Former Wirecard CEO Markus Braun has been arrested on charges of inflating the company's balance sheet, prosecutors in Munich said on Tuesday.
Braun resigned on Friday after the German payment service provider said auditors at EY couldn't locate 1.9 billion euros ($2.1 billion) of cash on its balance sheet. On Monday, the company said it was likely that those funds do not exist.
Prosecutors said that Braun turned himself in on Monday evening after a warrant was issued for his arrest. On Tuesday, prosecutors said he would be released from custody as soon as he has posted 5 million euros in bail. He would have to report to police weekly, they added.
When contacted by CNBC Tuesday, a spokesperson for Wirecard said it was "currently not making any further statements."
Braun is accused of having inflated Wirecard's total assets and sales volume through "feigned income" from transactions with third parties to make the company appear more attractive to investors and customers, prosecutors said.
They are investigating a 1.9 billion-euro black hole in the company's balance sheet after its search to find the missing funds appeared to hit a dead-end last week.
Two Philippine banks alleged to be holding the funds both denied any business relationship with Wirecard and said rogue employees had falsified documents linking them with the company. The Philippines' central bank also said Sunday that the money hadn't entered the country's financial system.
As the accounting crisis deepens, Wirecard is now fighting for its survival. The company said Monday that it was in talks with lenders on continued access to credit and has hired investment bank Houlihan Lokey to come up with a "sustainable" financing strategy. It is also looking at a potential restructuring that could see some business units terminated.
Felix Hufeld, president of German financial regulator BaFin, said Monday the Wirecard situation was a "scandal" and a "total disaster."
On Tuesday, the watchdog filed an updated case against the company looking at "suspected market manipulation." BaFin said Wirecard's admission that the missing cash flagged by EY likely does not exist had "heightened" its suspicions that the company's accounts for 2016, 2017 and 2018 were "incorrect."
"This has also strengthened BaFin's suspicion that, in these annual financial reports, the company disseminated information that gave false signals with regard to the share price of Wirecard AG and that the company thus violated the prohibition of market manipulation," BaFin said in a statement.
The watchdog has come under fire over its decision last year to temporarily ban short-selling in Wirecard shares.
Wirecard shares have crashed more than 80% since Wednesday as a result of the crisis. They moved about 16% higher in Tuesday's session following news of Braun's arrest.
Neil Campling of Mirabaud claims to have been following the Wirecard story for two years and has a zero price target on the company. The tech analyst said in a recent note that he thinks Visa and Mastercard will "revoke their licenses" as Wirecard is in breach of the payment networks' codes of conduct.
"We continue to closely monitor developments and assess new information as it becomes available," a Visa spokesperson told CNBC by email. "Our priority is, and will always be, maintaining the integrity of the Visa payments system and protecting the interests of consumers, merchants and our clients."
Separately, Mastercard told CNBC: "We are following these developments, but are not going to comment on specific customer conversations or situations."