The Secret Broker: When shareholders get well and truly DAX’d
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
Its been an interesting week with the ‘F word’ appearing in a few headlines, though for some shareholders, they would be using the other ‘F word’ that has a U in it.
Fraud has hit one company listed on the ASX and one listed on the German DAX this week. I suspect that the new forced COVID-19 office working arrangements has fully exposed the culprits, with their dacks down around their ankles and nowhere to hide.
Firstly, ASX-listed Freedom Foods Group (ASX:FNP) has had to put their CEO out to pasture with the cows, while the board decides what action to take with him.
The CFO has already been trucked out of the door and off to the knackers yard, after the board became aware that following a recent consolidation of a couple of warehouses, some old and obsolete stock dating back to 2017 had been discovered on the shelves gathering dust.
All of this action happened in the weeks prior to June 26 as the board became aware that the actual write-down in stock on hand was estimated to have to be around $60m, having originally estimated on May 29 that it would be $25m.
This should have all been audited, especially as we all know how quickly milk products go off. The value of the company’s inventory as at December 31, 2019 was $122m. So that’s literally 50 per cent of all stock going down the drain, in one go.
The stock remains suspended while everyone keeps finger pointing and passing the blame around, with the last trade of the shares at $3.01, down from $4.60 on May 15, 2020.
If you watch this video from the company’s last AGM, you will wonder how slick marketing to their shareholders managed to just stop there. Or maybe not.
All of this drama pales into insignificance when you see what has been going on in the land of leather Lederhosen’s, beer steins and pork knuckle.
In something that comes straight out of a Stephen King novel for shareholders, the German DAX superstar company Wirecard managed to implode on itself in spectacular style.
Over the last seven days, its MD was sacked and then promptly arrested this week for fraud, while the company’s auditors E&Y got compared by the press to Accenture’s achievement in the role it played in the Enron fraudulent activity.
This was due to the matter of $US1.9bn ($2.8bn) cash not being in the bank account, as previously signed off on in their official accounts.
Wirecard was once worth €24bn ($39.2bn) at its peak, with its shares changing hands at €191 in August 2018 and boasting over 5,000 employees worldwide.
It was founded in 1999 and almost went belly up in 2002, when it appointed an ex-KPMG consultant, Markus Braun, as its CEO. Markus, with his accounting knowledge, was the very same guy arrested this week on fraud charges.
His 7 per cent holding was once worth €1.6bn but as he had taken out margin loans, it is rumoured that he managed to keep €150m in cash, so his cell should be finely kitted out for him.
Wirecard started out enabling ordinary punters to fund their gambling and porn addictions, without being traced back to their own credit cards. They could put cash onto their Wirecard and then use the card to pay for those services online.
Or that is what they said they did.
Thanks to a backdoor listing, they slipped under the full scrutiny radar and went on to acquire lots of companies with some hard to understand structures.
Alarm bells started to ring for a few short sellers, who could not make their accounts add up and their research included trying to load money into one of their cards and trying to pay for something online.
They found this almost impossible to do and went on a few company office visits to alleged Wirecard partners.
At one claimed partners office address in the Philippines, all they found was a bemused and retired seaman living there with his family.
There was no office.
As the short sellers started to short the company even more and issue reports, the German equivalent of ASIC got their leather Lederhosen’s in a twist and banned any short selling of the company for two months in February 2019.
This was because of, and I quote, the “importance for the economy” and the “serious threat to market confidence”, after the share price fell below €100.
That’s how important this company had become for German investors.
It was their Rockstar two finger salute to Silicon Valley and it had at one point become the largest valued fintech company in Europe.
Markus announced in Trump style to the press in April 2020 that it was fake news that E&Y had buckled under pressure and refused to sign off on their accounts but the results were delayed because of Coronavirus.
From that day, the stock had fallen by 98 per cent until finally being suspended this week.
This is the first DAX 30 stock to ever go bankrupt.
So, in all of this, the auditors have a role to play and investors expect to have some kind of faith in the system.
Thank goodness for the short sellers and in Wirecard’s case, the Financial Times for exposing the truth in the first place. Even the FT’s exposé reporter was investigated by the German authorities before they were forced to actually do their real job.
The suspended CEO of Freedom Foods is ex-SG Warburg (now UBS). So I will now add ex-merchant bankers to the watch out list, along with any ex KPMG, PWC, E&Y or Deloitte person, as they all seem to know how to play the game their way and think they will arrogantly get away with it.
Will we ever learn?
The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at email@example.com.
Feel free to contact him with your best stock tips and ideas.