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Wirecard $2 billion Fraud and International Small Cap Funds - Wasatch, Artisan, etc.

https://cnn.com/2020/06/23/tech/wirecard-ceo-markus-braun-arrested/index.html
Wirecard (WCAGY) acknowledged on Monday that €1.9 billion ($2.1 billion) in cash included in financial statements — or roughly a quarter of its assets — probably never existed in the first place. The company withdrew its preliminary results for 2019, the first quarter of 2020 and its profit forecast for 2020.
I can't tell you the number of times I've seen this company as a top holding at international small cap funds such as Wasatch's, Artisan's, Oakmark's and Grandeur Peaks. Although I don't think it's a top holding anymore, this CEO Braun has been in charge for many years and I wonder as with the Sequoia Fund/Valeant and Oakmark/Washington Mutual cases what it says about active management that such frauds go undetected for years. Active fund managers get paid a lot of money to ostensibly do deep research on companies. Yet when these scandals happen you usually don't hear boo about it from them, and I wonder if they either completely missed the fraud despite their deep research or, worse, kept quiet about it. Do managers/analysts report financials that look weird to authorities? And why do they so rarely say anything about the fraud after the fact? I'm not pointing at any particular manager. I'm saying this in general always makes me a little more skeptical about managers' abilities. It seems like this fraud may have been ongoing for years, just like it was in the other examples.

Comments

  • A related concern, one which we've discussed in other threads, is proxy voting. Many mutual fund companies say they are most effective via direct engagement as opposed to voting for shareholder initiatives. Their "engagement" apparently doesn't result in learning about the companies they invest in, or as you suggest even worse they let problems slide, deciding not to effect change or at least bail out.

    Some companies like Vanguard and Blackrock pretend to actively engage with companies:
    https://www.cnbc.com/2019/10/13/blackrock-vanguard-found-religion-on-climate-doubts-are-growing.html

    While others don't even put up a pretense. The manager of the aforementioned Oakmark International Small Cap instead quotes Milton Friedman:

    “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
    https://oakmark.com/wp-content/uploads/sites/3/2019/09/17-0630_Oakmark_ThirdQuarterReport.pdf

    A reminder - much of what Enron did was within the rules of the game (mostly legal). "It often comes down to the premise that just because something is legal doesn’t mean it’s ethical [emphasis in original]. Sure, the MTM [mark-to-market] accounting method is used in responsible, pragmatic ways daily, by all kinds of ethical companies, but it was also used by the likes of Enron to dupe millions of investors out of their life savings."
    https://bizfluent.com/info-7747847-enron-scandal-ethics.html

    Your scenarios of what the fund companies knew and when they knew it go from bad to worse. It seems there are no white hats in the industry. The best one can do is look for lighter shades of gray.

  • I was an auditor with Arthur Andersen many years ago. We would send confirmation letters to banks to verify cash balances. Weren't any audit tests used to verify this cash balance valued at 25% of total assets?
  • I was quite surprised to find it held by BCSVX.
  • NYT: Deutsche Bank May Offer Wirecard a Lifeline
    https://www.nytimes.com/2020/07/02/business/wirecard-deutsche-bank.html

    Once again, Deutsche Bank puts on its not-so-white hat to cut a deal with a debt-ridden, likely fraudulent company that was headed by a questionable CEO. (Wirecard's former CEO is currently under arrest.)

    "It did not provide any further details."
  • I’m shocked I tell you ,
    I’m shocked that Jerry/ the Bosch doing something immoral or corrupt. How could The chancellor
    Angela Merkel allow this. I mean it’s not like it’s in the Teutonic DNA or anything. There is a reason that international mutual funds don’t hold a high percentage of German companies as compared to their British, French, Swiss and Japanese holdings.
  • edited September 20
    The bold below in the buzzfeed article is mine simply because I the phrasing is so... so.... (no words come to mind). Where do you train to talk like this?
    The letter warned that “leadership on financial crime had been lacking for a considerable period of time” at the bank and that managers had put the pursuit of profit above its responsibilities to fight money laundering.
    It said it found evidence of “financial crime risk being overridden by commercial drivers and in some cases a willingness to take on very profitable clients, regardless of financial crime risks.”
    The regulator said there was a “significant risk” that money laundering at the bank was “going unreported or undetected.”
  • There is a reason that international mutual funds don’t hold a high percentage of German companies as compared to their British, French, Swiss and Japanese holdings.

    Given that Japan's market is 3x the size of Germany's, there might be another explanation for funds holding a relatively large amount in Japanese stocks.

    For reference purposes, Vanguard's Developed Market Index Fund VTMGX has the following weightings:
    Japan 22%, UK 12%, Switzerland 9%, France 8%, Germany 8%

    Further, given that the UK's form of capitalism is closer to that of the US (a liberal market economy) than generally those on the Continent (coordinated market economies or if you prefer, mixed market economies), there might be an additional explanation for a claimed overweighting of UK stocks.

    See Varieties of Capitalism generally, and Table A1 in this paper for a relative scoring of how coordinated the economy of each OECD country was from 1995-2003.
    https://link.springer.com/article/10.1057/s41267-016-0001-8

    Not to mention that the US and UK legal systems are based on common law, while those of continental European countries are based on civil law.
    https://guides.law.sc.edu/c.php?g=315476&p=2108388

    That leaves us with Germany, France, and Switzerland from the list.

    Spot checking a few large cap blend funds:
    IGFFX: France 9%, Switzerland 7%, Germany 3%
    ARTKX: Switzerland 20%, Germany 5%, France 4%
    SGOVX: France 11%, Switzerland 5%, Germany 3%
    FMIJX: France: 10%, Switzerland 10%, Germany 3%
    SCIEX: Germany 18%, Switzerland 13%, France 3%
    MDIJX: France 11%, Switzerland 10%, Germany 7%
    OAKIX: Germany 18%, Switzerland 12%, France 12%
    TROSX: Germany 11%, Switzerland 10%, France 10%

    Germany doesn't seem to be underweighted compared with France and Switzerland, though I gladly acknowledge this is not a random sampling. A more robust analysis is welcome. The reasons for including the funds above:

    ARTKX, SGOVX, FMIJX, OAKIX are funds that one sees mentioned frequently here.

    I'm pretty sure that at least one T. Rowe Price Int'l fund has been mentioned in threads, though I'm not sure which one(s); TROSX is one of two non-index, non-institutional blend funds at TRP (the other is the much smaller Spectrum Int'l RPSIX).

    American Funds name shows up here also, though usually for its domestic funds. I included its only large cap blend int'l fund IGFFX.

    I've mentioned SCIEX as being effectively half of VWIGX, a fund that got a lot of discussion recently. In another thread on international core funds, I suggested MDIJX as a well balanced (between value and growth) int'l fund from a fine family for int'l funds (MFS).

    FWIW, though VWIGX is a growth fund, since it is hot, here is its country breakdown (including Japan and UK): Japan 10%, Germany 8%, France 6%, UK 6%, Switzerland 5%.
  • Between my 4 international funds the holdings in Germany is well below what the size of Germany’s GDP and population would suggest; DODFX, ARTKX, ESMAX and GISOX. None of them have a holding in Hibernating Fascist land above 7 percent.
  • Between my 4 international funds the holdings in Germany is well below what the size of Germany’s GDP and population would suggest

    Say what? Population? Germany has 1% of the world's population. Which of your four funds has well below 1% of assets in Germany?

    So let's stick with GDP. Again, not the greatest proxy for market cap (national market caps range from 3% of GDP in Costa Rica to 1300% of GDP in Hong Kong). But since you picked GDP as a metric, we can work with that.

    https://www.theglobaleconomy.com/rankings/gdp_share/ (GDP percentages)

    Germany has 4.64% of the world's GDP. I'm not going to exclude the US here, because most of your funds have more invested in the US than in Germany. Of your four funds, three of them have more than 4.64% invested in Germany. And the fourth, D&C, has 3.80% in Germany. That doesn't seem to be "well below what the size of Germany's GDP ... would suggest."

    OTOH, by your metrics (population and GDP), China is modestly underweighted. GISOX and ARTKX each hold 11% in China, and the other two hold less (to be expected for the European fund ESMAX). China generates 16% of the world's GDP with 18% of the population.

    A good way to test the hypothesis that Germany is underrepresented in international funds is to select funds randomly. You did the opposite; you formulated this hypothesis based on four funds that you had selected for investment (i.e. not random funds). You then used the same four funds to validate what you already knew was true about them. Not particularly persuasive.

    FWIW, of my global/international funds, half of them have more assets in Germany than in France and in Switzerland. This factoid doesn't mean anything either.

  • Sequoia Fund/Valeant and Oakmark/Washington Mutual cases
    It is good to be remind of. Then Enron and Worldcom are just as bad.
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