It is often said that the Federal Financial Supervisory Authority (BaFin) also violated its obligations in the Wirecard scandal. Thus, it should also be liable to the investors for replacement. The Federal Court of Justice (BGH) has now ruled that she is not liable. We explain what BaFin actually is, what duties it has and why it has not violated these according to the case law of the BGH, so that there is no liability of BaFin.

1st Wirecard scandal

Wirecard AG was founded in 1999 and included in the German Stock Index (DAX) in September 2018. The company provided information technology services related to electronic payments together with various subsidiaries. However, it was itself neither a payment service provider nor a credit institution. Wirecard AG was subject to financial market supervision and balance sheet control by BaFin. The financial statements and management reports of Wirecard AG were certified by the auditor, an auditing firm, with an unrestricted audit report for the 2018 financial year.

The publication of the annual and consolidated financial statements 2019 has been postponed several times. On 18 June 2020, Wirecard AG published an ad hoc announcement according to which the auditor had informed that the existence of bank deposits on escrow accounts to be consolidated in the consolidated financial statements totalled EUR 1.9 billion. there are still insufficient audit evidence. There are indications that incorrect balance confirmations have been submitted to the statutory auditor for fraudulent purposes. The amount of EUR 1.9 billion accounted for about a quarter of the Group balance sheet total.

On June 22, 2020, the Management Board of Wirecard AG announced by means of a further ad hoc announcement that alleged assets amounting to EUR 1.9 billion. Two banks in the Philippines are likely not to exist. Three days later, Wirecard AG applied for the opening of insolvency proceedings on its assets. This was opened on 25 August 2020 by the District Court of Munich. In previous years, there had been repeated media reports, in particular in the Financial Times, about various irregularities in the Wirecard Group.

2nd BaFin as federal authority

The Federal Financial Supervisory Authority (BaFin) is a federal authority. It carries out control and supervision activities. In addition to balance-sheet control, the subject of supervision is market abuse monitoring. In doing so, it performs a public task and is intended to serve the general public, as well as to secure the existence and further development of the state and society.

It follows from this area of responsibility that BaFin’s liability in the Wirecard scandal is problematic. The claim for compensation presupposes the third-party liability protection of the duty of office. This duty must exist precisely to protect the injured party. However, the national legislature has excluded the third-party protection in § 4 paragraph 4 FinDAG for individual investors.

3. Liability of BaFin according to the case law of the BGH

3.1.

The district court dismissed the claim for payment. The Oberlandesgericht has rejected the appeal of the plaintiff by order according to § 522 paragraph 2 ZPO. The review was not allowed. The plaintiff opposes this with his complaint. The BGH has confirmed the dismissive judgments of the courts of instance. However, further proceedings concerning BaFin’s liability are pending.

3.2. reason to consider BaFin’s liability

In the case of the decisions, the question is whether BaFin can be claimed for damages after the insolvency of Wirecard AG because of the massive share losses incurred during the investment. There are several breaches of duty in the room. In particular, the plaintiff claimed that BaFin had for years violated its legal obligation to investigate, prevent and report market manipulations of Wirecard AG and to provide accurate and complete information to the public and the capital market. It has not taken concrete indications of violations of accounting regulations by Wirecard AG as an occasion for a proper audit or proper information to the public. It should have taken control of the balance sheet at Wirecard AG.

3.3 Procedure for balance sheet control under the WpHG

As part of the control of the balance sheets, the WpHG provides for a two-stage control and distribution of competences. First of all, the German Audit Office for Accounting (DPR) checks. The DPR is a private-law organisation recognised by the Federal Ministry of Justice in the legal form of a registered association.

Only in exceptional cases does BaFin have to develop auditing activities at a second stage. Pursuant to § 108 (1) sentence 2, § 107 (1) sentence 1 WpHG a.F., BaFin ordered an audit of the accounts under its own responsibility insofar as there were concrete indications of a breach of accounting rules and at the same time the audit authority reported to it that a company refused to cooperate in an audit or did not agree with the result of the audit (§ 108 (1) sentence 2 number 1 WpHG a.F.) or that there were significant doubts as to the accuracy of the audit result of the audit authority or the proper conduct of the audit by the audit authority (No. 2). This applies, inter alia, if the audited entity refused to cooperate with the verifier or there were serious doubts as to the proper performance of the verification by the verifier.

BaFin has a margin of appraisal for these cases after the statutory determination (“concrete indications”, “significant doubts”). This margin of appraisal leads to the fact that the actions are not to be checked for their correctness, but only for their acceptability. The ex-ante view is crucial. Reasonableness may only be rejected if the decision in question is no longer comprehensible if the interests of a functioning criminal justice system are fully appreciated.

3.4. No liability of BaFin

3.4.1. Indications concerning irregularities

The BGH has dealt with the various clear indications of economic difficulties and problems of Wirecard AG, among others from the press, in different periods before the insolvency and the initiated and carried out activities of BaFin.

The Financial Times published January 30 and January 1 and 7. Referring to internal documents of Wirecard AG and investigations by the law firm R. & T. Singapore LLP, the suspicion that sales of Asian subsidiaries with the knowledge of Wirecard AG board members were faked by front companies and wrongly accounted for. Subsequently, premises of the Wirecard subsidiary were searched in Singapore.

3.4.2. No breach of duty by BaFin

BaFin already opened on 01. February 2019 investigations into market manipulation by both market participants and Wirecard AG. It addressed requests for mutual assistance to the supervisory authority in Singapore and requested Wirecard AG on 8 August. February 2019 and March 28, 2019 to comment on the allegations. On February 15, 2019, BaFin asked the auditing authority to review the shortened consolidated financial statements of Wirecard AG, including the management report as of 30. June 2018. On 29 March 2019, Wirecard AG requested the submission of the final report of the law firm R&T Singapore LLP, which was submitted to it on 29 July 2019.

As a result, BaFin has, on the one hand, taken investigative measures within the meaning of § 6 (3) WpHG and, on the other hand, carried out the examination of the shortened consolidated financial statements as of 30. June 2018 according to § 108 paragraph 2, § 107 paragraph 1 sentence 1 WpHG required.

In view of the fact that Wirecard AG had commissioned the law firm R. & T. Singapore LLP with external investigations precisely because of the allegations made, it was in any case not discretionary that BaFin first tried to investigate and clarify the facts with the participation of Wirecard AG. The refusal of a search measure pursuant to § 6 paragraph 12 WpHG a.F. in order to secure or seize documents and data was justifiable at this (early) stage of the procedure in order to maintain proportionality.

In addition, the investigations related to foreign affairs. Therefore, it was appropriate to wait for the investigation by the competent authorities in Singapore, as search operations had already taken place there. In addition, the verification by the verifier was still ongoing. Furthermore, the consolidated financial statements for the 2018 financial year prepared on 24 April 2019 were accompanied by an unrestricted auditor’s report.

3.4.3.

Under these considerations, the BGH assumed that BaFin’s measures for market surveillance and balance sheet control were not objectionable and were therefore in any case well acceptable. It is worth noting that BaFin’s actions must not jeopardize the activities of the law enforcement authorities. Therefore, it must inform the authorities of its state of knowledge. On the other hand, she must be rather cautious with her own actions and investigations. This has a restrictive effect on the content and scope of BaFin’s duty to perform its duties.

Furthermore, it is not necessary to examine whether the provision of § 108 (1) second sentence number 2 WpHG contradicted Article 24 of the Transparency Directive and therefore the standard must be interpreted as meaning that simple doubts already gave rise to a direct obligation to examine BaFin. There are no significant doubts or simple doubts. The decision of the defendants to leave the audit to the DPR was in any case reasonable. This is to reject a liability of BaFin.

3.5.

The BGH has not further checked whether the performance of tasks by BaFin provides third-party protection for the individual victims. § 4 paragraph 4 FinDAG rejects third-party protection in principle. The compatibility of this standard with European law is therefore crucial. However, the BGH regarded this as irrelevant in the dispute, so that it did not come to the submission to the ECJ. This question has therefore remained open. The non-response was possible because the BGH did not accept a breach of duty. If the duty is not already violated, it does not matter whether the duty is third-party protective.

4. No liability of BaFin: Effects for practice

The BGH has reviewed the justifiable actions of BaFin. This is likely to have led to a preliminary decision regarding further proceedings in the Wirecard scandal. It is not to be expected that the BGH will now come to an irresponsibility and thus liability in other proceedings. The legal treatment of BaFin’s liability should have come to an end.

In the matter, however, the BGH makes it much too easy. Doubts of any kind about a proper audit by the DPR finally had to force themselves on BaFin. Because BaFin, as a cooperation partner of the DPR, knew that an examination at their request, as with Wirecard in previous years, had taken between 8.0 and 8.4 months. These figures were also even on the homepage of the DPR. Accordingly, from the time these 8.0 or 8.4 months were exceeded by the DPR doubts (whether simple or significant).

Internal mails cited in the press showed that BaFin only asked in May 2020 why the examination took so long. In response, absolutely chaotic states were revealed in which DPR were revealed. Here, too, doubts had to be imposed and forced to act. Therefore, it was absolutely indefensible on the part of BaFin, especially in the light of the BGH jurisprudence, not even to act quickly in May 2020 and to draw the examination procedure itself. However, even the lower courts did not sufficiently deal with these issues. The reason for this is probably the lack of a claimant’s argument on this. Furthermore, the clarification of the scope of Section 4(4) FinDAG is of fundamental importance.

It seems, therefore, that the decision was the result of a tragic combination of inaccurate research and, accordingly, incomplete factual submission by the plaintiff with several instances which have the case recognizably quickly off the table and did not want to put the official liability and the exclusion of claims of § 4 (4) FinDAG under scrutiny.