According to a ruling by the Federal Court of Justice on October 6, 2021, savers who have concluded premium savings contracts can now demand money back. This is how the judges in Karlsruhe ruled on the first model declaratory action brought by consumer protection groups concerning unlawful clauses on variable interest rates in many older premium […]
WIRECARD-Scandal: Lawsuit against Auditors – What did Ernst & Young testify?
The Wirecard AG business model
The fact that Wirecard AG falsified balance sheets and defrauded investors and investors is now well known. The bubble burst abruptly on June 25, 2020, when news of the “disappeared” 1.9 billion euros that were supposed to be in escrow accounts became public. Why did no one notice for so long? And most importantly – how did Wirecard do it?
How did Wirecard’s fraud model work is a question that not only aggrieved investors are asking. It was a complex system that, according to some experts, only existed to launder money. When dealing with the Wirecard scandal, one must look at the system as a whole.
Basic information on the “Acquirer” business model
As an intermediary payment service provider, known in the trade as an “acquirer,” you forward money from the buyer to a merchant. The acquirer receives a claim against the buyer’s credit card company and is liable in the event of non-payment. So if the buyer or his credit card company doesn’t (can’t) pay, an acquirer still has to pay the merchant. To minimize the risk for itself, the acquirer retains collateral in such a transaction, which it does not pay out to the merchant until payment is made in full. This is usually only a small part of the purchase price. A small example: For a purchase of 100€, the merchant initially receives only 95€ from the acquirer, since 4€ serve as security and 1€ is the business fee. As soon as the acquirer receives the money from the credit card company, he pays out the remaining 4€ to the merchant.
The special Feature of the Wirecard Business Idea
Since the margins on processing such transactions are relatively low, a payment processor needs many transactions to have a profitable business model. Presumably for this reason, Wirecard has used business partners to expand processing in non-EU countries. According to the current state of the investigation, it can be assumed that the transactions were largely fictitious. Wirecard provided the business partners with the alleged customers and the technology for payment processing in order to apparently receive the fee for the alleged transactions. This (fictitious) fee, the third-party partners transferred via detours to the alleged escrow accounts.
The idea of the said escrow accounts was introduced from 2015, probably because at that time the critical inquiries regarding the business model accumulated. Previously, Wirecard had reported the (alleged) fees as receivables on its balance sheets.
Using the proceeds of the invented receivables, it was possible to make company acquisitions. Conspicuous thereby the increased prices. This was presumably done in order to channel money out of the company and back into the Group. The investigations therefore assume that this method was probably also used by Wirecard’s “senior management” to enrich themselves and to embellish the Group’s balance sheets.
The role of the auditors Ernst & Young
The ongoing lawsuits by aggrieved investors of Wirecard AG are directed against the auditor Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft. Based on the state of the investigation to date, we assume that a properly working auditor should have discovered the fraud and thus the damage to investors years ago. In addition, EY faces accusations of having actively helped to shape the business model, or at least of having covered it with full knowledge.
Join the community of plaintiffs against the auditors Ernst & Young here and claim your lost investment in Wirecard AG as damages.
How could EY not have been aware of this?
The question arises as to how EY was able to issue the last audit certificates without limitations. How could it be that the deficits identified by KPMG remained hidden from EY’s auditors in the years before?
After examining the legal situation, Schirp & Partner comes to the conclusion that the certificates could probably not have been issued without a breach of an auditor’s auditing obligations. EY has apparently certified credit balances in trust accounts of up to 1.9 billion euro in recent years without objection, although no sufficient evidence could have been provided, as the banks concerned deny the existence of the accounts. According to our analysis, this does not correspond to the dutiful procedure of an auditor.
What can affected Investors do?
We believe that EY is economically the better claimant for aggrieved investors. The future of Wirecard is written in the stars; the insolvency application was filed on June 25, 2020. Therefore, anyone who wants to enforce damages should consider whether he or she wants to take action against Wirecard at all.
We see a proceeding against the auditor EY as the better alternative. The latter has audited and certified the annual financial statements of Wirecard AG for many years and claims to have encountered incorrect balance confirmations for the first time in June 2020? In our opinion, this is not compatible with the auditing duties of an auditor. Only in March of this year, in a similar case, the German Federal Supreme Court (Bundesgerichtshof – BGH) had ruled against an auditor for incorrectly issued audit certificates and awarded the investor damages.
We have already filed a first class action. If you are also interested in a class action against the auditor EY, please contact us. As contact persons for your further proceedings, you can contact attorney Dr. Wolfgang Schirp, specialist attorney for banking and capital market law and attorney Dr. Susanne Schmidt-Morsbach, specialist attorney for banking and capital market law and specialist attorney for commercial and corporate law.
How to reach us
Schirp & Partner Rechtsanwälte mbB
Leipziger Platz 9
10117 Berlin, Germany
Phone: +49 (0)30 – 327 617 0
Fax: +49 (0)30 – 327 617 17
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