By Margot Patrick, Bradley Hope and Liz Hoffman
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 and securities 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 firstname.lastname@example.org, Bradley Hope at email@example.com and Liz Hoffman at firstname.lastname@example.org