Can fund managers be trusted with our savings?

Are our pensions safe in a lawless world where corruption, fraud and money-laundering are commonplace?

The world’s savings and future pension payments have long worried me. These fears were heightened by the debacle of the Liz Truss/Kwasi Kwarteng ‘mini budget’ when the fall in bond and gilt prices seemed to threaten bankruptcy for pension funds. As the Guardian explained, the Bank of England:

.. was forced to intervene …. to stop a “doom loop” in the gilt market as funds used in the pensions industry to support the retirement schemes of people across the country came close to collapse.

Now, in January, 2023 the court case into the 2020 collapse of the corrupt global payments group Wirecard, has begun in a high-security courtroom at Stadelheim prison in Munich. It highlights the risks investors in lightly regulated global corporations face.

The case is complex, and is expected to run into 2024. At its heart is a missing €1.5 billion ($2.3 billion back then) and the whereabouts of the fugitive Chief Operating Officer, Jan Marsalek. On Interpol’s ‘most wanted’ red list, the apparent mastermind behind the company is rumoured to be living in

“an elite, gated community in Moscow, Russia, under the direct protection of the Federal Security Service (FSB) government agency.”

One of the Financial Times’s most talented investigative journalists, Dan McCrum wrote a 300-page block buster Money Men on the “hot start-up, billion dollar fraud” that was Wirecard, the so-called ‘payments firm’. The book is a must-read and has already been made into an equally gripping Netflix documentary - Skandal!

I could not put McCrum’s book down last summer, but even after careful reading, had still not fully understood how the company’s executives made their billions.

That, it seems, was the point.

Money Men is not just a tale of everyday, globalised criminality skilfully disguised as Germany’s own Silicon Valley-style start-up success. Instead it is a tale of how such common-or-garden malfeasance is taken for granted by both private and public authorities - and by the fund managers responsible for our savings and pensions.

The book details lawlessness that is blithely ignored by stock market investors and by public, regulatory authorities - the presumed ‘guardians of the nation’s finances’. It is a tale of how corruption and money-laundering is overlooked by Wirecard’s auditors - Ernst and Young. It is about lawlessness as a feature of free-wheeling financialised capitalism, not a bug.

Nobody, not its investors or regulators, really understood what was happening inside... It was knee-deep in the worst kinds of porn, gambling and online scams. Its top brass appeared to be in bed with warlords, spies and mercenaries…. There was a parade of strange company names, but then words started to jump out: FALSIFICATION OF ACCOUNTS; FORGERY; CORRUPTION; MONEY LAUNDERING.

McCrum’s book is eloquently constructed. Each chapter details market and other violations and begins with a date, a place somewhere across the world, Wirecard’s share price at that time, and its market capitalization.

Take Chapter 11, Rabble and Strife - about the falsification of Wirecard accounts. The date is May 2015, the place the Mansion House - and McCrum is digging. The Wirecard market capitalization is €5bn.

Four long years later, on 30 January 2019, as the FT prepares to publish the biggest story of McCrum’s life - the company’s market capitalization has risen to a staggering €21bn. After publication of the story only €5bn is wiped off Wirecard’s capitalization - leaving its valuation at €14bn.

Ten months and many regulatory and legal shenanigans later, with the company’s market capitalization having now risen to €19bn, the FT tries again - this time with an ‘Exocet missile’ of a story. In response the share price did fall but market capitalization dropped by only $6 billion to €13bn.

Thirteen billion euros!

The company finally collapsed in 2020 when €1.5 billion was declared missing.

This criminality and the ease with which it was both perpetrated and funded should cause panic in the minds of millions of citizens that have entrusted hard-earned pension savings to fund managers. Many of those in charge of our savings chose to invest in this company as Paul Murphy testifies in: The Fund Managers who kept faith with Wirecard.

Towards the end of last year, a German journalist, Christian Kirchner, stumbled across an intriguing fact: one of Germany’s leading fund managers had made what Mr Kirchner described in the Finanz-Szene newsletter as a “crazy bet” on Wirecard.

DWS managers had gone on a Wirecard buying spree immediately after the Financial Times had published extensive evidence suggesting that a large portion of Wirecard’s revenue and profits did not exist. Mr Albrecht and his colleagues had bet more than €500m of their investors’ money that the FT reporting was wrong.

And German fund managers (and their absentee regulators) were not alone in their irresponsibility:

The UK’s Alexander Darwall, routinely described as a “star manager”, built his personal brand at Jupiter Fund Management. The performance of funds under his guidance there benefited massively from heavy holdings in Wirecard across a period when the German company’s stock rose six-fold..

Mr. Darwell subsequently left Jupiter and set up his own fund, Devon Equity Management.

In January (2020), Mr Darwall apologised to investors “for having too much in it”, but reiterated his admiration for the company and its business model.

“They fit what we look for. They do something special and different and better than other companies and they can monetise it,” he said at the time. “So I’m extremely comfortable with the Wirecard investment. I might remind you I invest in companies — not stock — and the point about Wirecard is: it’s a great company.”

After Thursday’s revelations, Mr Darwall sold his entire position.

When all is said and done in a Munich court in 2024, the real ‘Skandal!’ of the Wirecard story is not the corruption, pornography and warlords. Nor is it the story of a fraudulent, fugitive COO protected by Putin’s regime.

Rather it is about the threat posed to the world’s savers and investors by easy, mobile money, reckless asset fund managers, careless regulators and ignorant policy-makers - all fast asleep at the wheel.