FRANKFURT — Berkshire Hathaway may have found a way to get back some of the hundreds of millions of dollars it lost after buying a seemingly solid German pipe maker that turned out to be on the verge of going bust.
The conglomerate, led by Warren E. Buffett, is suing Jones Day, the law firm that represented the owners of the pipe maker when it was sold to a Berkshire Hathaway subsidiary in 2017. The lawsuit, filed late last month, accuses Jones Day of helping to trick Berkshire Hathaway into paying five times what the German company was worth.
There is not much chance that Berkshire Hathaway will recover any money from the sellers of the pipe maker, Wilhelm Schulz, which was named for its founder. The shareholders have declared bankruptcy and are facing a criminal investigation in Germany. But Jones Day is a prominent international law firm with deeper pockets.
The attempt to collect damages from Jones Day is an unexpected twist in the saga of Wilhelm Schulz, which is based in Krefeld, a city north of Düsseldorf. If the suit is successful, it will be at least a small consolation to Berkshire Hathaway shareholders after the company lost $23.3 billion in the first half of 2020. (Profits rebounded in the later part of the period, however.)
“The fraudulent transaction would never have occurred without Jones Day’s substantial assistance,” according to the lawsuit, filed in U.S. District Court in Houston on behalf of Precision Castparts, a Berkshire Hathaway subsidiary that makes components for aircraft. The lawsuit accuses Jones Day of withholding documents that would have exposed Wilhelm Schulz’s perilous financial state and calls the firm a “co-conspirator” in a “massive fraud.”
Ulrich Brauer, the partner in charge of Jones Day’s office in Düsseldorf, said the firm would not comment on a pending case.
Jones Day lawyers in Houston and Düsseldorf handled the sale of Wilhelm Schulz, which specializes in pipes for the oil and gas industries. Jones Day also represented the owners, who included Wolfgang Schulz, the son of the founder, when the case went before an arbitration panel in New York.
The panel found in April that Mr. Schulz and other managers had used false sales invoices, computer hacks and phantom customers to make Wilhelm Schulz look healthier than it was and hoodwink Precision Castparts into paying a grossly inflated price. The deal was a rare misstep for the organization run by Mr. Buffett, who is considered one of the savviest investors in the world.
The arbitrators awarded 643 million euros ($756 million) in damages to Precision Castparts, which is based in Portland, Ore. That is the difference between the €800 million that Precision Castparts paid for Wilhelm Schulz and its estimated true value of €157 million. The arbitrators’ decision was upheld in July by the U.S. District Court for the Southern District of New York.
Because the holding company controlled by Mr. Schulz is in insolvency proceedings, “it is unclear if it will pay even a fraction of the damages it caused,” according to the lawsuit on behalf of Precision Castparts, which says Jones Day should pay the arbitrators’ award instead.
German prosecutors are pursuing a criminal investigation of Mr. Schulz and others involved in the deal but have not filed any charges. A spokesman for the Düsseldorf state’s attorney’s office, citing German privacy laws, said he could not divulge any information about potential suspects. Mr. Schulz has denied wrongdoing.
Normally a law firm’s communications with clients would be considered privileged, offering a degree of protection to Jones Day. The firm has asked a Texas court to seal the case on those grounds.
But Precision Castparts argues that lawyer-client confidentiality cannot be used to cover up fraud under German or United States law.
In addition, the claims against Jones Day are based on files discovered in Wilhelm Schulz offices after the acquisition, according to the lawsuit. Finders keepers, in other words.
The suit was filed on Precision Castparts’ behalf by Reid Collins & Tsai in Austin, Texas, a law firm that specializes in suing other law firms.
The text of the lawsuit against Jones Day has been partly redacted while a Texas judge decides whether the firm is entitled to keep some information confidential. But the central allegation is clear: that Jones Day was aware of information that would have revealed Wilhelm Schulz’s dire financial condition, but failed to disclose it to Precision Castparts.
For example, Schulz had fallen behind on repaying a €325 million loan from Commerzbank. In return for a bridge loan, the bank negotiated new terms that gave it the right to take control of Schulz if the company defaulted.
Wilhelm Schulz “was the corporate equivalent of a house about to go into foreclosure,” the lawsuit says. But Precision Castparts never knew about the revised loan agreement because Jones Day withheld it, the lawsuit contends.
Jones Day also did not disclose a report by the consulting firm KPMG, commissioned by Schulz, which concluded that the company faced an “imminent liquidity crisis,” according to the lawsuit. Nor, the suit says, did Jones Day inform Precision Castparts that a German lawyer had warned Wilhelm Schulz managers that they were legally obligated to declare bankruptcy.
“Had Precision known the truth,” the lawsuit says, “it would have never acquired the Schulz subsidiaries.”
According to Austrian Startup Monitor, entrepreneurs have founded more than 2,200 startups in Austria since 2008, with the number of tech companies growing 12% per year since then, significantly faster than the 3% growth rate for traditional companies.
Home to roughly 50% of Austria’s startups, Vienna has a plethora of VC, corporate and university investors. Top VCs include 3TS Capital Partners, AC & Friends, Cudos Capital, FSP Ventures, Hansmen Group, i4g Investment, i5invest, LilO Ventures, next.march, primeCROWD, Speedinvest and Venionaire Capital, among others.
The local ecosystem benefits from several initiatives, including the Social Impact Awards, Vienna Startup Awards, Design Week, Climate KIC Stage, Innovation Incubation Center and INiTS Accelerator. The well-run Pioneers Festival contributed massively to the ecosystem for several years after a certain TechCrunch editor-at-large gave the organizers an excuse to expand on a simple TechCrunch meetup. But the festival was shuttered last year after its sale to a local accelerator meant that the event itself ran out of steam. Perhaps it was just as well, given this year’s pandemic.
State support for startups is also there. The Austrian government created a comprehensive startup program in 2016 to make the country more attractive to startups setting up there.
Standout exits include fitness app maker Runtastic, acquired by Adidas for $240 million in 2015, as well as listings marketplace Shpock, which was acquired by Norwegian publishing conglomerate Schibsted in 2015. Other notable startups originally from Vienna include mySugr, wikifolio, kompany and Codeship.
There have been jitters on the way, however. The Austrian Private Equity and Venture Capital Organization’s 2019 report found that Austria’s startups saw €237.6 million invested in 2018, but, this number fell 8.2% to €218 million in 2019; the number of deals exceeding €500,000 also dipped by 8.7%. Foreign funding also slowed in 2019 after a few years of a bull run — between 40% and 63% of deals sized €0.25-€1.99 million were significantly funded by foreign investors in 2018.
Despite the decline, local investors have started to pick up the slack, boosting the number of funding rounds over €5 million to 12 deals in 2019 from 11 in 2018. In both years, all but one of those deals drew a substantial part of the funding round from foreign investors.
We expect more to emerge from Vienna’s tech scene in the future. The Pioneers Festival (RIP) proved that Vienna is a fascinating bridge between Western European capital and entrepreneurial culture, and East European entrepreneurs and talent, which it will no doubt continue to benefit from in years to come. But — just as will happen with Lisbon this year and the loss of Web Summit — the loss of a major conference in Vienna to shine a light on the city and ecosystem, combined with the pandemic, may have cooling effects for the next couple of years.
Notable Vienna startups:
Newsadoo: Uses artificial intelligence to personalize news.
Cashpresso: Links customers, merchants and banks to offer consumer financing options.
Jobrocker: An online job search portal that connects applicants’ CVs with job openings.
What trends are you most excited about investing in, generally? B2B software, robotics, no/low-code automation, AI-enabled vertical solutions, e-health, companies enabling others to hire and engage talent remotely.
What’s your latest, most exciting investment? Lokalise.
Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now? Companies that enable others to manage and automate billing even further (e.g., per API call), next-gen video conferencing, solutions guiding women through menopause, providing solutions that help companies to offer mental health services to distributed teams, bringing cloud kitchens to the next level (not running central kitchens).
What are you looking for in your next investment, in general? As always, ambitious, smart, hard-working teams eager to build a category leader in a huge market.
What other types of products/services are you wary or concerned about? Concerned about solutions that leverage behavioral data to influence people for the sake of optimizing profit, overload of sales and marketing tech, overload of chatbot providers. [It is] hard to compete with players that have benefited from huge network effects such as food delivery.
How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less? We focus on German-speaking areas and Central Eastern Europe. Opportunistically we would also invest outside of the region, still in Europe.
Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders? Austria — no specific industry focus within software. However, well-positioned in the biotech space, CEE — given the strong presence of IT outsourcing companies, the region is well-positioned to build solutions in the business-process automation, dev tool space. Storyblok (our portfolio). Others to watch: Anyline, Adverity, Bitpanda, PlanRadar, Refurbed.
How should investors in other cities think about the overall investment climate and opportunities in your city? Regarding Vienna — we are seeing the first generation of entrepreneurs building global companies. Their and their team experience will be at utmost value creating a new wave of tech companies that compete on a global level.
Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work? Yes, we already see this — exciting companies coming out of small cities in Poland, Germany, etc. and companies going remote.
Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times? Telemedicine, online education has been accelerated. We see a shift that otherwise would have taken years, especially in the relatively conservative German-speaking area. As mentioned previously, mental health solutions, hiring and employing remotely are some of the opportunities highlighted by COVID-19. Companies that are heavily exposed are those that have been serving the long tail of companies, small merchants, and local businesses that were closed down or experienced much less traffic in past months and hence are extremely sensitive around their cost base, discontinuing services that are not 110% essential.
How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now? We have always been very selective and focused, partnering up three to four times a year. We continue at the same pace. The companies that perform well despite COVID-19 are still in a strong position for attracting external capital. Of course, we help our portfolio to secure a runway and have a discussion how/whether the situation has impacted their offering/GTM. Some companies have to rethink their value proposition, some rethink their target groups either to make up for slower sales cycles or on the other hand to leverage and benefit from the current situation.
Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic? Yes, we see that Lokalise is growing heavily with the current customer base as their customers expand to new markets, likely to make up for slower revenue growth in their existing markets. We see that Nethone (fraud prevention) is able to double down on e-commerce. Online fraud and online transactions are skyrocketing as people spend much more time online. (On the other hand, their airline customers of course show a different trajectory.)
What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two. It is inspiring to see how founders go through the current situation, act instead of reacting, especially in those countries where there is less government support incentives in place. Personally, I am also happy to see that people use the work from home time to rethink and introduce healthier habits.
Any other thoughts you want to share with TechCrunch readers? As the world has gone online and the location matters much less, there is an opportunity to distribute the created value and wealth more evenly — be it a company founded in a “non-tech-hub” location or be it talent hired remotely.
Volkswagen completed the corporate equivalent of probation after a court-appointed monitor said Monday that the carmaker had fulfilled the conditions of a 2017 plea bargain stemming from its use of illegal software to evade emissions regulations.
The final report by Larry Thompson, a former United States prosecutor appointed to enforce Volkswagen’s promise to reform its corporate culture, noted that the German automaker had adopted measures like making it easier for employees to report wrongdoing. It is a major milestone for the company as it tries to recover from one of the biggest scandals in automotive history, one that has cost it well over $30 billion and severely damaged its reputation.
Volkswagen, the world’s largest carmaker, pleaded guilty in 2017 to conspiring to defraud the U.S. government and violate the Clean Air Act. The company had rigged its diesel-powered cars to meet air-quality standards while being tested, but they exceeded those standards in regular driving.
As part of the plea agreement with the Justice Department, Volkswagen agreed to cooperate with a court-appointed monitor whose job was to ensure that the company reformed its compliance systems and corporate culture so that similar wrongdoing would not happen again.
Mr. Thompson, the monitor, was deputy attorney general under President George W. Bush and later worked as general counsel for PepsiCo.
Mr. Thompson said Thursday that “the structures and processes are in place” to prevent future scandals of the same magnitude. “This is a starting point,” he said during a joint interview with Herbert Diess, the Volkswagen chief executive. “The company will need to be vigilant.”
The three-year project was costly and time consuming for Volkswagen, especially when the company is trying to make a transition to electric cars. The effort “was a very good investment,” Mr. Diess said.
“We had deficiencies,” he said. “The issues he pushed will make us a stronger company.”
Mr. Thompson said he could not guarantee that there would be no other scandals at Volkswagen. “Volkswagen is such a large and complex company,”he said. “What I can certify to is that if another problem comes up, it will be handled much differently than the diesel scandal.”
Volkswagen has admitted that, after research at West Virginia University raised questions about the company’s diesel cars, executives spent more than a year deliberately misleading regulators before finally confessing in September 2015.
By coincidence, the Department of Justice on Monday announced a settlement with Daimler on accusations the company had also manipulated engine software to deceive regulators about how much pollution Mercedes cars and trucks produced during normal driving.
The settlement, which Daimler disclosed last month, will set the German company back about $1.5 billion after paying civil penalties, repairs to about 250,000 affected vehicles and other measures to compensate for the environmental damage.
The civil penalty portion of the Daimler settlement amounts to $3,500 per car, about $1,000 more per car than Volkswagen had to pay in 2017 — evidence, U.S. officials said during a news conference, that the Trump administration is tougher on polluters than it gets credit for. However, Volkswagen was required to buy back diesel cars from their owners and take other corrective measures that raised the total cost to around $15 billion.
By court order, Mr. Thompson operated largely in secret, supervising dozens of lawyers and specialists based at Volkswagen’s headquarters in Wolfsburg, Germany, who oversaw attempts by the company to reform its sprawling organization. Volkswagen employs more than 670,000 people; it produced nearly 11 million vehicles last year.
Volkswagen’s unforgiving, win-at-all-costs culture was seen as the underlying cause of the emissions scandal. In 2006, when engineers developing a new diesel engine discovered that they could not meet United States emissions standards, they devised engine software designed to deceive regulators. To admit failure would probably have meant the end of their careers at Volkswagen.
Mr. Diess said that the emissions fraud occurred because of “a combination of too much pressure and lack of a speak-up culture.”
Among other changes, Volkswagen has created a whistle-blower system so that employees can report possible wrongdoing without fear of reprisal. Volkswagen also delegated more responsibility to lower-level managers in an effort to become less hierarchical.
Court documents indicate that some Volkswagen engineers were uneasy about the illegal software, but none approached authorities until shortly before the cheating came to light in September 2015.
During official emissions tests, the software activated pollution controls so that the car appeared to be clean. During everyday driving, those controls were scaled back to protect the engine. As a result, Volkswagen diesel passenger cars spewed more harmful nitrogen oxides than a long-haul truck.
Volkswagen strives to be more ethical, but the competitive pressures in the auto industry have only become more intense. Mr. Diess acknowledged that he had to be careful not to push subordinates so hard that they crossed ethical boundaries.
“This is a crucial point,” he said. “We have to be ambitious. We have to be competitive. We have to push for results. But we have to find a balance.”
He noted that Volkswagen delayed by several months the market debut of the ID.3, Volkswagen’s first car designed to run on batteries, which is seen as a make-or-break vehicle for the company. The first deliveries to customers began this month.
The engineers who devised the illegal software in 2006 were desperately trying to make a deadline for the launch of new diesel models.
Mr. Thompson’s final report frees Volkswagen managers in Wolfsburg from intense oversight as they try to survive a plunge in sales caused by the pandemic, and meet increasingly tough competition from Tesla, which is building a factory near Berlin.
The pandemic continues to cut deeply into sales in Latin America and some other markets, Mr. Diess said, though sales in China have largely recovered. There are still supply chain disruptions and other problems. “Things are working,” Mr. Diess said. “I wouldn’t call it normal.”
Over the past several years there were signs of friction at times between Mr. Thompson and the executives at Volkswagen, a German icon not used to being told what to do by American lawyers. Early in his tenure, Mr. Thompson pressured the company to dismiss managers who were under criminal investigation but continued to hold high-ranking positions. Volkswagen had argued that it could not fire the managers if they had not been convicted of crimes, but eventually relented.
There was also some tension over Volkswagen’s refusal to release some documents it said were relevant to pending lawsuits and therefore privileged. “We were able to work through that issue,” Mr. Thompson said.
The legal aftermath of the scandal continues to unfold. On Sept. 9, a court in Braunschweig, Germany, ruled that there was enough evidence to bring Martin Winterkorn, the former Volkswagen chief executive, to trial on charges related to the emissions cheating.
At the end of this month, a court in Munich will begin hearing evidence in the trial of Rupert Stadler, the former chief executive of Volkswagen’s Audi luxury car unit. Mr. Stadler is accused of continuing to sell cars with illegal software even after regulators in California and Washington uncovered the wrongdoing. He and several former Audi managers and engineers will be the first defendants to go on trial in Germany.
Mr. Winterkorn and Mr. Stadler deny wrongdoing.
Volkswagen continues to fight numerous legal battles stemming from the scandal. It has reached a settlement with most diesel owners in Germany, but some continue to pursue legal claims. The company also faces suits in Britain and other countries, as well as a civil complaint by the Securities and Exchange Commission in the United States.
The S.E.C. accused Volkswagen of concealing the risks it was taking when it sold corporate debt to American investors even as it was manufacturing cars with illegal software. In August, Volkswagen won a significant legal victory in that case when a federal judge in California ruled that a large share of the claims were covered by an earlier settlement with the Department of Justice.
Even as Facebook, the world’s largest social media platform, admits that climate change “is real” and that “the science is unambiguous and the need to act grows more urgent by the day” the platform appears unwilling to take steps to really stand up to the climate change denialism that circulates on its platform.
The company is set to achieve net zero carbon emissions and be supported fully by renewable energy in its own operations this year.
But as the corporate world slaps a fresh coat of green paint on its business practices, Facebook is looking to get out in front with the launch of a Climate Science Information Center to “connect people with science-based information”.
The company is announcing a new information center, designed after its COVID-19 pandemic response. The center is designed to connect people to factual and up-to-date climate information, according to the company. So far, Facebook says that over 2 billion people have been directed to resources from health authorities with its COVID-19 response.
The company said that it will use The Climate Science Information Center to feature facts, figures, and data from the Intergovernmental Panel on Climate Change (IPCC) and their global network of climate science partners, including the UN Environment Programme (UNEP), The National Oceanic and Atmospheric Administration (NOAA), World Meteorological Organization (WMO) and others. This center is launching in France, Germany, the UK and the US to start.
While Facebook has been relatively diligent in taking down COVID-19 misinformation that circulates on the platform, removing 7 million posts and labeling another 98 million more for distributing coronavirus misinformation, the company has been accused of being far more sanguine when it comes to climate change propaganda and pseudoscience.
A July article from The New York Times revealed how climate change deniers use the editorial label to skirt Facebook’s policies around climate disinformation. In September 2019 a group called the CO2 Coalition managed to overturn a fact-check that would have labeled a post as misinformation by appealing to Facebook’s often criticized stance on providing and amplifying different opinions. By calling an editorial that contained blatant misinformation on climate science an editorial, the group was able to avoid the types of labels that would have redirected a Facebook user to information from recognized scientific organizations.
Facebook disputes that characterization. “If it’s labeled an opinion piece, it’s subject to fact checking,” said Chris Cox, the chief product officer at Facebook.
“We look at the stuff that starts to go viral. There’s not a part of our policies that says anything about opinion pieces being exempted at all.”
With much of the Western coast of the United States now on fire, the issues are no longer academic. “We are taking important steps to reduce our emissions and arm our global community with science-based information to make informed decisions and tools to take action, and we hope they demonstrate that Facebook is committed to playing its part and helping to inspire real action in our community,” the company said in a statement.
Beyond its own operations, the company is also pushing to reduce operational greenhouse gases in its secondary supply chain by 75 percent and intends to reach net zero emissions for its value chain — including suppliers and employee commuting and business travel — by 2030, the company said. Facebook did not disclose how much money it would be investing to support that initiative.
The firm expects the massive changes in e-commerce, healthcare, logistics, and urban infrastructure to remain in place for an extended period of time and is urging investors to rethink their approaches to each as a result.
“It really ties into the mandate that we have in thematic investing,” said Leon Pedersen, the head of Thematic Investments at CPPIB.
There was a realization at the firm that structural changes were happening and that there was value for the fund manager in ensuring that the changes were being addressed across its broad investment portfolio. “We have a long term mandate and we have a long term investment horizon so we can afford to think long term in our investment outlook,” Pedersen said.
The Thematic Investments group within CPPIB will make mid-cap, small-cap and private investments in companies that reflect the firm’s long term theses, according to Pedersen. So not only does this survey indicate where the firm sees certain industries going, but it’s also a sign of where CPPIB might commit some investment capital.
The research, culled from international surveys with over 3,500 respondents as well as intensive conversations with the firm’s investment professionals and portfolio companies, indicates that there’s likely a new baseline in e-commerce usage that will continue to drive growth among companies that offer blended retail offerings and that offices are likely never going to return to full-time occupancy by every corporate employee.
Already CPPIB has made investments in companies like Fabric, a warehouse management and automation company.
The e-commerce wave has crested, but the tide may turn
Amid the good news for e-commerce companies is a word of warning for companies in the online grocery space. While usage surged to 31 percent of U.S. households, up from 13 percent in August, consumers gave the service poor marks and many grocers are actually losing money on online orders. The move online also favored bigger omni-channel vendors like Amazon and Walmart, the study found.
The CPPIB also found that there may be opportunities for brick and mortar vendors in the aftermath of the epidemic. As younger consumers return to shopping center they’re going to find fewer retailers available, since bankruptcies are coming in both the US and Europe. That could open the door for new brands to emerge. Meanwhile, in China, more consumers are moving offline with malls growing and customers returning to shopping centers.
Some of the biggest winners will actually be online entertainment and cashless payments — since fewer stores are accepting cash and music and video streaming represent low-risk, easier options than live events or movie theaters.
LOS ANGELES, CA – MAY 30: General views of tourists and shoppers returning to the Hollywood & Highland shopping mall for the first weekend of in-store retail business being open since COVID-19 closures began in mid-March on May 30, 2020 in Los Angeles, California. (Photo by AaronP/Bauer-Griffin/GC Images)
Healthcare goes digital and privacy matters more than ever
Consumers in the West, already reluctant to hand over personal information, have become even more sensitive to government handling of their information despite the public health benefits of tracking and tracing, according to the CPPIB. In Germany and the U.S. half of consumers said they had concerns about sharing their data with government or corporations, compared with less than 20 percent of Chinese survey respondents.
However, even as people are more reluctant to share personal information with governments or corporations, they’re becoming more willing to share personal information over technology platforms. One-third of the patients who used tele-medical services in the U.S. during the pandemic did so for the first time. And roughly twenty percent of the nation had a telemedicine consultation over the course of the year, according to CPPIB data.
Technologies that improve the experience are likely to do well, because of the people who did try telemedicine, satisfaction levels in the service went down.
DENVER, CO – MARCH 12: Healthcare workers from the Colorado Department of Public Health and Environment check in with people waiting to be tested for COVID-19 at the state’s first drive-up testing center on March 12, 2020 in Denver, Colorado. The testing center is free and available to anyone who has a note from a doctor confirming they meet the criteria to be tested for the virus. (Photo by Michael Ciaglo/Getty Images)
Cities and infrastructure will change
“From mass transit to public gatherings, few areas of urban life will be left unmarked by COVID-19,” write the CPPIB report authors.
Remote work will accelerate dramatically changing the complexion of downtown environments as the breadth of amenities on offer will spread to suburban communities where residents flock. According to CPPIB’s data roughly half of workers in China, the UK and the US worked from home during the pandemic, up from 5 percent or less in 2019. In Canada, four-in-ten Canadian were telecommuting.
To that end, the CPPIB sees opportunities for companies enabling remote work (including security, collaboration and productivity technologies) and automating business practices. On the flip side, for those workers who remain wedded to the office by necessity or natural inclination, there’s going to need to be cleaning and sanitation services and someone’s going to have to provide some COVID-19 specific tools.
With personal space at a premium, public transit and ride hailing is expected to take a hit as well, according to the CPPIB report.
New York City, NY is shown in the above Maxar satellite image. Image Credit: Maxar
Supply chains become the ties that bind in a distributed, virtual world
As more aspects of daily life become socially distanced and digital, supply chains will assume an even more central position in the economy.
“Amid rising labor costs and heightened geopolitical risk, companies today are focused on resilience,” write the CPPIB authors.
Companies are reassessing their reliance on Chinese manufacturing since political pressure is coming from more regions on Chinese suppliers thanks to the internment of the Uighur population in Xinjiang and the crackdown on Hong Kong’s democratic and open society. According to CPPIB, India, Southeast Asia, and regional players like Mexico and Poland are best positioned to benefit from this supply chain diversification. Supply chain management software providers, and robotics and automation services stand to benefit.
“Confined to their homes for months and subjected to a rapid reordering of their perceived health risks and economic prospects, consumers are emerging from a shared trauma that will change their priorities and concerns for years to come,” the CPPIB study’s authors write.
In the wake of yesterday’s landmark ruling by Europe’s top court — striking down a flagship transatlantic data transfer framework called Privacy Shield, and cranking up the legal uncertainty around processing EU citizens’ data in the U.S. in the process — Europe’s lead data protection regulator has fired its own warning shot at the region’s data protection authorities (DPAs), essentially telling them to get on and do the job of intervening to stop people’s data flowing to third countries where it’s at risk.
The original complaint that led to the Court of Justice of the EU (CJEU) ruling focused on Facebook’s use of a data transfer mechanism called Standard Contractual Clauses (SCCs) to authorize moving EU users’ data to the U.S. for processing.
Complainant Max Schrems asked the Irish Data Protection Commission (DPC) to suspend Facebook’s SCC data transfers in light of U.S. government mass surveillance programs. Instead, the regulator went to court to raise wider concerns about the legality of the transfer mechanism.
That in turn led Europe’s top judges to nuke the Commission’s adequacy decision, which underpinned the EU-U.S. Privacy Shield — meaning the U.S. no longer has a special arrangement greasing the flow of personal data from the EU. Yet, at the time of writing, Facebook is still using SCCs to process EU users’ data in the U.S. Much has changed, but the data hasn’t stopped flowing — yet.
Yesterday the tech giant said it would “carefully consider” the findings and implications of the CJEU decision on Privacy Shield, adding that it looked forward to “regulatory guidance.” It certainly didn’t offer to proactively flip a kill switch and stop the processing itself.
Ireland’s DPA, meanwhile, which is Facebook’s lead data regulator in the region, sidestepped questions over what action it would be taking in the wake of yesterday’s ruling — saying it (also) needed (more) time to study the legal nuances.
The DPC’s statement also only went so far as to say the use of SCCs for taking data to the U.S. for processing is “questionable” — adding that case by case analysis would be key.
The regulator remains the focus of sustained criticism in Europe over its enforcement record for major cross-border data protection complaints — with still zero decisions issued more than two years after the EU’s General Data Protection Regulation (GDPR) came into force, and an ever-growing backlog of open investigations into the data processing activities of platform giants.
In May, the DPC finally submitted to other DPAs for review its first draft decision on a cross-border case (an investigation into a Twitter security breach), saying it hoped the decision would be finalized in July. At the time of writing we’re still waiting for the bloc’s regulators to reach consensus on that.
The painstaking pace of enforcement around Europe’s flagship data protection framework remains a problem for EU lawmakers — whose two-year review last month called for uniformly “vigorous” enforcement by regulators.
The European Data Protection Supervisor (EDPS) made a similar call today, in the wake of the Schrems II ruling — which only looks set to further complicate the process of regulating data flows by piling yet more work on the desks of underfunded DPAs.
“European supervisory authorities have the duty to diligently enforce the applicable data protection legislation and, where appropriate, to suspend or prohibit transfers of data to a third country,” writes EDPS Wojciech Wiewiórowski, in a statement, which warns against further dithering or can-kicking on the intervention front.
“The EDPS will continue to strive, as a member of the European Data Protection Board (EDPB), to achieve the necessary coherent approach among the European supervisory authorities in the implementation of the EU framework for international transfers of personal data,” he goes on, calling for more joint working by the bloc’s DPAs.
Wiewiórowski’s statement also highlights what he dubs “welcome clarifications” regarding the responsibilities of data controllers and European DPAs — to “take into account the risks linked to the access to personal data by the public authorities of third countries.”
“As the supervisory authority of the EU institutions, bodies, offices and agencies, the EDPS is carefully analysing the consequences of the judgment on the contracts concluded by EU institutions, bodies, offices and agencies. The example of the recent EDPS’ own-initiative investigation into European institutions’ use of Microsoft products and services confirms the importance of this challenge,” he adds.
Part of the complexity of enforcement of Europe’s data protection rules is the lack of a single authority; a varied patchwork of supervisory authorities responsible for investigating complaints and issuing decisions.
Now, with a CJEU ruling that calls for regulators to assess third countries themselves — to determine whether the use of SCCs is valid in a particular use-case and country — there’s a risk of further fragmentation should different DPAs jump to different conclusions.
Yesterday, in its response to the CJEU decision, Hamburg’s DPA criticized the judges for not also striking down SCCs, saying it was “inconsistent” for them to invalidate Privacy Shield yet allow this other mechanism for international transfers. Supervisory authorities in Germany and Europe must now quickly agree how to deal with companies that continue to rely illegally on the Privacy Shield, the DPA warned.
In the statement, Hamburg’s data commissioner, Johannes Caspar, added: “Difficult times are looming for international data traffic.”
He also shot off a blunt warning that: “Data transmission to countries without an adequate level of data protection will… no longer be permitted in the future.”
Compare and contrast that with the Irish DPC talking about use of SCCs being “questionable,” case by case. (Or the U.K.’s ICO offering this bare minimum.)
Caspar also emphasized the challenge facing the bloc’s patchwork of DPAs to develop and implement a “common strategy” toward dealing with SCCs in the wake of the CJEU ruling.
In a press note today, Berlin’s DPA also took a tough line, warning that data transfers to third countries would only be permitted if they have a level of data protection essentially equivalent to that offered within the EU.
In the case of the U.S. — home to the largest and most used cloud services — Europe’s top judges yesterday reiterated very clearly that that is not in fact the case.
“The CJEU has made it clear that the export of data is not just about the economy but people’s fundamental rights must be paramount,” Berlin data commissioner Maja Smoltczyk said in a statement [which we’ve translated using Google Translate].
“The times when personal data could be transferred to the U.S. for convenience or cost savings are over after this judgment,” she added.
Both DPAs warned the ruling has implications for the use of cloud services where data is processed in other third countries where the protection of EU citizens’ data also cannot be guaranteed too, i.e. not just the U.S.
On this front, Smoltczyk name-checked China, Russia and India as countries EU DPAs will have to assess for similar problems.
“Now is the time for Europe’s digital independence,” she added.
Some commentators (including Schrems himself) have also suggested the ruling could see companies switching to local processing of EU users’ data. Though it’s also interesting to note the judges chose not to invalidate SCCs — thereby offering a path to legal international data transfers, but only provided the necessary protections are in place in that given third country.
Also issuing a response to the CJEU ruling today was the European Data Protection Board (EDPB). AKA the body made up of representatives from DPAs across the bloc. Chair Andrea Jelinek put out an emollient statement, writing that: “The EDPB intends to continue playing a constructive part in securing a transatlantic transfer of personal data that benefits EEA citizens and organisations and stands ready to provide the European Commission with assistance and guidance to help it build, together with the U.S., a new framework that fully complies with EU data protection law.”
Short of radical changes to U.S. surveillance law, it’s tough to see how any new framework could be made to legally stick, though. Privacy Shield’s predecessor arrangement, Safe Harbour, stood for around 15 years. Its shiny “new and improved” replacement didn’t even last five.
In the wake of the CJEU ruling, data exporters and importers are required to carry out an assessment of a country’s data regime to assess adequacy with EU legal standards before using SCCs to transfer data there.
“When performing such prior assessment, the exporter (if necessary, with the assistance of the importer) shall take into consideration the content of the SCCs, the specific circumstances of the transfer, as well as the legal regime applicable in the importer’s country. The examination of the latter shall be done in light of the non-exhaustive factors set out under Art 45(2) GDPR,” Jelinek writes.
“If the result of this assessment is that the country of the importer does not provide an essentially equivalent level of protection, the exporter may have to consider putting in place additional measures to those included in the SCCs. The EDPB is looking further into what these additional measures could consist of.”
Again, it’s not clear what “additional measures” a platform could plausibly deploy to “fix” the gaping lack of redress afforded to foreigners by U.S. surveillance law. Major legal surgery does seem to be required to square this circle.
Jelinek said the EDPB would be studying the judgement with the aim of putting out more granular guidance in the future. But her statement warns data exporters they have an obligation to suspend data transfers or terminate SCCs if contractual obligations are not or cannot be complied with, or else to notify a relevant supervisory authority if it intends to continue transferring data.
In her roundabout way, she also warns that DPAs now have a clear obligation to terminate SCCs where the safety of data cannot be guaranteed in a third country.
“The EDPB takes note of the duties for the competent supervisory authorities (SAs) to suspend or prohibit a transfer of data to a third country pursuant to SCCs, if, in the view of the competent SA and in the light of all the circumstances of that transfer, those clauses are not or cannot be complied with in that third country, and the protection of the data transferred cannot be ensured by other means, in particular where the controller or a processor has not already itself suspended or put an end to the transfer,” Jelinek writes.
One thing is crystal clear: Any sense of legal certainty U.S. cloud services were deriving from the existence of the EU-U.S. Privacy Shield — with its flawed claim of data protection adequacy — has vanished like summer rain.
A cool T-shirt? Some trendy sandals? People in need of summer fashion tend to look in the large-scale shopping precincts downtown.
These days the window displays are plastered with just one word against a red background: SALE!
This is not unusual for July, the season of the summer sales: A price war is part of an attempt to clear their shelves and make way for fall fashions. But nothing is usual about 2020.
A summer price war is underway in Germany’s city center
This year the shelves are still full. During the lockdown, stores were closed and shopping ground to a halt. Now they have opened their doors again, but people are staying away saying they do not feel comfortable in enclosed spaces: the risk of infection, they fear, is simply too high. Precautions such as masks and hand disinfection help to contain the virus — but, very few people feel genuinely comfortable in shops.
The pleasure has gone
Clothes shopping downtown is all about chance purchases, about discovering something new, about the buzz. A trip for pleasure. Shopping as seduction.
But for most people the corona pandemic means that for now, at least the traditional shopping spree is a no-go, says the German Retail Federation (HDE).
While food retailers are doing good business and online shopping is booming, sales in the textile trade have plummeted in the last two months. As a result, one-third of all businesses in the sector say they are struggling to survive.
An HDE spokesman told DW that masks are, “a massive turn-off for shoppers.”
There can certainly be no doubt that it is no fun at all to wear a mask in sultry summer temperatures. And many stores in Germany have no air conditioning. So, behind the mask, people quickly start sweating. So, they run outside and strip off the mask.
Masks are one of the features in shop window decorations these days
No surprise, therefore, that the HDE has welcomed proposals from some regional governments to drop mandatory masks for shoppers in federal states with low infection rates.
Such an easing has been called for by the economics ministers in the northern states of Mecklenburg-Vorpommern and Lower-Saxony, who have the backing of the business-friendly opposition party, the Free Democrats (FDP).
The central government in Berlin, “ought to sit down with the retail trade and come up with shared criteria for a plan that would allow individual regions to scrap mandatory masks,” says FDP deputy parliamentary group leader Michael Theurer in Berlin. He concedes that changes can not be made overnight but believes that, “they cannot be imposed forever, without taking regional factors into account.”
Angela Merkel was seen wearing a mask for the first time in early July
For her part, Angela Merkel is sticking to her hard line. The chancellor is unbending in her rejection of any moves to break with compulsory masks. “Everywhere in public life that social distancing cannot be guaranteed, masks are important and indispensable,” says government spokesman Steffen Seibert, who adds: “It is imperative if we are to keep infection rates down and protect both our fellow citizens and ourselves.”
Seibert emphasizes that vigilance is all the more important during the summer season: “Regions that might currently have very low infection rates will be welcoming holidaymakers from around the country.” And while that renewed mobility is very much to be welcomed, “it must go hand in hand with a willingness to obey the regulations that have in recent months served us so well in the battle against this pandemic: distancing, hygiene rules and where necessary compulsory masks.”
How to protect yourself against the coronavirus
Better than nothing
It has not been proven that the face masks seen above can effectively protect you against viral infections. That said, these masks are probably able to catch some germs before they reach your mouth or nose. More importantly, they prevent people from touching their mouth or nose (which most people do instinctually). If you are already sick, such masks may keep you from infecting others.
How to protect yourself against the coronavirus
Disinfect your hands
One of the best ways to protect yourself from the virus is to frequently clean your hands, according to the World Health Organization’s (WHO) list of recommendations. The WHO recommends alcohol-based hand rub, like the ones seen here in a hospital.
How to protect yourself against the coronavirus
Soap and water will do as well
The simpler day-to-day solution is to use water and soap, if you’ve got some handy. But make sure to wash your hands thoroughly. Health authorities in the US recommend washing your hands for at least 20 seconds, making sure to pay attention to areas like your fingertips, thumbs and underneath your nails.
How to protect yourself against the coronavirus
Coughing and sneezing – but doing it right!
So here’s what the doctors recommend: When coughing and sneezing, cover your mouth and nose with your flexed elbow. Or use tissue — but then immediately throw that tissue away and wash your hands. With your shirt or sweater, however, no, you don’t need to throw them away. Do wash them frequently, though, or take them to the dry cleaner’s.
How to protect yourself against the coronavirus
Another recommendation that may not work for everybody: Avoid close contact with anyone who has fever and cough! If you have to tend to sick people, make doubly sure to take additional protective measures.
How to protect yourself against the coronavirus
Got a fever? Go to the doctor, not on a trip!
If you have fever, cough and difficulty breathing, seek medical care early. Avoid public places so you don’t infect others. And also, explain to your doctor where you’ve previously traveled and who you may have come in contact with.
How to protect yourself against the coronavirus
When visiting live markets in areas currently experiencing cases of the novel coronavirus, avoid direct unprotected contact with live animals. That includes any surfaces that are in contact with animals as well.
How to protect yourself against the coronavirus
Well done — not rare!
Cook meat thoroughly. The consumption of raw, or undercooked, animal products should be avoided. Raw meat, milk or animal organs should be handled with care to avoid cross-contamination with uncooked foods. These are good food safety practices and help prevent the spread of illnesses.
Author: Fabian Schmidt
The regions have the final say
According to Germany’s Infection Protection Law, it is not the central government in Berlin, but the governments in individual federal states that have the final say. And so far they are sticking with mandatory masks. Bavaria’s influential Premier Markus Söder of the conservative CSU party defends masks as, “one of the very few instruments that we have to protect ourselves from the coronavirus.”
Leading social democrat Norbert Walter-Borjans says he agrees or that having to wear masks in shops might be something of “an imposition” but: “a tolerable imposition.” And Health Minster Jens Spahn is calling on people to be sensible: “I understand the impatience and the yearning for things to get back to normal. But the virus is still out there.”
The epidemiologists agree. From the start, they have warned that not just high-tech medical masks will reduce the risk of infection but also every day or community masks that help to prevent the spread of the virus when people cough, sneeze, or talk.
To shop or not to shop: that is the question
Nevertheless, the debate over masks or no masks for shoppers rumbles on. Where it leads will probably depend on the extent to which consumers get back to old shopping habits despite their masks. Bernd Althusmann – economics minister in Lower Saxony – has announced that his government will renew the situation after the summer break. Much the same is being mooted in the eastern state of Saxony. One thing is clear: the challenge will be to find a balance between people’s health and the health of the economy.
FRANKFURT — Only a few weeks after Berkshire Hathaway bought what looked like an upstanding example of German engineering prowess, a manager in Warren Buffett’s widely admired corporate empire received an unsettling email.
“I have to get rid of something I witnessed in the last few months,” the anonymous author wrote in slightly awkward English. “There is a falsification of data going on.”
The whistle-blower’s tip eventually led to the exposure of an elaborate conspiracy involving fake sales invoices, phantom customers and hacked computer systems, according to testimony in a legal dispute. The case showed that even Mr. Buffett, one of the shrewdest investors in the world, can be hoodwinked.
What looked like a profitable German manufacturer of specialized pipes for the oil and gas industry was, in fact, nearly bankrupt, according to testimony.
As a result, according to the findings of an American arbitration panel, Precision Castparts, a Berkshire Hathaway subsidiary, paid 800 million euros, or $870 million, for a company that was worth only about one-fifth that price.
The acquisition of the company, Wilhelm Schulz, was an expensive misstep for Mr. Buffett’s holding company, which has also been hit hard by the pandemic. Early in May, Berkshire Hathaway reported a loss of almost $50 billion in the first quarter as lockdowns and the economic downturn took a toll on the company’s portfolio of airlines and financial firms.
The case also dents the mythos of the Mittelstand — the midsize manufacturing companies that underpin the German economy. German prosecutors have opened a criminal investigation focusing on eight suspects at Wilhelm Schulz, all of them former high-ranking executives, finance officials or information technology specialists. None have been charged.
The investigation was reported earlier by the Handelsblatt newspaper.
The circumstances that allowed Mr. Buffett’s organization to be tripped up by a little-known German manufacturer were detailed by the arbitration panel that considered a complaint filed by Precision Castparts, which is based in Portland, Ore. The tribunal found that Wilhelm Schulz executives and employees had “engaged in a pervasive scheme” to conceal the company’s dire financial condition so that Precision Castparts would go ahead with the acquisition.
“This is not a close case,” the tribunal found. “The evidence strongly points to fraud, and there is little in the record to suggest otherwise.”
Lawyers representing interests of the sellers, three German holding companies owned primarily by members of the Schulz family, deny wrongdoing and have asked the U.S. District Court for the Southern District of New York to dismiss the arbitrators’ decision.
On the surface, Wilhelm Schulz seemed like the kind of solid industrial company that has made Germany an export powerhouse. Based in Krefeld, north of Düsseldorf in Germany’s industrial heartland, Schulz appeared to have a strong position in its market niche: specialized pipes for the oil and gas industry.
The chief executive, Wolfgang Schulz, was the son of Wilhelm Schulz, who put his name on the company when he founded it only months after the end of World War II. Wolfgang Schulz was well known locally as the owner of a pro ice hockey team, the Krefeld Penguins. Mr. Schulz has denied wrongdoing and vowed to clear his name.
Precision Castparts began thinking about acquiring Wilhelm Schulz after being approached by an intermediary in 2016.
Berkshire Hathaway had acquired Precision Castparts only a few months earlier for $37 billion, Mr. Buffett’s biggest acquisition ever. Though best known for its aircraft parts, Precision Castparts also makes products for oil and gas production, an industry that was suffering even before the pandemic caused fuel prices to plummet.
Wilhelm Schulz seemed like a way for Precision Castparts to increase its presence overseas, and a rare opportunity to buy a German company. Many midsize German manufacturers are owned by families that are loath to sell.
Precision Castparts dispatched employees to Krefeld, where they spent six months poring over Wilhelm Schulz’s financial records. They examined lists of the biggest customers, interviewed Schulz employees and visited Schulz facilities.
But unbeknown to Precision Castparts, Schulz had narrowly avoided bankruptcy only weeks before. The company had been unable to make payments on a €325 million credit line from Commerzbank, according to the arbitrators’ report. A lawyer hired by Schulz had advised the company that it was obligated under German law to file for insolvency.
Schulz avoided that fate only because it persuaded Commerzbank to front it €8 million more, saying it was waiting for payment from a big customer. The bridge loan came with a proviso. If Schulz couldn’t pay, Commerzbank would effectively take control of the company.
Schulz was also raising cash by borrowing against accounts receivable — money that customers owe but have not yet paid — a common practice known as factoring. But some of the documentation that Schulz presented to the lender (and later reviewed by Precision Castparts before the purchase) was fabricated by using Photoshop software to create fake invoices and delivery receipts, the arbitrators found.
How could Precision Castparts’ auditors miss these glaring problems? One incident described in the arbitrators’ report illustrates how Schulz employees made the company look healthier than it was.
In October 2016, as Precision Castparts was going through Schulz’s financial records, a Schulz information technology employee engineered a five-day outage of the computer system used to track sales and orders. A team at Schulz exploited the downtime to fabricate nearly 50 orders, worth tens of millions of euros, that were backdated to make it look as if they had been placed in 2014 and 2015, according to the arbitrators’ report.
Orders were recorded from companies with which Schulz no longer did business, according to testimony. One supposed customer had effectively ceased to exist years earlier.
The whistle-blower’s email arrived in early March.
The informant, later identified in the arbitrators’ report as someone who worked in information technology at Schulz, wrote that a small team of co-workers was entering fake customer orders into the company’s computer system to “make our company look much better than we really are.”
“I regard this as a criminal act and don’t want to work for a company which uses such methods any longer,” the email said.
Alarmed, Precision Castparts flew in consultants who specialize in accounting fraud, along with its own financial controllers.
After months of digging, one investigator discovered the backdated computer invoices. Another learned from Schulz employees not involved in the fraud that companies that were supposed to be among the firm’s biggest customers were not customers at all. Auditors found emails in which Schulz employees appeared to be discussing how to artificially pump up sales.
In 2018, in an attempt to get some of its money back, Precision Castparts invoked a provision of the sales contract that required disputes to be settled by arbitrators.
In April, a tribunal in New York found that Wolfgang Schulz and his employees had “engaged in a pervasive effort to present a fundamentally misleading picture of the financial condition” of the company. An expert who testified concluded that fake transactions inflated Wilhelm Schulz’s profits by €160 million.
Through a spokesman, Mr. Schulz, 73, declined to respond to the accusations in detail, citing the continuing criminal investigation. Last year, German authorities searched his home. Mr. Schulz said through a spokesman that he “clearly rejects the accusations of fraud.”
His lawyers argue that Wilhelm Schulz was worth the €800 million that Precision Castparts paid for it. Any loss of value was caused by poor management since the acquisition took place, including a decision to fire all the top executives after irregularities were discovered, they say.
Precision Castparts “continues to aggressively use the Schulz brand in the market, even as it demands return of the purchase price,” Schulz Holding said in a statement.
Precision Castparts has prevailed in the legal battle so far. The arbitration tribunal awarded it €643 million in damages — the purchase price minus Wilhelm Schulz’s estimated true value of €157 million.
It’s doubtful whether Precision Castparts will be able to collect the money. The three holding companies that sold their shares in Wilhelm Schulz have declared insolvency. Wolfgang Schulz sold almost all of his stake in the Krefeld Penguins in April for an undisclosed price. Jan-Philipp Hoos, a Düsseldorf lawyer who is serving as bankruptcy administrator of the holding companies, declined to comment.
The financial hit comes at an especially bad time for Precision Castparts. Its main customers, aircraft makers like Boeing as well as oil and gas producers, have been hit hard by the economic effects of the pandemic.
But Wilhelm Schulz does not seem to have shaken Mr. Buffett’s faith in Germany, a country whose engineering he has often praised.
“We view this as a unique situation involving individual circumstances,” David Dugan, a spokesman for Precision Castparts, said in an email. The experience with Wilhelm Schulz, he said, “does not impact our view of German industry.”
In the elite corridors of corporate Germany, Markus Braun had become a legend.
A little-known entrepreneur until just a few years ago, Mr. Braun had forged an obscure Bavarian company called Wirecard into a German tech icon, winning a coveted spot on the benchmark DAX stock index. Wirecard provided the invisible financial plumbing that, with a wave of plastic over a card reader almost anywhere in the world, made transactions happen. Hedge funds and global investors scrambled to buy shares.
When critics raised red flags about the company’s seemingly miraculous success, questioning murky accounts and income that could not be traced, Mr. Braun, a methodical executive from Austria who was the company’s biggest shareholder, hit back repeatedly, and the stock price skyrocketed.
But on Thursday, Mr. Braun’s empire came crashing down after Wirecard filed for insolvency proceedings, days after the financial technology company acknowledged that 1.9 billion euros ($2.1 billion) that it claimed to have on its balance sheets probably never existed. Its longtime auditor, EY, formerly Ernst & Young, said the company had carried out “an elaborate and sophisticated fraud.” Mastercard and Visa said Friday that they were considering cutting ties.
Wirecard, which owes creditors €3.5 billion, said its survival was not assured, sending its battered shares below €2 Friday from over €100 a week ago. The European Commission on Friday opened an investigation into Germany’s financial regulator for failing to catch the problems, despite numerous reports of wrongdoing.
How one of Germany’s most feted companies fell from grace — it is the first listed member of the 30-year-old DAX to go bust — is something investigators in several countries are still trying to piece together. German prosecutors arrested Mr. Braun on Monday on accusations of inflating sales volume with fake income to lure investors, and authorities are searching for Jan Marsalek, his former chief operating officer, who was fired Monday and may be in Asia.
The Philippine government is investigating the missing €1.9 billion, which Wirecard claimed to have held in two Philippine banks; the banks said last week that they had never dealt with Wirecard.
But one thing is sure: Anyone paying attention should not have been surprised. Since 2008, Wirecard had attracted skeptics who wondered how the company could generate the worldwide revenue it claimed. The questions, raised by analysts and investigated in a series of articles in The Financial Times, were repeatedly waved away by Mr. Braun, whose global ambitions grew with the stock price.
Wirecard and lawyers for Mr. Braun did not respond to requests for comment. Mr. Braun did not enter a plea before he was freed on bail, because he was not charged.
Though Wirecard was smaller and less known globally than rivals like PayPal, the criticism was seen as an attack on a homegrown success story. It drew the attention of Germany’s financial regulator, BaFin, which investigated the people asking the questions — often short-sellers, who stood to gain by falling shares, and journalists — rather than the repeated allegations of financial shenanigans.
Critics said they were subject to a harassment campaign, including phishing attacks by hackers to gain access to email accounts and intimidating surveillance outside their homes and offices. Wirecard has denied any wrongdoing.
Scrutiny of BaFin has intensified since the president, Felix Hufeld, acknowledged this week that officials had failed to prevent a calamity. “The situation is a complete disaster,” he said.
And EY, which faces litigation from distressed shareholders and bondholders who say it didn’t do its job, now says it was duped: “There are clear indications that this was an elaborate and sophisticated fraud involving multiple parties around the world.”
Mr. Braun, 50, who lives in Vienna, joined the Munich-based company in 2002 when it was a fledgling start-up and on the verge of collapse. A computer science expert and self-described “pathological optimist,” he had previously worked for KPMG’s consulting business.
He built up Wirecard by initially offering its services to pornography and gambling sites — growing businesses that other online payment companies tended to avoid. By 2005 the company was listed on the Frankfurt Stock Exchange, and Mr. Braun opened a banking division, which issued Visa and Mastercard credit cards.
Questions about Wirecard’s finances began surfacing in 2008 after the head of a German shareholder association alleged the company’s 2007 consolidated accounts were incomplete and misleading. Wirecard hired EY to conduct an audit, which showed no irregularities. An author of the association’s report was prosecuted and briefly jailed for not disclosing short positions he held in Wirecard stock, from which he profited when the share price fell.
Wirecard continued to prosper by making contactless payments seem effortless and attracting what it said were thousands of new merchants. Between 2011 and 2014, the company raised €500 million from shareholders and began an aggressive international expansion. It bought up small third-party payments companies called merchant acquirers around Asia, luring more investors and lifting the share price.
The accounting scandal centers on escrow accounts set up by several of those businesses, which allowed Wirecard to operate in countries where it didn’t have a license, including Singapore, Indonesia, Malaysia, Dubai and beyond.
The merchant acquirers, which provide retailers with credit card payment terminals that were then plugged into Wirecard’s payments system, generated a large chunk of revenue and profit for the company over years. They were supposed to have deposited revenue for Wirecard into the escrow accounts. But the company said this week that the funds might never have existed.
Analysts and short-sellers said they had quickly noticed irregularities.
Mark Hiley, a founding partner of the London-based independent research provider The Analyst, which makes recommendations for short-sellers, was among a handful of outspoken critics. Since 2014, he has written 43 reports highlighting why Wirecard was what he called “a house of cards” as it dished out hundreds of millions of euros to acquire such operations throughout Asia.
“When you looked at the local companies’ financial filings, you could see they were very small businesses, with very low revenue and limited profitability,” Mr. Hiley said. “We were concerned: Why were they paying so much money for these small, barely profitable companies?”
The mystery deepened when Wirecard reported the merchant acquirers were suddenly raking in big money. “They literally went from unprofitable businesses to highly profitable ones in the first year,” Mr. Hiley said. “It just didn’t pass the smell test.”
The businesses provided Wirecard monthly reports of combined revenue from merchant transactions, but no detailed breakdown, according to Mr. Hiley. While Wirecard said such income eventually accounted for around half its total revenues — making Wirecard look ever more profitable to investors — the arrangement prevented Wirecard’s auditors from being able to verify the accounts.
Scrutiny grew when Wirecard bought an Indian payments business for €340 million in 2015, its biggest deal to date. That year, J Capital Research, which provides investment advisory services, published a report stating that Wirecard’s Asia operations were smaller than the company had led investors to believe. Wirecard accused short-sellers of paying for the report.
The next year, Financial Times journalists who had begun running a series of articles raising similar questions, as well as analysts, hedge funds and short-sellers who had been critical of Wirecard, reported becoming targets of prolonged hacking campaigns.
Among them was Matthew Earl, an investor and co-author of a report by Zatarra, a financial research and investigations firm that claimed to have identified alleged money laundering inside the Wirecard empire. Mr. Earl said he suspected that Wirecard was falsifying its profit and balance sheets, partly through buying companies at high prices — including the Indian firm — where the purchase money went to related parties and was then returned back to Wirecard.
Soon after the reports were published, Mr. Earl said, he started being followed and watched at his home and office, and became the target of a phishing campaign featuring sophisticated emails that included extensive personal details about him and his family.
“I estimate I received a total of 3,000 phishing emails, while emails were also fabricated and circulated to discredit me,” Mr. Earl said in an interview. He said he had also received “extremely aggressive letters” from Wirecard’s lawyers that threatened a libel suit and a police complaint.
Mr. Hiley of The Analyst recounted a similar experience when he sent an investigator to India last year to verify his suspicion that the business was not bringing in as much money as Wirecard claimed. When the investigator went to the address listed for the local affiliate in Chennai, he found a small office in a dilapidated building.
The investigator called Mr. Hiley immediately. “There is no real business here,” Mr. Hiley recalled the investigator’s telling him. “There’s a few employees, a few broken laptops, but I can’t find any customers,” the investigator added. When the investigator left, Mr. Hiley said, he was followed in his taxi “by a couple of guys in tuk tuks,” and was so spooked that he changed hotels for safety.
Despite the critical reports, Wirecard was becoming part of Germany’s corporate elite. It leapt into the DAX index in September 2018, knocking out the stalwart Commerzbank and causing a sensation in the country. In April 2019, BaFin filed a criminal complaint against several short-sellers and two Financial Times journalists after Wirecard accused them of negative reporting to drive down the share price.
Mr. Braun was moving more into the spotlight, becoming an A-list speaker at technology and payment conferences, where he was hailed as a “hero” and “rock star,” and eventually began wearing Steve Jobs-style black turtlenecks. He promoted the concept of a fully cashless society from which players like Wirecard stood to benefit, and predicted that all retail payments would be digital within a decade.
“The aim of the board is to conquer the world in a powerful, organic way,” the German newspaper Welt reported him saying in 2018.
But late last year, as more reports of suspected wrongdoing emerged, the company delayed EY’s annual report for 2019 and hired KPMG to provide an independent assessment of its books.
The audit, released in April, did little to douse the growing fire. In the most serious finding, covering 2016 to 2018, KPMG said it was unable to verify the existence of €1 billion in revenue that Wirecard booked through three third-party acquiring partners.
As institutional investors called on him to resign, Mr. Braun remained defiant, saying the audit had found no evidence of wrongdoing. He refused to restate Wirecard’s accounts for those years.
German financial regulators redirected their scrutiny from critics to the company itself. On June 5, prosecutors raided Wirecard headquarters and opened proceedings against management on suspicion of releasing misleading information that may have affected Wirecard’s share price. On June 17, EY said it would not publish its long-delayed annual report and audit because it could not account for the missing €1.9 billion.
Mr. Braun and the board said the company was the victim of fraud. But two days later, Mr. Braun was out.
By Friday, Wirecard had all but crumpled into insolvency.
The former chief executive of Wirecard, a German electronic payment platform, has been arrested in Munich, prosecutors said Tuesday, after the company admitted that 1.9 billion euros ($2.1 billion) missing from its accounts probably “do not exist.”
Markus Braun, who resigned as chief executive on Friday, traveled from his home in Vienna to Germany late Monday and turned himself into the authorities.Earlier on Monday, the Munich state attorney had filed a petition for an arrest warrant on suspicion of market manipulation.
Mr. Braun, 50, built Wirecard from a small Bavarian start-up into a darling of the financial technology sector; it grew so dominant that it knocked Germany’s Commerzbank out of the DAX stock market index in 2018. But its shares have tumbled over 80 percent in recent days after the company’s board disclosed that its auditors, EY, formerly Ernst & Young, couldn’t locate accounts containing nearly 2 billion euros and postponed its annual report.
The German prosecutors accused Mr. Braun of misrepresenting Wirecard’s earnings by inflating its sales with falsified income by using so-called third-party acquirers, which provide payment-related services.
Later on Tuesday a court released Mr. Braun on bail of 5 million euros, and on condition that he show up in Munich once a week to check in with authorities.
Two Philippine banks that reportedly had held that money in escrow accounts last week revealed that they had never dealt with Wirecard. One of them, Bank of the Philippine Islands, issued a statement saying claims that the company was a client were “spurious.”
The other bank, BDO Unibank, revealed last week that a document claiming Wirecard held an account at the financial institution had been faked and carried forged signatures of bank officers.
Mr. Braun resigned Friday as chief executive and was replaced by James Freis, a former compliance officer at Germany’s stock exchange who was hired only the day before to serve on Wirecard’s management board.
Mr. Braun has not been formally charged with a crime, but he may be kept in jail for up to six months pending charges, according to the Munich prosecutor’s office.
His downfall as a combative executive hailed in the German corporate world was precipitated by a series of reports in The Financial Times over the last year questioning accounting irregularities in the company’s Asian operations. Wirecard disputed the reports, calling them “fake news” and claiming it was under attack by speculators.
An Austrian businessman and computer science expert, Mr. Braun, who lives in Vienna, joined the Munich-based company two years after it was founded in 1999 and led Wirecard for nearly two decades. He previously worked for KPMG’s consulting business.
Mr. Braun methodically built Wirecard into an apparently profitable international business, initially offering its digital payment services to pornography and gambling sites, which other online payments platforms tended to shun.
Over the years, the company prospered by making contactless payments seem effortless; it attracted hundreds of thousands of new merchants, including high-profit customers like Apple Pay, Google Pay and Visa.
Mr. Braun was virtually unknown until the company won a spot in Frankfurt’s blue-chip stock index, the DAX, causing a sensation in Germany. In a 2018 article in the German newspaper Zeit, Mr. Braun, who recently began wearing black turtleneck sweaters like Steve Jobs, was described as being sober, coldly analytical and highly private. “I have no interest in being a celebrity,” he told Zeit, describing his own personality as “quite boring.”
Nonetheless, Mr. Braun became a regular speaker at technology and payment conferences, where he promoted the benefits of a cashless society and predicted that the world’s retail payment infrastructure would replaced by a single, fully digital system within a decade.
When the reports emerged of suspected wrongdoing at Wirecard, Mr. Braun and his team responded by delaying EY’s annual report for 2019 and hiring KPMG to provide an independent assessment of the company’s books.
In its report, released in April, KPMG said it could not provide sufficient documentation to address all allegations of irregularities.
In the most serious finding, covering 2016-18, KPMG said it had been unable to verify the existence of €1 billion in revenue that Wirecard booked through three obscure third-party acquiring partners. The findings led to calls by some investors for Mr. Braun’s ouster.
The KPMG report then attracted the attention of Germany’s financial regulator, BaFin, which had previously suspected short-sellers of manipulating Wirecard’s stock price.
On June 5, prosecutors raided the company’s headquarters and opened proceedings against management as part of the inquiry initiated by BaFin. Prosecutors said in a statement that the company was suspected of releasing misleading information that may have affected Wirecard’s share price.
After the raid, Wirecard said it would cooperate with the investigation. “The board is optimistic that this matter will be resolved and that the accusations will be shown not to be founded,” it said in a statement.
German financial regulators this week admitted making mistakes in their oversight of the company.
The situation is a “total disaster,” Felix Hufeld, the president of BaFin, said Monday, adding that his agency and others should have had tougher oversight.
“It is a scandal that something like this could happen,” Mr. Hufeld said.