Former Wirecard shareholders are suing EY Germany over alleged asset stripping as they fear a complex organisational revamp at the Big Four firm will make it harder if not impossible to enforce damage claims over its allegedly flawed audits of the defunct payments group.
EY is facing an avalanche of lawsuits from former Wirecard investors, as well as its administrator, demanding billions of euros in damages.
The Big Four firm had issued unqualified audits for almost a decade for the once-celebrated German tech company, which collapsed in June 2020 in one of Europe’s largest accounting scandals.
The firm last month accepted a €500,000 fine from Germany’s audit watchdog over alleged violations of its professional duties as well as a two-year ban to take on new large, listed audit clients. EY said it did not agree with all of the watchdog’s findings.
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EY is adamant that damage claims from Wirecard investors are unmerited, but earlier this year, it executed a complex internal reorganisation ring-fencing its lucrative non-audit operations, according to people familiar with the transaction.
In a multi-stage process that first involved a change of the existing group’s legal structure, the firm then carved out its highly profitable consulting, tax and M&A advisory operations through an asset swap between the legacy body and three of EY’s four business lines.
The profitable units, which account for three-quarters of its annual €2.6 billion revenue, are now sitting in separate legal entities from its auditing business. Of the firm’s 11,000 employees, 8,000 as well as the units’ client relationships were also transferred.
“The legal entity that is subject to the Wirecard lawsuits is stripped of significant assets, which otherwise could have been used to cover damage claims,” said Joachim Lehnhardt, a partner at Quinn Emanuel Urquhart & Sullivan, which represents a number of large institutional shareholders who are suing EY. He said this made it “much harder to enforce claims” over the Wirecard audits.
In a worst-case scenario for claimants, the legal entity that is subject to the lawsuits, and currently generates €714 million in annual revenue, could even “be turned into an empty shell with no operative business and no assets”, Lehnhardt warned.
Berlin-based litigation lawyer Marc Liebscher, who is part of the legal team that is pursuing a class-action lawsuit against EY, said the changes were a “brazen move to protect the bulk of EY’s assets in Germany from the Wirecard litigation.”
Mr Liebscher and his colleges last week already filed a motion to Bavaria’s highest District Court, which is hearing the class action lawsuit, that the split was happening in bad faith hence constituting an “abuse of law”. In the motion, which was seen by the Financial Times, the lawyers demanded the court establish that all of EY’s German business units remain liable for potential damages.
Wirecard’s administrator Michael Jaffé, who late last year filed a lawsuit of €1.5 billion in damages against EY, is also highly concerned about the move and is evaluating legal steps against the reshuffle, according to people familiar with his thoughts. Mr Jaffé declined to comment.
EY said in a statement that its reorganisation aligned its legal structure in Germany with other European countries, adding that it was also reflecting diverging regulatory requirements for its different business lines. “The legal entity changes don’t have any consequences for the liability risk of current or former mandates or ongoing lawsuits,” the firm said.
However, people familiar with EY’s internal discussions acknowledge that the non-audit business lines will not be exposed to Wirecard litigation risks after five years, after a legally stipulated transition period will have expired. Litigation lawyers warn that the slow moving court procedures in Germany will almost certainly mean that the lawsuits will still be ongoing, pointing out that a similarly complex class action lawsuit over alleged misconduct by Deutsche Telekom dragged on for 19 years before it was finally settled.
They added that another key motivation was the increased liability of its auditors in Germany in the wake of the Wirecard scandal and the need to protect the other units from future potential liability claims caused by the audit work.
But Quinn Emanuel’s Lehnhardt pointed to the fact that EY in early 2024 also created an additional legal entity in Germany that meets the required legal and regulatory requirements to perform audit work. Should the professional service firm be sentenced to pay damages to Wirecard shareholders, it could shift its existing audit business into the new entity and declare the old one insolvent, he warned.
EY declined to comment on the legal motion that was filed to the Munich court last week.
A person familiar with EY’s thinking argued that the firm would never have been able to meet billions in damages claims as it does not possess meaningful physical assets and pays out all of its profits to its partners each year.
Bavaria’s highest District Court said it was unable to respond to a request for comment because of “procedural reasons”. It said in February that it was planning to hold the first hearing of the class action lawsuits this fall. – Copyright The Financial Times Limited 2024
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