The imbalance of the real estate group led to its nationalization at the end of 2009. The federal government took over all shares from the shareholders. The bottom line is that the bankruptcy cost taxpayers billions.

In 2009 the Arcandor retail group - formerly Karstadt-Quelle - also went bankrupt. The CEO Thomas Middelhoff was convicted of embezzlement and tax evasion. In 2012, Schlecker's drugstore, which operated most of the branch's branches in Germany, filed for bankruptcy. Several members of the family have been tried for embezzlement, the delay in bankruptcy and bankruptcy.

In 2014 IVG Immobilien was involved in insolvency proceedings that reduced the company's capital to zero and increased it again through a "debt-to-equity swap". The claims of the creditors were exchanged for new shares in the company, excluding the old shareholders. This ended the listing on the stock exchange.

What can shareholders do in the event of bankruptcy?

The list could be expanded for a long time - with names such as Philipp Holzmann, Swissair, the Kirch Group, Hypo Alpe Adria or Air Berlin. But what can shareholders learn from Wirecard, for example, from the past? What can you do? To anticipate the result: it usually does not look good for shareholders. They make losses, often total losses. The values ​​often fall into the abyss.

Return and risk are closely related in the stock market: the higher the return, the higher the risk, as a rule. In the event of bankruptcy, the shareholder bears this entrepreneurial risk. Shareholders often see themselves as creditors and the insolvent company as a debtor, to whom capital has been given with its subscription. Strictly speaking, however, the shareholders themselves are debtors in bankruptcy proceedings. Because they are shareholders of the insolvent company. However, they have no obligation to make additional payments.

The course of insolvency proceedings depends on the prospects during and after the bankruptcy. In principle, insolvency can arise in two ways. On the one hand through over-indebtedness of a company: Then the loans are higher than the assets of the company. Or due to a lack of liquidity: Then the company can no longer pay the running costs from the income.

How does the bankruptcy process work?

If there is still prospect of recovery in an insolvent company, self-administration takes place: the company works out an insolvency plan for restructuring within a protective shield period of three months. The three months are a grace period for claims by creditors. A trustee monitors this phase.

If there is no longer any chance of recovery, the district court appoints a (provisional) insolvency administrator from outside who will settle the matter for the company. That is the case with Wirecard. The Munich lawyer Michael Jaffé is the insolvency administrator there. The previous management has nothing more to say.

In such a case, the stocks become the pawn of speculators, often with strong price movements at a low level. The old shareholders usually look into the tube, there is not much left of their capital. Companies like Arcandor, Babcock Borsig, Philipp Holzmann, Walter Bau or Wirecard become undead on the stock exchange, zombies that are listed as living corpses in the index. Example Wirecard: the share was once worth almost 200 euros. Now their rate is not even 60 cents.

What are the shareholders' rights?

Because the shareholders are not creditors of the insolvent company, they cannot register claims with the insolvency administrator. You are left out, without the right to influence the bankruptcy proceedings. Only when all liabilities have really been settled do the shareholders have a chance (Paragraph 199 S. 2 InsO). As a rule, however, the assets are usually not even sufficient to satisfy the claims of all creditors - let alone compensate for the losses of the shareholders. Because in a typical insolvency procedure, at best ten percent of the claims are satisfied.

At Wirecard, too, shareholders hardly have any reason to be optimistic. On June 25, 2020, the company filed for bankruptcy due to impending insolvency and over-indebtedness. Investors lost billions of dollars. The share never fell to zero, but still twitched. And in fact there are still some valuable areas at Wirecard.

However, shareholders are unlikely to benefit from the proceeds from these areas. Because they are at the very back of the distribution. First the creditors are satisfied. So far, around 11,500 creditors have filed claims totaling 12.5 billion euros. Insolvency administrator Jaffé has already sold some of the group's foreign subsidiaries. The proceeds from this should, however, only be a good half a billion euros. It is already ruled out that the insolvency administrator will bring back the billions lost by creditors.

And it is only after the creditors that it is the turn of the shareholders. This includes first of all the tax office with tax claims, the social security funds with outstanding social contributions, banks and suppliers. The financial institutions Commerzbank, LBBW, ABN Amro and ING alone are said to have loan receivables of 1.5 billion euros from Wirecard. And bond holders are also creditors and therefore receive money back before the shareholders.

What options do shareholders have left?

However, if it is a case of fraud, as is the case with Wirecard, investors can consider claims for damages. Such a lawsuit can be directed against the company itself. Shareholders can even register a corresponding claim with the insolvency administrator before a court has decided on the compensation. However, many years will pass before a judgment is reached. And the insolvency administrator must recognize the claims for damages.

If you then get through the years of legal dispute, the reward is not the compensation of the exchange rate losses, but only satisfaction according to the quota. Nevertheless, shareholder protectors advise shareholders to register for bankruptcy. This does not cause any costs. The shareholders' association DSW supports investors who want to try to get their money back.

What about auditors and financial regulators?

The auditor EY (Ernst and Young) has audited Wirecard's balance sheets. Can you hold them accountable for this? Who should shareholders rely on if not the judgment of the auditors? The two fund companies DWS and Union Invest have already announced lawsuits against EY. The Tübingen law firm Tilp is preparing a test case against EY. This should clarify whether there is a fundamental claim against EY. In order to be successful in court, one would have to prove intent to the auditors.

Here, too, the public prosecutor's office first determines whether EY really only forgot to obtain balance confirmations from the Asian banks because of a mistake. EY argues that the conspiratorial and extensive fraud at Wirecard could not be uncovered in the audit. It remains to be seen how the investigation will go. The entire criminal investigation will be time-consuming and thus delay the processes for compensation.

And what about the financial regulator Bafin? Shouldn't she also have "slouched"? The law firm Tilp is also planning a test case for capital investors against the Bafin. But the Bafin enjoys a liability privilege and is usually not directly liable to the investors. Investor advocates are therefore planning a state liability suit against the federal government. He has to stand up for failures of the financial supervision, so the argumentation. However, the outcome of such proceedings is extremely uncertain. Overall, there is a long, rocky road ahead of investors for which they will need patience.

Biallo conclusion

For shareholders, the situation is grave, but not hopeless. On the way to compensation, however, they need a lot of stamina. Because of the limitation period of three years, there is no hurry. When the fog around the dubious transactions has cleared, it may be advisable to join a class action lawsuit.

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