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The Wirecard logo is seen in Aschheim, Germany, on June 19, 2020.

Sven Hoppe/The Associated Press

Europe has few big-name fintech stars. That game was left to the Americans. But one European company was becoming a contender – Wirecard.

The German electronic payments company, founded in 1999 in Bavaria, had a spectacular run in recent years and was going global. By 2018, it was one of the most glamorous members of the German market’s Dax 30 index, where it jostled for attention among the country’s top industrial powers, including Volkswagen, Siemens and Munich Re. Its market value of €25-billion ($38-billion) put it ahead of once-mighty Deutsche Bank. Wirecard chief executive Markus Braun, with his casual black turtleneck sweaters, even affected the sartorial style of Steve Jobs.

For many short-sellers, the company’s relentless rise was a mystery. One of them, John Hempton of Australia’s Bronte Capital, began shorting Wirecard more than a decade ago. No luck; the shares kept rising. In a blog post in 2016, he said he could not confirm the purchase of some businesses picked up by the company. “Wirecard has long struck me as suspect,” he wrote.

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Turns out short-sellers and various newspapers – notably the Financial Times – who had questioned Wirecard’s legitimacy for years were right. On Thursday, Wirecard dropped a bombshell when it revealed a €1.9-billion black hole in its balance sheet and said its auditor, EY, couldn’t trace the money. The shares collapsed. Mr. Braun resigned the next day.

On Monday, the company said the missing funds, which were supposedly held in the accounts of two Filipino banks used to settle payments for third-party accounts, probably “do not exist.” The shares plunged again, taking their decline to 85 per cent since late last week.

Today, Wirecard is fighting for its survival as it’s pulverized by one of the biggest accounting scandals since the 2003 collapse of Italian dairy products giant Parmalat, whose brazen scam to inflate profits saw the creation of a fake account with €4-billion of non-existent cash.

There is no shortage of culprits to blame for Wirecard’s spectacular downfall. But if there’s one party that should drop its head in shame, it is BaFin, the German financial services regulator. For years, it was aware of complaints from short-sellers and reports from journalists that there might be less to Wirecard than met the eye. Yet BaFin didn’t swing into action until it was too late. Worse, it even adopted a shoot-the-messenger strategy last year, when it banned the short-selling of Wirecard shares. (Shorting, as its known, is a bet that shares will fall.)

Mr. Hempton is furious at BaFin. In a tweet posted on Saturday, he said: “It is time to defund BaFin. Discuss.” In another tweet, posted earlier, he said: “BaFin is incompetent to the point of malice.”

Investors who were convinced that Wirecard was extremely overvalued can be forgiven for thinking a conspiracy existed to prop up the shares.

The damning allegations against the company actually go as far back as 2008 and ratcheted up in January, 2019, when the FT reported about a whistle-blower complaint into potentially fraudulent money flows in Wirecard’s Asia-Pacific operations, including the use of forged and backdated contracts. The FT story hammered the shares. Wirecard denied any wrongdoing and sued the FT for what it called “unethical reporting.”

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An analyst at the German lender Commerzbank dismissed the FT report as “fake news” and urged investors to buy the shares (within days, the analyst’s report was removed from the bank’s research site).

Shortly thereafter, the public prosecutor’s office in Munich, with the backing of BaFin, launched a criminal investigation into the author of the FT report, Dan McCrum, for price manipulation on the stock market. About the same time, BaFin banned the shorting of Wirecard shares.

In October, after Wirecard, the Munich prosecutor’s office and BaFin produced no evidence that the FT had acted maliciously, and Singaporean crime investigators raided the company’s Singapore office, Mr. McCrum wrote another report exposing internal spreadsheets that “appear to indicate a concerted effort to fraudulently inflate sales and profits at Wirecard businesses in Dubai and Ireland, as well as potentially mislead EY, Wirecard’s tier-one auditor.”

The shares slumped again and soon recovered, but more bad news for investors was to come. In April, KMPG, which was appointed late last year by Wirecard to perform an internal audit, said it could not validate the existence of about €1-billion in cash. Last week, the whole internal effort to keep Wirecard upright failed when the governor of the central bank of the Philippines confirmed that the missing €1.9-billion, which were supposedly held in escrow accounts at two local banks, had not entered the domestic banking system. It appears the amount was invented.

Why BaFin spent years going after the short-sellers and financial journalists who alleged fraud at Wirecard, instead of Wirecard itself, is a mystery. In a panel discussion on Monday, BaFin president Felix Hufeld called the Wirecard scandal “a shame” for Germany, but defended the short-selling ban it slapped on the shares last year.

BaFin’s early hesitation to get to the bottom of the endless fraud allegations levelled against Wirecard is the real shame. Germany may not own Europe’s biggest stock market – the London Stock Exchange is still the leader – but it is the continent’s dominant economy, and promotes itself as an ethical corporate and market operator. BaFin’s meek performance on the Wirecard file utterly failed to burnish the image Germany covets.

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