Only five days after Gotham City Research published a report accusing Gowex of misleading investors, Gowex’s management has filed for bankruptcy protection in Spain. The company’s CEO, Jenaro Garcia, resigned and admitted that he had been publishing false financial accounts for at least four years.
For those of you who are not familiar with Gowex, it is a Spanish company that claimed to make a lot of money by offering free Wi-Fi service via Gowex hotspots, by partnering with telecom operators and municipalities (setting up free Wi-Fi hotspots for the latter), and by showing ads to people who log onto their Wi-Fi hotspots.
The company is listed on Madrid’s Alternative Exchange (Mercado Alternativo Bursatil or MAB) where it is not subject to rigorous reporting requirements (it is also traded on New York OTC and NYSE Euronext Paris). For example, Gowex was not required to file quarterly financial reports; twice a year was enough. The MAB was established to allow small companies like Gowex to raise capital without more onerous burdens. Today, investors dumped many of the shares of other companies listed on the MAB, out of fear that there are others like Gowex.
Gowex’s spectacular fall can be seen in this chart, which shows the stock trading around 20 EUR, then plunging to 5 EUR after Gotham City Research published its report on 1 July 2014. At one point in its brief and blissful existence, Gowex was valued at over $1 billion.
On the Eve of the Fall from Grace
Prior to July 1, Gowex and its CEO, Jenaro Garcia, had been the toast of Spanish tech world. Even as late as the 1st of July, when Gotham City Research issued its report, the mayor of Madrid, Ana Botella, visited the offices of Gowex and praised the company and its founder, Jenaro Garcia. Here’s a snippet from the 1 July 2014 Gowex press release:
Madrid, July the 1st 2014-. The Mayor of Madrid, Ana Botella, visited this morning the headquarters of GOWEX (GOW-MAB, NYSE Alternext ALGOW, LGWXY-ADR Program) the Madrilenian leading company in creating Wireless Smart Cities® all over the world. During the visit, the Mayor was accompanied by Dolores Flores, General Coordinator of Economic and Employments, Lorenzo Amor, president at the National Federation of Self-Employement and Pedro González, Trade and Business development Director at Madrid Emprende. During the visit, the Madrid Mayor highlighted the important work of its founder and CEO Jenaro Garcia, as an example of entrepreneur and businessman who has managed to turn a company that took its first steps in Madrid, into a world reference for the free WiFi. The president of the National Federation of Self-Employement, ATA, Lorenzo Amor highlighted how “Madrid is an example of the importance involving the cities’ development and transformation, the entrepreneurship in a smart city, which is not only where new technologies play the main role, but also able to detect and support talent. The city of Madrid and GOWEX are a clear example of the mutual benefit provided by the institutional support for entrepreneurship and self-employment in cities “. “It is a great honor that the City Council of Madrid emphasize the values and business career of GOWEX, since it is in this city where we launched five years ago one of our first projects in collaboration with AVPPM, (Newsstands Association of Madrid), WiFi Kiosks, which, thanks to its innovative value, has been largely responsible for our further success. Besides, thanks to the support of the Madrid Council, together we have managed to turn Madrid into a great WiFi Smart City, “says Jenaro García GOWEX CEO.
This lavish praise is what Gowex, its management and shareholders have been accustomed to over the past two years, as Gowex and its CEO have been given many awards, including the “Start-Ex” award from the Spanish government in early 2014. Gowex was voted “best new listed company” by the Federation of European Stock Exchanges (in November 2013) and the European Commission!
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Here’s a timeline of Gowex’s rapid fall from grace:
July 1, 2014 (Tuesday): Gotham City Research publishes 93-page report entitled Let’s Gowex: La Charada Pescanova – the Pescanovan Charade giving Gowex a target price of zero and stating that its revenues are largely a work of fantasy. On this same day, Gowex hosts the Mayor of Madrid, Ana Botella. Gowex contends that Gotham City Research is lying and threatens to sue Gotham City Research for defamation. Shares of Gowex plunge 46 percent.
July 2, 2014 (Wednesday): Gowex still claims Gotham City Research is lying. According to the Financial Times, “when the shares collapsed, triggering a suspension, the immediate response of regulators at Spain’s alternative stock market regulator, the Mercado Alternativo Bursatil, was to fire off angry missives to America’s SEC and the UK’s FCA. It wanted to “determine if there have been illegal operations” on the part of Gotham and its managers.” (Doesn’t the MAB look foolish now?)
Gowex’s share price plunges by another 26 percent. Gowex issues this July 2 statement in response to the Gotham City Research report (who knows now how much of this is true):
“Madrid, July 2, 2014-. GOWEX (GOW-MAB, NYSE Alternext ALGOW, LGWXY OTC Market), leading Company in creating Wireless Smart Cities®, updates the relevant fact published yesterday, July the 1st. The Company confirms that in 2013 it achieved revenues of 182.6 million euros, of which 25.4 million euros correspond to GOWEX Telecom and 157.2 correspond to GOWEX Wireless, equity of 94.4 million euros, net cash position of 54.8 million euros and having accrued 10.5 million euros in income tax.
These figures have been verified by a chartered account auditor (i.e. R.O.A.C. no 2691 Madrid).
GOWEX plans to carry out cumulative investments of 260 million euros for the period (i.e. from 2014 to end 2018) in addition to the cumulative investments of 60.6 million euros accomplished by the Company since 2011.
Furthermore, GOWEX intends to expand its level of job creation. Today, the Company generates direct jobs and indirect jobs. In order to reinforce the transparency, the Company has requested the submission of tenders to several prestigious audit firms, facing hiring in the coming weeks.
Moreover, GOWEX will increase the number of allied cities to its projects, business partners and customers. Currently, the Company offers its services in 91 cities, such as New York, Bordeaux, Madrid, Santiago de Chile, and Dublin amongst others. In addition, amongst its partners and customers are leading vendors such as Cisco, ZTE, Nintendo, AT&T. T-Mobile, iPass, Skype and Iberia.
No customer of GOWEX is a related party.
The Company notes that the independent stockbroker analysts have published target prices ranging from €17 to €31 per share. The market consensus is at a value of €23.97 per share.”
July 3, 2014 (Thursday): Trading in shares of Gowex is suspended. CEO Jenaro Garcia claims that Gotham City Research’s allegations are false and again threatens to sue Gotham City Research. CEO Jenaro Garcia writes a letter to the shareholders:
Following its request to suspend trading in the Company’s shares, the Board of Directors of LET’S GOWEX S.A. (mad:GOW)FR:ALGOW -24.93% (otcqx:LGWXY), hereinafter “GOWEX” or the “Company”, wishes to make available to the market the following relevant facts: As agreed with the relevant regulatory bodies, trading in the Company’s shares will remain suspended while GOWEX prepares relevant facts for publication which will seek to clarify the Company’s position following the unfounded and defamatory claims made earlier this week by Gotham City Research. The Company will make available to the market clear information on key facts without delay.
We remain at your disposal for any clarification deemed appropriate.
Jenaro García Martín
President of the Board of Directors
July 4, 2014 (Friday): Trading in Gowex shares remains suspended.
July 5-6, 2014 (Saturday and Sunday): The truth comes out. CEO Jenaro Garcia admits that he faked the accounts. Garcia resigns. Gowex’s board of directors decide to file for insolvency.
Here’s a screenshot of Gowex CEO Jenaro Garcia’s bizarre Twitter feed (I took this screenshot over the weekend of July 5-6). The earlier tweets show a positve, upbeat CEO who even goes out running, followed by a confession and a plea for mercy.
July 7, 2014 (Monday): The Gowex dream is over. The scandal spills over to other companies listed on the MAB, with shares of other MAB-traded firms losing 20 percent or more.