Spanish Tech Company Admits It Is A Fraud Following Short-Seller Report

There was a time when reports issued by short selling-focused research shops such as Muddy Waters would usually result in disparagement lawsuits by the targeted company (typically a  reverse-merged Chinese fraudcap), seeking to shut said short-sellers and restore confidence in the company (when the best way to restore confidence would have been for the company to simply buy back its shares at severely depressed values).

However, the reputation of such bearish-biased research boutiques is set to soar following the latest fiasco involving Spanish mid-cap tech company Let's Gowex (GOW), a Madrid-based provider of Wi-Fi connections and support services for mobile-phone carriers, which a week ago was the subject of a research report by Gotham City Research (whose work has deservedly appeared in the past on Zero Hedge) and its Twitter frontliner @LongShortTrader.

In the report, Gotham predicted that "Gowex shares are worth €0.00 per share." It added that over 90% of Gowex’s reported revenues do not exist noting that "we estimate GOW’s actual revenues to be <€10 million."

Its conclusion: "the shares will be suspended, just as Pescanova’s shares were suspended." Needless to say at the time Gowex vehemently denied the report saying all its allegations were false.

Gotham was right: after the stock crashed by 50% in the days after the release of the report, on July 3 Gowex SA was suspended from trading, and overnight, the CEO admitted his company is a fraud and, as Bloomberg reports, Let’s Gowex will file for insolvency and said its chief executive officer resigned after admitting he presented false accounts for at least the past four years.

The board of the Madrid-based provider of Wi-Fi connections accepted CEO and founder Jenaro Garcia’s resignation after he took full responsibility for fake accounts, the company said in a regulatory statement today. Gowex shares have dropped 60 percent since July 1, when short-seller Gotham City Research LLC said the start-up was worthless, claiming the company inflated revenue.

Aside from humiliation for an entire sell-side following which ignored the clear warnings signs and pushed the stock to a market cap of some $2 billion before the Gotham report, this is also a hit to the Spanish stock market.

Gowex’s fast growth, with a market value that more than doubled between going public in 2010 and the release of Gotham’s report, was a rare success story in a country that has failed to foster successful technology start-ups with global reach. The company was also one of the best performers in Madrid’s small-cap MAB stock index, an alternative funding source for small companies in line with a government drive to promote financing options for businesses.

It isn't going to be performing that well now that it is worth precisely the €0.00 Gotham predicted. Perhaps what is most shocking is how quickly the company folded and admitted it had been cooking the books - it is almost as if it didn't even bother preserving some value while selling shares to idiot BTFDers.

That said, we are confident that the CEO will surely avoid prison time for defrauding investors and cooking the books for 5 years. After all he apologized: "I made a voluntary confession in court,” Garcia said on Twitter today - voluntary, that is, only after the jig was up. "I want to collaborate with justice. I will face the consequences." The posting followed an earlier message in which he said he was apologizing “to everybody. I am truly sorry."

Below is the full statement released by the company early this morning:

 The Board of Directors of the Company announces that on July 5 2014, at 16’00, at the Company's offices, Mr. Jenaro García Martin, Chief Executive Officer and President of the Board, has declared in the presence of different Board Members that the financial accounts of the Company for the last four years, at least, do not show a full and fair view of the Company’s situation, taking responsibility for this falsity.


The Board, as stated in the minutes of the meeting, signed by the Board Members attending the session (Mrs. Solsona Piera, Martínez Marugán and García (attending the meeting both on his own behalf and representing the Board Member Ms. Maté),has revoked all powers and delegations granted to the Chief Executive Officer and has accepted his resignation.


The Board, anticipating that the Company might not be in a position to face its ongoing debts when they become due, has agreed to file for a declaration of voluntary insolvency, without prejudice of other measure that it may adopt for the best protection of the Company’s interests, regarding which it will immediately inform the market as soon as it might  adopt them.


The Board resolutions shall be notarized by exhibition of the minutes, as it has not been possible to certify their contents, since the Board has accepted the resignation of Mr. Garcia Martin and  has not appointed a new President.


We remain at your disposal for any clarification deemed appropriate.

This latest loss of confidence in a rigged market will likely mean that all other companies trading on Spain's MAB stock index are about to be monkeyhammered:

It looks like an isolated case in the Spanish context, but I do think it is significant in the context of MAB -- it’s a market that’s relatively new and has had some failures and the vigilance of the information about the companies has not always been adequate,” Jose Ramon Pin, a professor at the Barcelona-based IESE business school, said in a phone interview.


The MAB is a “market basically for SMEs and sort of company that quotes there tends to have more aggressive strategies,” he said.


Gowex is one of 23 stocks listed on the Madrid’s MAB index, which includes companies from toy retailer Imaginarium SA (IMG) to carbon fiber manufacturer Carbures Europe SA (CAR), whose stock is up 114 percent this year. Zinkia Entertainment SA (ZNK), which produces a cartoon television series, sought creditor protection last year.

Every bubble eventually bursts. As for Gotham and @longshorttrader congratulations on not only being contrarian and doing another tremendous piece of research, but, more importantly, being right. Curious what other names Gotham Street hates? Here is a sampling: Ebix Inc. (EBIX), The Tile Shop Holdings Inc. (TTS), Blucora Inc (BCOR), and Quindell Plc. (QPP)

Gotham's full research report is below.