The man who led Wirecard into insolvency

By Arno Schuetze, Sabine Wollrab and Patricia Uhlig
FRANKFURT, July 9 (Reuters) - On the night of June 18,
Wirecard AG's new compliance chief stayed up late at his office
in the company's low-rise headquarters in the Munich suburb of
Aschheim to pore over the payment firm's books.
It was James Freis' first formal day on the job after his
start date had suddenly been accelerated by the refusal that
morning of Wirecard's auditors to sign off on the 2019 accounts
and the company's suspension of its chief operating officer. As
Freis, a former financial investigator at the U.S. Treasury,
scanned the books he was struck by Wirecard's unusual practice
of relying on a third party to hold large sums of money in
escrow on behalf of its subsidiaries that are present in
countries where it doesn't have its own operating licenses,
according to a person with knowledge of the matter.
The evidence that fraud had probably been committed was
obvious to anyone with financial market experience, this person
said. The next day, Wirecard's long-time chief executive officer
resigned and Freis became interim CEO.
Over the following week, the 49-year old American was
involved in a rapid wave of decisions that culminated in
Wirecard filing for insolvency, according to people involved in
talks on restructuring its debts. In the end, the process left
creditors with scant hope of recovering $4 billion they are owed
and investors holding shares that were nearly worthless.
Prosecutors are now investigating Wirecard's other senior
managers on suspicion of fraud, breach of trust, false
accounting and market manipulation. They have arrested former
CEO Markus Braun, have a warrant out for the former chief
operating officer and have widened the field of suspects to
include all management board members except Freis. No charges
have been filed.
Wirecard and its supervisory board chairman declined to
comment on events in the week leading up to the company's
insolvency filing and the accounting issues. The company has
acknowledged that the funds likely didn't exist but hasn't
publicly identified who it believes to be responsible. It has
said the decision to file for insolvency was because Wirecard
was over-indebted and not in a position to meet its financial
commitments.
Braun, who has been released on bail, has denied wrongdoing.
A lawyer for the former CEO did not respond to a request for
comment but has previously declined to comment.
The former chief operating officer, Jan Marsalek, remains at
large and his whereabouts are unknown. His lawyer declined to
comment. The company fired Marsalek on June 22.
Freis moved to Frankfurt from Washington six years ago to
become head of compliance at Deutsche Boerse DB1Gn.DE , which
runs the Frankfurt Stock Exchange.
Wirecard announced Freis' appointment as Chief Compliance
Officer on May 8, ten days after forensic accountants at KPMG
had publicly raised red flags about Wirecard's accounting for
the three prior years saying they had been unable to verify the
existence either of revenue from the third-party partners or the
balances held in escrow.
Freis was in the Bavarian capital ahead of his official July
1 start date to house hunt, when Wirecard issued a surprise
statement. On June 18, the company announced that its long-time
audit firm EY, previously known as Ernst & Young, could not
confirm the existence of 1.9 billion euros ($2.1 billion)
supposedly held in trust at two Asian banks - a quarter of its
balance sheet. That evening, Wirecard suspended Marsalek, the COO, and
announced Freis would assume his new post with immediate effect.
Freis appeared in a video statement posted by Braun on
Wirecard's website late that night. In the video, Braun
introduced the new compliance chief, who nodded awkwardly in
acknowledgment. Braun also said in the video that Wirecard may
have been the victim of a fraud "of substantial dimensions,"
without specifying who may have been responsible.
It was that night that Freis spent looking through the
company's books. The next morning, Freis reported his initial
findings to the supervisory board, according to the person with
knowledge of the matter. Within hours, Braun had resigned.
Freis also personally wrote a corporate statement that
disclosed the findings, the person with knowledge of the matter
said. The statement, released by the company in the pre-dawn
hours of the morning of Monday June 22, said the management
board assessed the "prevailing likelihood" that the 1.9 billion
euros held in trustee accounts "do not exist.”
EY, which had audited Wirecard for more than a decade, has
said it uncovered a sophisticated fraud and reported its
findings immediately to the supervisory board. The audit firm
declined further comment.
Freis was also under pressure from Wirecard's lenders. EY's
refusal to sign off on the accounts meant that creditors would
be able to call in some 2 billion euros in loans. Freis worked
over the weekend with Wirecard's freshly appointed restructuring
advisers to get a dialogue going with creditors, according to
sources with knowledge of the matter.
Some 15 banks agreed on the Monday to roll over their credit
line to Wirecard. But, by Wednesday, it had become clear that a
move by Germany's financial regulator, BaFin, to ring-fence
Wirecard's banking subsidiary from the rest of the group would
tie Freis' hands.
The problem Freis faced, according to a person involved in
the talks between Wirecard and its lenders, was that he would be
unable to pay the company's bills if the regulator blocked
access to the necessary account at Wirecard Bank.
Freis saw that, even if the loans were rolled over, Wirecard
would probably to have to file for insolvency in three to six
months, the person involved in the talks said. But by postponing
the inevitable, he risked criminal liability, this person added.
Delaying insolvency is a criminal offence in Germany. The next
day, June 25, Wirecard announced it would file for insolvency.
Freis continues to oversee day-to-day operations at the
company while the administrator sells of the remnants of
Wirecard.