By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit.

Until last week, Gowex’s business – installing and maintaining free Wi-Fi in public spaces such as streets, train stations and newspaper kiosks – had been growing at lightening pace. It had secured contracts with over 70 global cities, including New York City. And its value on the stock market was rising – last Monday it was valued at €1.4 billion. The problem is that it was all a sham; and today, seven days after GothamCity’s brutal market intervention, the company is practically worthless – just as GothamCity had warned in the 90-page report it published last week.

In the document it released on its website, Gotham laid out a series of incongruities in Gowex’s reporting practices. Here’s a quick round-up (you can read the full report here):

• GOW’s audit fee is €40,000 – roughly 10 percent of what it should be if Gomex’s reported revenues were genuine. What’s more, Gowex’s auditor is an unknown entity and is listed at a private domicile in one of Madrid’s less reputable neighborhoods.
• Gowex told some investors that New York City was paying them €7.5 million for its services. GOW told Gotham it was €2 million. According to New York City, the real number is less than €200,000.
• The head of investor relations is the CEO’s wife, who signed off on GOW’s annual reports.
• CEO Jenaro Garcia was a Director of Advanced Refractive Technologies, a penny stock fraud whose shares were revoked by the US Securities and Exchange Commission.

Now for the bombshell:

• Gowex’s actual Wireless revenues are at most 10% of what GOW reports in its financial statements.

From Denial to Confession, in Five Short Days

At first, Gowex did what all other Gotham City targets had done: it went on the counterattack. As the value of its stock plummeted, the firm accused Gotham of defamation and announced its attention to hire PwC to audit its accounts. That was on Wednesday and Thursday last week. Then the CEO, Jenaro García, gave a rousing speech to employees laden with corporate platitudes and empty bromides. He even joked that Gowex would soon be providing Wi-Fi for Gotham City. That was on Friday.

On Saturday, the game was up. García admitted to the administrative board of Gowex, and then on Sunday in the courts, that he had cooked the books over the last four years, meaning that he is now facing charges of falsifying documents and fraud. He also published a tweet in which he begged for forgiveness from all those affected and promised to assume “the consequences and collaborate with the justice system”.

Financial Fallout

However well-intentioned it may have been, García’s apology is unlikely to repair the damage done to the thousands of investors who bought into the company and are now completely trapped. The shares lost 60% (900 million euros) of their value last week before trading was suspended. And they are likely to lose the remainder of their value, given that the company has already sought protection from its creditors.

In its 2013 accounts, the company recognized that its financial debt was €29.8 million – double the amount for 2012. The biggest loans, for €8.92 million, came from a number of unspecified private banks. Among the company’s other creditors are public institutions backstopped by taxpayers, such as Spain’s Industry Ministry, which granted soft loans worth €4.8 million; the European Investment Bank (EIB) and the European Investment Fund, which lent €3 million each; and the Center for Technological Industrial Development (CDTI), which is part of the Economy Ministry and lent €420,000 to the firm.

However, arguably the greatest victim of Gowex’s collapse is the credibility of Spain’s market institutions and the regulators charged with protecting investors from fly-by-night fraudsters such as García.

By far the worst affected institution is the Alternative Stock Market (MAB), where Gowex has been listed since 2010. The MAB was set up in 2009 to help provide private financing for some of Spain’s fastest growing SMEs. However, as critics have been arguing for years, the exchange offers little transparency and sorely lacks professionalism. Now, given that (a) Gowex accounted for roughly 50% of total stock on the exchange; and (b) a growing number of MAB-listed companies now intend to delist from the exchange, including the largest remaining firm, Carubures, the days of Spain’s mini-Nasdaq may well be numbered.

More Gothams Needed

If nothing else, the Gowex case highlights the vital service provided by contrarian analysts like Gotham. Until last week Gowex was one of the most recommended stocks in Spain, including among the country’s biggest banks. It was also a darling of the establishment, featured in countless newspaper articles and news reports. Indeed, at the very moment that Gotham released its note, Gowex’s Madrid HQ was receiving a visit by Ana Botella, the Mayor of Madrid and wife of former Spanish premier José María Aznar.

In short, García and his small band of fellow hucksters were able to pull the wool over the eyes of Spain’s establishment and investment community for four long years. But that’s not all: it also hoodwinked some of the world’s most powerful investment funds, including NY-based hedge fund TIAA Cref Investment Management; the French firm CamGestion (belonging to BNP Paribas); JP Morgan Chase; Santander Asset Management; Credit Agricole, Axa Funds, and Blackrock.

With total expenses of just 50,000 euros and eight months of painstaking research, Gotham City was able to wipe out almost all of these giant fund’s shares in Gowex, while no doubt pocketing handsome returns from its own shorts. After taking its first ever full scalp – until Gowex all of its targets had survived, albeit in a much weakened state – the anonymous group will no doubt fade back into the darkness, as it prepares for its next assault.

But before doing that, it released a brief message on its website, including the following excerpt:

Question: Who is to expose the misdeeds of such fraudsters?

Answer: Short sellers… Auditors, regulators, lawyers, investment bankers, and others rarely detect fraud. Insiders and short sellers do.

Given the scope and scale of regulatory capture and audit failure in this post-Enron age, it’s hard to fault Gotham’s reasoning. And considering that fraud has in many ways become the model du jour of 21st century finance, perhaps we need more Gotham Cities to defend us. And hopefully one day, they might begin focusing their attention and energies higher up the corporate food chain. By Don Quijones.

Also by Don Quijones: Negotiations behind closed doors are under way to water down all forms of financial regulation on both sides of the Atlantic via the Transatlantic Trade and Investment Treaty. Leading the charge: not the US government, but an unholy alliance between the European Commission, Wall Street, and the City of London. Read…. A Dark Alliance: European Union Joins Forces With Wall Street

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