The fall in the share price of Wirecard due to speculation about balance sheet manipulation has hit shareholders quite unexpectedly. Now many are looking for legal representation to file a lawsuit. Because Wirecard has apparently hesitated for a long time to inform its shareholders via ad hoc notification about the imminent, significant price losses. But many affected investors, who are now seeking a lawsuit, wonder who they should now sue against. After all, the focus is on Wirecard AG, its Executive Board and bodies as well as the auditing firm it commissions and BaFin. In addition, there is uncertainty among many concerned as to how to deal with the costs of legal assistance and court costs, if no legal protection insurance applies. Some try to handle the financing through process financiers. These assume both the legal fees and the possible legal costs. In return, they will receive a certain share of the possible compensation payment.

At least in fiscal terms, there is a little comfort. Because losses when trading in shares can be offset against profits from other share transactions in the tax. This applies both in the year in which a loss occurs and to future gains if there are no gains before. A loss transfer into the previous year, however, is excluded.

In the video we explain the legal consequences of the scandal around the Wirecard share and the possibilities to sue for damages.

1st starting point Wirecard share

In recent years, Wirecard AG as a DAX company has been one of the great points of light in the German financial firmament. It also shone far into the international financial universe and magically attracted investors large and small. Now this sun suddenly explodes as a supernova and collapses visible to all to a black hole for millions and billions of euros invested in it.

What came to the shareholders of Wirecard AG in mid-June 2020 will probably remain in their memory for a long time. Allegations and backgrounds will probably continue to romp in the media for quite some time, but calm will probably only come when the courts involved have passed their judgment and the current insolvency administrator has stifled his task. And of course, with the Federal Financial Supervisory Authority (BaFin), the state supervisory authority is now also obliged to take a stand in order to transfer possible own mistakes or shortcomings into a process that leads to improved protection for investors in the future.

2nd Wirecard: claims of shareholders

In the meantime, the shareholders of Wirecard AG affected by the financial scandal are more interested in the steps now to be taken than in the current share price of their former hopeful on the stock exchange. Who is responsible for this significant fall in the price of Wirecard shares? What is the consequence of this? Are shareholders entitled to compensation? And if so, by whom? Of course, then there is also the question of how one can claim his claims. After all, litigation is far from easy – especially in financial terms. This also applies if many claims of the same kind are put forward in bundled form in a class action.

Even if we cannot ask for information about the future of the upcoming legal dispute with these questions, hoping to know the truth of tomorrow today, we know how to deal with losses from stock transactions at tax. For this purpose, we will provide you with information that will hopefully also be of use to you in this aspect. But let us first explain a few points about the legal measures, which are certainly now more prominent among the shareholders concerned.

3. The four defendants in the Wirecard scandal

First of all, we look at who might be responsible for the Wirecard scandal and what it may be. If this is justiciable, then you at least already know those or even those people who can sue for damages.

Basically, one assumes here a tort law claim that is based on civil law and securities trading law, whereby the EU regulation on market abuse (MMVO/MAR) also plays a role. The accusation is that Wirecard AG would have had to comply with its obligation to inform its shareholders about the imminent, massive price loss much earlier. Although it seems that there have been quite different actions in which one may assume criminal energy, it is this aspect in particular that promises the greatest prospect of compensation. Whoever neglected or even delayed all this duty and which motives played a role in it is therefore of course also important.

Defendant Number 1: Wirecard AG

The damage to the shareholders arose because Wirecard AG, in simple terms, was worth less than stated – or specified. Apparently, the trickery to outwit the stock market and financial investors to artificially increase the value of the company has been grabbed. On the one hand, this is the responsibility of the public limited liability company, which as a corporation also constitutes a legal person, which can thus be sued. On the other hand, certainly the board, the real decision-maker in this matter. So there is either a claim for damages against their D&O insurance (liability insurance) or perhaps even against them.

Defendant Number 2: The organs of Wirecard AG

Thus, a number of natural persons bear the actual responsibility for what was decided in the company. In terms of the scandal, these are the people who had the overview of the actual financial situation of Wirecard AG. In addition to the Executive Board, this also includes the Chairman of the Supervisory Board and its members. As such, they have a duty to warn shareholders and inform them about the connections in an ad hoc report in the media in all events that can mean a significant price loss. Now the accusation is that this ad hoc publicity obligation according to Article 17 paragraph 1 of the MMVO was complied with far too late. As a result, they, too, are targeted as defendants in civil court proceedings and criminal prosecution in the wave of actions now underway.

When EUR 1.90 appears on a balance sheet as capital that has no relation to reality, this is often a matter to which an auditor attaches little importance. However, if it is EUR 1.9 billion, then one would think that this is already attracting some attention. Especially when such a renowned name as EY was responsible for auditing at Wirecard AG for many years. Therefore, many plaintiffs also see a certain responsibility in the auditing company, against which they now also take civil action.

3.4 Defendant No. 4: BaFin

In fact, it seems that even state supervision has a certain responsibility in the Wirecard scandal. Because its function, it should be nice that it should protect against such alleged fraud in the financial sector. It is therefore reasonable to conclude that partial liability must also be claimed here. So the BaFin comes into question as a defendant party.

Costing process, process financing helps

Anyone who has taken out legal expenses insurance, which also applies in the present case, only needs to commission a suitable law firm to represent his interests. But even those private investors who do not have adequate protection can use ways and means to also get their right to damages. The magic word for this is process financing.

litigation financing is an investment method in which investors bet in some way that the party you support in damages proceedings will win the process. Because in return for the investment in the necessary legal support of the plaintiffs, the legal financier receives a share of the awarded damages. Of course, there is also a risk for the investor that the court sees the matter differently. But at least the plaintiff bears no further financial risk.

5. tax offset losses on shares with just such profits

5.1 Loss offsetting and loss carry forward

For once, in this article we only come to the tax aspects of the topic at the end. But this may be a small pavement for Wirecard shareholders. Because who now sells his Wirecard shares, which you may have bought at a price of EUR 100, for only EUR 2.50, has experienced a tax-related loss. This loss is offset against profits of the same kind in the taxation of income from capital gains. Profits of the same kind are applicable here exclusively to those profits which are also related to the trading of securities. A crediting of losses from the Wirecard debacle to dividends received from other sources is excluded.

Also excluded is the offsetting of losses with profits from the previous year. In principle, there is the possibility of a loss transfer in income tax law. However, the legislature has excluded this for income from capital assets of this kind.

Even if there are no further gains from trading in other shares during the investment period in which the loss occurs due to the sale of the shares, the loss remains. It can then still be offset against profits made from trading stocks in subsequent years. This loss carry forward therefore knows no expiration date.

5.2. Tax treatment of compensation payments

If, however, damages are actually paid to shareholders, this may result in them being taxable. If they are directly linked to the offsetting of a loss of taxable profit, then these benefits are considered to be equivalent to the expected profit. This would therefore be the case if shareholders were compensated for the price losses of their shares.

If, however, there is only an indirect connection between a compensation payment and the loss of profit, then there is no tax liability for income tax. The reason for this is that such compensation does not correspond to any of the types of income enshrined in income tax law. This could be the case, for example, if a judgment should confirm claims for damages by shareholders against the auditing firm.

6. An Afterword to Think

6.1 Direct economic consequences of the Wirecard scandal

Wirecard shareholders may use offsetting their loss with other gains as a comfort pavement. But this event has a whole series of other consequences. The vast majority of those affected will have to do without state-tax comfort. First and foremost, we also want to think of all the honest employees of the public limited company, whose job is threatened by insolvency or even lost. Furthermore, Germany as a financial market has to expect effects from the scandal, which in turn will shake up further jobs in the financial sector. It is also a question of trust in Germany as a location that comes to the fore in such events and will also have an influence in the future when making decisions as an investor when investing. Smaller investors in particular will now more than once consider whether they should continue to invest in shares of well-known corporations in the future. This will certainly have further economic consequences for the people of Germany.

6.2 Tax policy aspects of the Wirecard scandal

Thus, two tax policy effects of the financial scandal are intertwined. On the one hand, the Federal Republic of Germany escapes the tax due to these developments around the Wirecard share, which was to be expected from the hoped-for profit of the shareholders. Instead, future taxes are also lower by offsetting with these losses. And secondly, this event will also affect all other citizens in our country beyond the shareholders, albeit indirectly and thus not noticed or quantified by anyone. Because if the state escapes taxes, either some cuts in the federal budget for a compensation, or higher taxes elsewhere fill the gaps.

The most likely is to expect both consequences. The direct loss of taxes due to the Wirecard scandal may actually be small, especially compared to the total tax revenue in Germany. But the fact that this can be perceived as anything other than improving the situation at a time when the economy is already confronted with the effects of the corona pandemic, so that it needs government support, needs no further explanation.