(Bloomberg) -- Wirecard AG has temporarily suspended its outgoing chief operating officer after revealing that auditors couldn’t find about 1.9 billion euros ($2.1 billion) in cash, spooking investors and casting doubt on the company’s leadership and survival.
Jan Marsalek has been suspended on a revocable basis until June 30, the company said in a statement on Thursday. James Freis, who had already been tapped to lead the company’s new “integrity, legal and compliance” department starting next month, will begin in his role immediately. Marsalek was due to step down from the COO role to a new position in charge of business development, Wirecard said in May.
The company suffered one of the worst stock slumps in the history of Germany’s benchmark index on Thursday after revealing that auditors had been unable to find billions of cash that was supposed to be held in Asian banks. The company warned loans of as much as 2 billion euros could be terminated if its audited annual report, delayed for the fourth time, was not published by Friday.
Marsalek had tried to get in touch with the two Asian banks and trustees over the past two days to recover the missing money, but wasn’t successful, according to a person familiar with the matter. It’s unclear if the funds can be recovered, the person added. Marsalek couldn’t immediately be reached for comment.
Ernst & Young was unable to confirm the location of the cash in certain trust accounts, and there was evidence that “spurious balance confirmations” had been provided, Wirecard said in a statement on Thursday. That’s about a quarter of the consolidated balance sheet total, the company said.
“We are stunned,” said Ingo Speich, a fund manager at Deka Investments, a top 10 shareholder at the firm. “A new start in terms of personnel is more urgent than ever.”
The escalating crisis also calls into doubt the future of Chief Executive Officer Markus Braun. The executive, also the company’s biggest shareholder, has been at the helm since 2002, building the company from a startup into a payment provider whose technology facilitates transactions around the world.
Braun painted the company as a potential victim in a separate statement. The CEO has been resisting calls to resign and aggressively defending the company against accusations of accounting fraud, led by a series of articles in the Financial Times.
“It is currently unclear whether fraudulent transactions to the detriment of Wirecard AG have occurred,” said Braun, adding that the company will file a complaint against unnamed persons.
In another statement published overnight, Braun said the trustee involved is in “constant contact” with EY and Wirecard and has promised to clear up the issue quickly with the two banks.
“It cannot be ruled out that Wirecard has been the victim in a substantial case of fraud,” Braun said.
The stock dropped as much as 71% to 29.90 euros in Frankfurt on Thursday, one of the biggest falls on record and the largest for a member of Germany’s prestigious 30-company DAX stock index. It later recovered somewhat to 39.90 euros, a decline of 62%. Wirecard’s bonds suffered a record plunge.
Wirecard warned loans up to 2 billion euros could be terminated if its audited annual report was not published by June 19. Analysts at Morgan Stanley estimated that Wirecard has available cash of around 220 million euros, if it cannot locate the missing $2.1 billion.
“While we would expect Wirecard to seek covenant waivers, if the banks call 2 billion-euros of debt and that is mostly drawn, then we expect investor focus to turn to the balance sheet and liquidity,” said analysts at Morgan Stanley in a note on Thursday.
Wolfgang Donie, analyst at NordLB, warned that the “overall situation at Wirecard can only be described as insupportable and the scandal is now becoming a crisis that is threatening the existence of the company.”
German financial markets regulator BaFin said it is examining Wirecard’s disclosure on Thursday as part of its investigation into whether the company violated rules against market manipulation, according to a spokeswoman.
In September 2018, Wirecard reached a market valuation of 24.6 billion euros, replacing Commerzbank AG in the DAX alongside titans such as Volkswagen AG, Siemens AG, and Deutsche Bank AG. Following Thursday’s collapse, the company is valued at around 6.7 billion euros.
“Wirecard’s retreat could be terminal,” said Neil Campling, an analyst at Mirabaud Securities.
EY told Wirecard that their results will require additional audits after two unnamed Asian banks that have been managing the company’s escrow were unable to find accounts with about 1.9 billion euros in funds, Wirecard said in an additional statement. Those funds had been set aside for risk management, the company said.
Wirecard said last month that the latest delay in publishing results was due to EY needing more time to finish its review, and that the auditor hadn’t found anything material within the scope of its work. Wirecard had previously postponed the results while it was working with KPMG on a probe into allegations about accounting irregularities.
Braun has aggressively fought against allegations that the company’s financials have been mismanaged. Braun has also resisted calls from activist investors TCI Fund Management Ltd. to step down, promising to regain investor confidence and improve compliance and control.
Wirecard headquarters were searched in May by German prosecutors as part of a probe involving the company’s senior management.
Wirecard said in February that full-year revenue rose about 38% to 2.8 billion euros while earnings before interest, taxes, depreciation and amortization jumped 40% to 785 million euros.
(Updates with Braun statement from 10th paragraph)
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