WiFi provider Gowex goes bankrupt and admits falsifying accounts

One of the brightest stars of the Madrid stock market imploded on Sunday, after WiFi provider Let's Gowex was forced to declare bankruptcy and admit that its chief executive and founder had falsified the company's accounts for at least the past four years.

In a statement, the board of Gowex said it had accepted the resignation of Jenaro García Martín after he took full responsibility for fake accounts.

"I made a voluntary confession in court. I want to collaborate with justice. I will face the consequences," Mr. García Martín said on Twitter. The posting followed a message saying: "I ask everyone for forgiveness. I am deeply sorry."

People walk past a kiosk with an advertisement for wifi provider Gowex in Madrid on July 3, 2014.
Gerard Julien | AFP | Getty Images
People walk past a kiosk with an advertisement for wifi provider Gowex in Madrid on July 3, 2014.

On Monday, the company's staff issued a statement saying they were "in a state of complete shock" and were "considering taking legal action", adding that they expected "support and prompt action by the authorities".

Gowex's collapse is likely to deal a heavy blow to investor confidence in the Spanish stock market and its regulators, coming so soon after a similar accounting scandal brought down Pescanova, the frozen fish group.

The admission of fraud also somewhat appears to vindicate Gotham City Research, the U.S.-based shortseller that highlighted alleged accounting and management failures at Gowex in a research note only last week.

It also came just hours after Gowex said it had hired PwC to conduct a forensic audit of its accounts in response to Gotham's note.

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Investors in Madrid's MAB alternative stock exchange took fright on Monday, sending down share prices across the board in a first response to the admission of accounting fraud at Gowex, one of the most prominent members of the MAB index.

Five of the 23 companies listed on Madrid's junior market fell by more than 10 percent in midday trading, with some stocks losing as much as 20 per cent of their value. El País, the Spanish daily, reported that at least four companies currently listed on the MAB were keen to leave the exchange, raising doubt about its long-term future.

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Shares in BME, the Spanish stock exchange also fell on Monday, amid investor concern that the Gowex scandal could inflict broader damage on the country's principal bourse. BME was down more than 3 percent in midday trading.

Short sellers, which also include Valiant Capital, had borrowed 2.8 percent of Gowex's shares, and are certain to reap significant profits from the company's collapse.

Trading in Gowex shares was suspended on Thursday after they dropped by about 60 percent in two days, wiping about €870m off the company's stock market value.

Gotham's report, which put a target price of €0.00 on Gowex shares, said as much as 90 per cent of the company's revenues did not exist, pointing out that—among other things—Gowex appeared to be managing far fewer WiFi hotspots than it claimed.

The shortseller also highlighted that Gowex was paying only a fraction of the audit fees that similarly sized companies paid, and that its auditing firm was a little-known outfit that lacked proper offices and did not have a business email address.

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Before Mr. García Martín admitted falsifying the company's accounts, he along with Gowex had hit back at the Gotham report, saying it was "categorically false."

Their broadside against Gotham was echoed by Spain's CNMV stock market regulator, which called on the US Securities and Exchange Commission and the UK Financial Conduct Authority to provide information about the shortseller. The CNMV also said it was investigating trading in Gowex shares before the release of the Gotham report.

Following Mr. García Martín's subsequent admissions, the company's official statement did not comment on the other allegations made in the Gotham report.

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Gowex, which is listed on Madrid's MAB alternative stock exchange and on NYSE Alternext, had been repeatedly hailed as a rare Spanish high-tech success story. Impressed by claims of rapid growth in sales and profits, investors drove up the company's share price more than 30-fold between Gowex's initial offering in 2010 and the all-time high last year.

As recently as November last year, it was named one of Europe's "Best New Listed Companies" by the Federation of European Stock Exchanges and the European Commission.

Gotham City Research, whose analysts include Daniel Yu, has published similar dossiers against four other companies since February 2013.

By Tobias Buck of The Financial Times