Kapow! Gowex falls foul of Gotham report

Spanish wifi provider Gowex was recently valued at €1.9 billion after a stratospheric share price rise, only to file for bankruptcy last Sunday after its chief executive admitted to falsifying accounts.

The catalyst? A blog post on a simple Wordpress website issued by a secretive short-selling outfit that claims to be motivated by a Batman-like desire for corporate justice.

Not many investors will have waded through the damning 93-page report issued last week by Gotham City Research; the blog post summary told them enough. More than 90 per cent of Gowex's revenues did not exist, Gotham estimated; the shares were worthless, and would soon be suspended.

While this is Gotham’s biggest victory to date, its reports invariably send shivers through the stock market.

In April, it said up to 80 per cent of profits reported by British insurance-outsourcing business Quindell were "suspect", describing the firm as a "country club built on quicksand".

Like Gowex, Quindell shares had soared over the previous year, enjoying an eight-fold increase. Like Gowex, they tanked after the report, a one-day 39 per cent fall wiping nearly £1 billion off the company’s value. Quindell branded the report “highly defamatory” but shares, which peaked at £6.82 in April, continue to decline, falling below £1.90 this week.

In February, Gotham targeted US online search company Blucora. Shares fell 8 per cent there following the report, and have continued to drift lower in recent months.

Gotham's first report was issued last year, when it accused US insurance software firm Ebix of accounting irregularities. Its stock more than halved, falling below $10. Today, it trades about $13.50, around 30 per cent below pre-Gotham levels, although the nightmare scenario outlined in the report – it warned the stock might fall to zero – has not come to pass.

Private investor

Gotham also slammed another US firm,

Tile Shop Holdings

, in 2013, saying it could fall by up to 93 per cent. Shares fell 40 per cent on the report, and have traded sideways since then.

Although Gotham’s reports purport to shine a light into the murky side of corporate life, it is unforthcoming regarding its own activities. No address or phone number is given on its website; there is no mention of who is behind the company; no details regarding stock positions are detailed. Its reports say readers should “assume” Gotham “stands to profit” if there is a decline in the share price of the company being investigated.

Gotham is thought to be headed by Daniel Yu, a little-known private investor who is said to operate a popular Twitter account under the pseudonym LongShortTrader. Yu recently corresponded with Bloomberg and the Wall Street Journal, both times refusing to divulge the firm's size, how it makes money, or any personal details such as his age or educational background.

He also declined to say how much money he made from the collapse of Gowex, whose case he had worked on for eight months, only saying his profits were “dwarfed” by chief executive Jenaro García’s “cumulative profits earned by defrauding [Gowex’s] investors”.

Data suggests short sellers began to bet against Gowex in April, with bearish bets peaking just before the report’s publication. By then, some 2.3 million shares had been sold short, which would represent bets worth more than €40 million. There is no way of estimating how much of this was wagered by Gotham.

"The way we make money is by telling the truth," Yu said this week, adding that Gotham – named after the city where crime-fighting comic book hero Batman works his magic – was "willing to do this for free".

Yu became interested in corporate wrongdoing and short selling after 2008, when he lost money after investing in troubled mortgage lender Freddie Mac.

“The world needs someone to expose these crooks,” he said, adding that, like Batman, Gotham is “driven by the desire to show people that the world doesn’t belong to seemingly untouchable wrong-doers”.

Short selling

Gotham’s reflections on disgraced Gowex chief Jenaro García are similarly lofty, saying his confession will hopefully “mark the beginning of a life filled with honesty, redemption, and restitution”, adding: “May truth, justice (and not vengeance), restoration, and redemption prevail”.

It all sounds somewhat religious, as are the three people Gotham follows in its Twitter account – Pope Francis, Presbyterian pastor Timothy Keller and the Ecumenical Patriarch of Constantinople.

Tongue in cheek? Presumably, although Gotham’s defence of short selling, and its condemnations of corporate malpractice, appear genuine.

Some might say Gotham’s secretive behaviour is ironic, given its own calls for transparency, but it appears content to remain in the shadows, its most recent letter ending: “It is not who we are underneath, but what we do that defines us”.

Sound familiar? Yes, it’s a line from a Batman movie.