Over the weekend, Spanish company Let’s Gowex, which provides free wifi for public spaces like malls and town centres, filed for involuntary insolvency. The company’s CEO, Genaro Garcia, also resigned after telling the company’s board that its financials over at least the last four years were falisified.
The same day as the company’s statement that it would file for insolvency, Garcia tweeted, “I apologise to everyone. Sorry wholeheartedly.” Garcia has subsequently tweeted that he made a deposition and confession in court and is willing to accept the consequences.
On its own, news that a company is going out of business because it was cooking the books for several years is a big deal, but there is an added wrinkle for Let’s Gowex: they got found out first.
Gotham City Research published a research report on Let’s Gowex on July 1 that said Let’s Gowex’s shares were worthless and that more than 90% of the company’s revenues were made up. Gotham City is an independent research firm that focuses on special situation investing, and typically publishes short theses on companies.
At the time of Gotham’s report, Let’s Gowex’s market cap was €1.43 billion. Let’s Gowex’s 2013 revenues totaled €182 million, and Gotham believes that more than 90% of these didn’t exist. Gotham said that it believed Let’s Gowex’s 2013 revenues actually totaled just €8 million.
Gotham City’s report, which it published after 8 months of diligence on Let’s Gowex, was initiated after the firm found a number of red flags at the company, among them that Let’s Gowex failed a basic “smell test” of investing: performance relative to peers. On that basis, Let’s Gowex’s double-digit revenue growth far outpaced peers like Towerstream, Boingo, and iPass that also provide wifi services.
Following Gotham’s initial report, Let’s Gowex said the report, “has major factual inaccuracies and false statements which the Company considers defamatory.”
On July 4, Let’s Gowex said it hired PriceWaterhouseCoopers to examine the company’s financials.
Two days later, the company declared itself insolvent.
The collapse of Let’s Gowex should see Gotham City not only turn a financial profit but a reputational one as well.
Gotham City, like Muddy Waters Research, Citron Research, and The Street Sweeper, publishes independent research on publicly-traded companies online, often outlining what they perceive to be major flaws in a company’s business model or accounting practices.
Research from these publications is divisive. Some in the market describe it as unfair “hit pieces” on companies, while others would say this work is important because it keeps companies honest; Gotham, Muddy Water, and Citron are open about their potential to profit from a stock move following the publication of their report.
These reports can often move stocks, but a company going out of business almost as soon as a sceptical report is published is unheard of.
The collapse of Let’s Gowex also has some bigger market implications. A Bloomberg report on Let’s Gowex’s demise noted that the company was one of the best performers in Madrid’s MAB stock index, an index for small companies in Spain that Bloomberg called, “an alternative funding source for small companies in line with a government drive to promote financing options for businesses.”
Let’s Gowex, however, isn’t the only company that has recently come under scrutiny from Gotham City. In April, Gotham said that Quindell, a U.K.-based software and consulting company, had 92% downside.
In February, Gotham City published a report critical of Blucora, formerly Infospace, which provides online search solutions with Gotham saying its shares are worth no more than $US5.
Last year, Tile Shop and Ebix, were among the companies targeted by Gotham City reports.
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