Gowex fall casts doubt on Spain’s credibility

In March, Jenaro García, then-chief executive of technology firm Gowex, received a business prize from the Spanish prime minister.

"A society needs entrepreneurial examples like you – that's why these awards are so well-deserved," said Mariano Rajoy during the ceremony. At that time, Gowex was valued at around €1.4 billion and García (46) was widely regarded as a dynamic business talent with the Midas touch.

Four months later, Gowex’s future is in doubt after a whirlwind few days that have left its image as a darling of the Spanish technology industry in tatters. Over the weekend, it declared itself bankrupt and García resigned, having admitted to falsifying the company’s results.

“I apologise to everyone. I am truly sorry,” he wrote on Sunday on his Twitter account, the profile of which shows the entrepreneur shaking hands with former New York mayor Michael Bloomberg. In another post on the same day he said: “I am ready to face the consequences and co-operate with the justice system.”

On Tuesday, García posted an open letter to his employees: "I know I have caused irreparable damage to all of you and to many of your friends and families," he wrote, before finishing the missive by quoting in full Rudyard Kipling's poem If.

The Gowex bubble started to burst on June 1st, when US-based investment company Gotham City Research issued a report for its clients in which it warned the Spanish firm's results were "too good to be true". It based that conclusion on a range of findings, including the fact that providing free wifi services – Gowex's specialty – has never been profitable for any of its competitors.

“We are confident [Gowex] is a charade and its shares are worthless,” reads the 93-page document, which states the firm’s reported revenues – totalling €183 million in 2013, for example – were exaggerated by at least 10 times.

Initial denial

Gowex’s initial denial that this was the case did not stop the company’s shares losing 60 per cent of their value on Spain’s alternative stock market, the MAB, until trading in them was suspended on June 3rd.

On June 5th, after days of frenzied speculation, García admitted to board members that he had falsified the company’s accounts for the last four years. Having accepted his resignation, the company opened bankruptcy proceedings. On Sunday, García handed a written confession to the High Court, which is currently consulting the state anti-corruption prosecutor on how to proceed with the case.

The scandal has sparked inevitable questions about the efficiency of Spain's regulatory framework. José Manuel Amor, a partner at consultancy firm Analistas Financieros Internacionales (AFI) in Madrid, said that while the country's blue-chip Ibex 35 stock exchange is rigorously supervised, the MAB, which allows smaller firms to float shares, is less so.

Stricter policy

“This is a warning to the supervisors with regard to these kinds of markets, in which perhaps there should be a stricter policy when it comes to the information that companies have to provide,” he said.

On Monday, economy minister Luis de Guindos described the Gowex case as “unique”, although he said the government plans to tighten up regulation in this area.

He also said the national stock market commission would carry out an analysis of the controls governing the MAB, which has already seen four companies announce their intention to exit the market this week, apparently in response to the heavy losses it has suffered in recent days.

Apart from the shareholders and creditors affected, many observers see the MAB, created in 2008, as one of the main victims of the Gowex fiasco.

"It is not the end [of Gowex], if it comes to that, which is the worst thing about this scandal," said an editorial in El País newspaper on Tuesday, "but rather the disastrous damage that is being caused to the MAB, a market that seeks to find alternative financing for small and medium-sized companies that are short of bank credit, and which is now utterly discredited and useless for its functions."

Meanwhile, both the city hall and the regional government of Madrid have announced that they will cancel their contracts with Gowex, which provides them with wifi coverage on public transport and in other urban areas. Gowex has a presence across Spain and in several other countries – although the Gotham City Research report also cast doubt on the number of wifi "hotspots" the firm claims to have.

Gowex’s managing director in North America, Carlos Puyol, announced his resignation on Monday, having joined the company in April with the brief of expanding its presence to cities across the United States. It currently offers wifi coverage from spots in New York, Miami, San Francisco and Chicago.

Credibility dented

There is a broader concern that Spain’s overall credibility will be dented by this episode. It follows that of

Pescanova

, the Spanish frozen fish giant, which last year declared itself insolvent after revealing debts of €3.6 billion – three times more than its official accounts declared.

With Spain having only recently bounced back from a double-dip recession, which has left it still struggling with a jobless rate of over 25 per cent, financial blogger Amparo Polo fears the repercussions from the case will go beyond the confines of the MAB market and the internet industry.

“From today onwards, a small company is going to have to give a lot of explanations to prove that it’s telling the truth,” she noted on her blog.

“But a lot of other institutions and entities will be affected. And, in the long term, so too will the reputation of Spain as a place to do business.”