Six suspicious things about Gowex investors should've spotted sooner

The Spanish Wi-Fi provider has filed for bankruptcy and admitted its accounts were falsified. Here are the red flags that should have raised eyebrows.

by Rachel Savage
Last Updated: 02 Jan 2015

Every now and then a corporate fraud comes along that is so audacious everyone throws up their hands and admits the wool was drawn over their eyes. Hindsight, though, is a wonderful thing and in retrospect it can all look rather obvious.

Such is the case with Gowex, a Spanish Wi-Fi provider, which filed for bankruptcy yesterday after admitting its now ex-chief exec Jenaro García Martín had falsified accounts for the last four years. Not quite as big a deal as Enron, but another case of seriously hoodwinked investors.

García Martín also tweeted he had confessed, in Spanish and then badly-spelt English.

The company, whose now-suspended shares had risen by as much as 22-fold since listing two years ago, had said just last Friday it was hiring PwC to comb through its accounts after mysterious shortseller Gotham City Research published a damning research note on July 1st targeting a share price of €0.00 and claiming ‘over 90% of Gowex’s reported revenues do not exist’.

It appears to vindicate Gotham, which has been publishing scathing research on a barely-there Wordpress site since February 2013 and can only be contacted by an email form – no phone number or registered address in sight. In April it took a damning swipe at insurer Quindell, listed on London’s AIM market, which has threatened legal action in response after its shares plunged by more than two-thirds.

Even after one of its arrows most definitely found its mark, there is no word on whether Gotham will emerge from the shadows or retain its Batman-esque mask. Here, though, are some of the red flags it waved that helped to bring down Gowex.

1.  Audit fees were 5-10% of competitors’

Gowex paid a mere €68,500 (£31,700) in audit fees in 2013, according to the research note. That was just 0.04% of its reported revenues of €182.6m, whereas competitors including Boingo and iPass paid as much as 40 times more to bean counters, as a proportion of annual sales. Gotham concluded ‘its audit fee makes sense if their actual revenue is <€10 million’.

2.  Its auditor worked out of an apartment

Gotham claimed to have visited Gowex’s auditor, which is almost unknown in Spain. It apparently worked out of one room in an apartment and didn’t even have a business email address. Curiouser and curiouser…

3.  It lied. A lot.

While Gowex has now admitted its accounts have been made up for at least the last four years, it had a history of apparent bare-faced lies which more eagle-eyed investors could have spotted sooner. One of a litany of alleged porkies told by the company includes apparently claiming it had spent €50m on lobbying the EU, which it then updated to a mere €5,000 when queried by the EU’s Transparency Register.

4.  Its largest customer probably didn’t exist

According to excerpts of Gowex documents posted by Gotham, a company called Seansuntel was its largest customer and supplier. Except a cursory Google suggests it probably doesn’t exist and the research claims the two operated from the same IP addresses. How very murky.

5.  The CEO’s wife headed investor relations

Husbands and wives can work together just fine, but, when added to all the other evidence the mysterious Gotham appears to have gathered, it does seem pretty fishy that García Martín’s wife not only schmoozed investors but also signed off accounts the company has now admitted were falsified.

6.  It didn’t provide basic metrics

Finally, Gowex didn’t provide metrics like how many Wi-Fi hotspots it provided or breakdown revenues in any detail. You’d think investors would want to know, but it seems they were drawn in by a company that now looks like it was in fact too good to be true.

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