By Margot Patrick, Bradley Hope and Liz Hoffman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 30, 2020).
When influential tech investor SoftBank Group Corp. backed
Wirecard AG last year, it gave a $1 billion jolt to the German
fintech, and temporarily quieted questions about the legitimacy of
its profits.
Wirecard's rapid unraveling last month in an accounting scandal
is bringing new scrutiny to the deal. SoftBank lent its name and
reputation to the digital-payments company, but offloaded the
financial risk to other investors. Mutual funds and pension funds
that bought Wirecard bonds are sitting on massive losses.
German prosecutors said last week that the company's inflated
balance sheet allowed Wirecard to raise EUR3.2 billion ($3.7
billion) in debt in the years leading to its collapse, money that
is now lost. Nearly half of that money came as a result of
SoftBank's involvement.
SoftBank executives stood to profit personally on last year's
deal, while the company itself never put in any money. One aspect
of the investment undisclosed to Wirecard's bond investors: a
multimillion-dollar finder's fee paid to a German businessman for
introducing executives of the two companies, according to people
familiar with the matter.
Top SoftBank executives held several long calls last month to
determine whether the Japanese conglomerate faced legal risk from
helping to inject money into Wirecard so soon before it admitted a
$2 billion black hole on its balance sheet, people familiar with
the calls said. The conclusion: SoftBank was safe from investor
lawsuits, but would take a reputational blow, they said.
SoftBank has said it took allegations of accounting
irregularities at Wirecard seriously but had no reason to believe
they were true at the time of the bond investment, according to a
spokesman.
Founded and run by the risk-taking billionaire Masayoshi Son,
SoftBank is a giant in the technology world. SoftBank's $100
billion Vision Fund, launched in 2016, became the deepest pockets
in the industry, but has stumbled with big bets on troubled
startups such as office landlord WeWork and hotel company Oyo.
Early last year, SoftBank executive Akshay Naheta was hunting
for deals to pitch executives back in Tokyo when he found a target
that looked undervalued: Wirecard.
The German payments company was getting hammered by reports of
accounting irregularities in the Financial Times and by short
sellers. It could use a seal of approval from a big investor like
SoftBank.
Mr. Naheta trumpeted an investment as the kind of thing SoftBank
should be doing more of. He and his boss, Vision Fund chief Rajeev
Misra, had been pushing Mr. Son for more than two years to let them
set up a multibillion-dollar hedge fund partially seeded by
SoftBank to do complex public market deals.
Mr. Naheta, a 39-year-old former Deutsche Bank trader, suggested
a EUR900 million ($1.06 billion) convertible bond investment. All
of the risk could be parceled out to other investors, while
maintaining significant upside if Wirecard's shares performed well,
according to people familiar with the deal.
The Vision Fund's compliance team questioned why a German
investor named Christian Angermayer was to receive a
multimillion-dollar brokerage fee for introducing Mr. Naheta to
Wirecard executives, including Chief Executive Markus Braun,
according to people familiar with the compliance review. Public
companies such as SoftBank and Wirecard don't often pay middlemen
fees to find each other. Mr. Angermayer's only role was introducing
the men, both of whom he knew socially. The compliance team
approved the fee.
After Wirecard's recent debacle, the SoftBank Group's overall
compliance team reviewed Mr. Naheta's due diligence and found it
was "rigorous and substantive," according to a SoftBank
executive.
Mr. Angermayer, a technology investor behind commercial efforts
to use hallucinogenic substances to treat depression and other
ailments, declined to comment. A lawyer for Mr. Braun said her
client wouldn't make any public statements due to ongoing
investigations.
SoftBank set strict conditions, according to some of the people
familiar with the deal. Wirecard had to address specific
allegations about its accounting in deal documents with SoftBank.
This included Wirecard promising that an internal spreadsheet
described in Financial Times articles as evidence of accounting
irregularities didn't exist. It had to get a credit rating and
issue a corporate bond as well.
On April 24, 2019, Wirecard announced a SoftBank affiliate would
take a roughly 5% stake through a five-year convertible bond.
SoftBank would also become a strategic partner, introducing
Wirecard to the dozens of hot tech startups it backed. Wirecard
shares soared above a EUR130-a-share strike price on the bond. The
deal would take several months to close.
Analysts built the chance of Wirecard processing payments for
Uber Technologies Inc. or another giant backed by SoftBank into
their valuation models.
In mid-September, Mr. Braun flew to California, where Mr. Naheta
introduced him to founders of other SoftBank-backed companies at
the posh Langham hotel in Pasadena, according to some of the people
familiar with the deal. Wirecard announced partnerships to use its
payments-processing platform with at least three of the
SoftBank-backed firms.
Before the convertible bonds were issued, Mr. Naheta lined up
Credit Suisse Group AG, to repackage the convertible bond into new
securities. They were sold to hedge funds, private banks and mutual
funds. Hedge-fund firm Citadel LLC and a BNP Paribas SA convertible
bond fund were among the buyers, according to people familiar with
the bond sale. Thanks to falling corporate borrowing rates and
Wirecard's elevated share price, the SoftBank strategic investment
fund managed by Mr. Naheta made an instant profit on the
convertible bond.
In another twist, SoftBank, as a company, didn't itself put any
money into the strategic investment fund. It retained a small
percentage in fund management and performance fees, according to
some of the people familiar with the deal.
Instead, high-ranking SoftBank employees and Abu Dhabi's
state-owned Mubadala Development fund backed the strategic fund,
the people familiar with the deal said. When the bonds were issued,
they made EUR64 million instant profit.
They retained upside if Wirecard's share price stayed high. Mr.
Naheta told business associates in the fall that he and other top
SoftBank employees each already stood to make tens of millions of
dollars in profits, according people familiar with the
investment.
In mid-October, the Financial Times published excerpts of the
spreadsheet Mr. Braun had told SoftBank didn't exist, reviving
concerns about the company's accounting.
British activist investor Chris Hohn, who was shorting
Wirecard's stock, met Mr. Naheta that week. He said SoftBank should
push for a special audit, according to people familiar with the
meeting. Mr. Naheta came to the meeting with Mr. Hohn's own
confidential Wirecard analysis. "I can get anything," he told Mr.
Hohn when asked how he obtained it.
On a video call the next day, SoftBank executives asked Mr.
Braun for an outside audit.
In a follow-up email reviewed by The Wall Street Journal,
SoftBank lawyers suggested that Wirecard invite Financial Times
journalists to share its information confidentially with members of
Wirecard's supervisory board and the new auditor, as a way of
"eliminating unwanted noise/attention" of additional stories. A
Financial Times spokeswoman said a meeting didn't take place.
As pressure built on Wirecard from other investors, too, to do
an audit, SoftBank threatened to pull its partnership if Wirecard
didn't agree, according to some of the people familiar with the
matter.
Wirecard hired KPMG to conduct the audit the next week.
In November, Wirecard's chief financial officer said of the
EUR1.4 billion raised from the convertible bond and the corporate
bond SoftBank required them to issue, EUR840 million was used to
pay down bank loans and EUR200 million bought back Wirecard's own
stock.
In April, KPMG said it couldn't verify key information about
Wirecard's three largest business partners. The stock went into
free fall in June when Wirecard's auditor, Ernst & Young GmbH,
said it couldn't confirm that EUR1.9 billion meant to be in
Philippine banks was there. Wirecard filed for bankruptcy a week
later.
Mr. Naheta left the Vision Fund in May for SoftBank Group,
becoming a senior vice president working directly on investments
with Mr. Son. After Wirecard said the cash was missing, Mr. Naheta
tweeted that he was "totally baffled by the lack of competence and
responsibility displayed by E&Y." EY says Wirecard's collapse
was a result of large-sale fraud designed to circumvent checks, and
that it is cooperating with authorities.
On July 8, Credit Suisse liquidated the repacked securities
linked to the Wirecard convertible bonds for 12% of face value.
Write to Margot Patrick at margot.patrick@wsj.com, Bradley Hope
at bradley.hope@wsj.com and Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
July 30, 2020 02:47 ET (06:47 GMT)
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