gowex Once again, the good faith of many people was challenged due to the latest news item: the bankruptcy of Gowex. The company had led the Mercado Alternativo Bursátil (MAB) as a benchmark on this alternative stock market after multiplying its value 18-fold since it was first launched in March 2010. And though it boasted a market capitalization of €1.44 billion only a few hours before this Greek tragedy unraveled, it has now joined what appears to be an endless list of corporate frauds. Its founder, Jenaro García, was forced into a corner by the information released by an unknown foreign analyst that questioned the veracity of his account figures. Hours after confirming that all the figures in the report were false, he was forced to accept the sad truth: he had been consistently falsifying the accounts over the previous years (at least the four years the company was listed on the MAB). Although the accounts did not reflect reality, no one had detected the fraud. Not the auditors, the tax authorities or, it goes without saying, the company’s board of directors. He had fooled nearly 5,000 minor shareholders who had trusted him with their savings, not to mention institutional investors, some of which are respectable, well-known names in the Spanish financial sector. Once more, the alarms did not go off on time and the same old story was repeated:

  • Regulators did not do their job (auditors, board of directors and, in this case, the MAB).
  • Supervision systems failed once again and need to be closely examined to determine what went wrong and what should be changed.
  • A complex financial engineering system enables some people to continue lying year after year.
  • Accounts everyone loved that were used as an example of extraordinary management. While similar companies had trouble with major losses, Gowex reported increased income and two-digit profit figures year after year on a market with reduced margins from a product like free Wi-Fi sold to the public sector.

It is not a Typical Case: Gotham City Research However, there is something that stands out in the fall of this Spanish company. It was not a case of financial strangulation typical of the failure of a business model held up by lies. It was the result of the report of an unknown research company that has issued only eight reports since it was founded just a year ago. Its name, Gotham City Research, contains a reference to the city where the Batman comic book figure performed his humanitarian actions.

Batman logo. Author: Shane Becker
Batman logo. Author: Shane Becker

Gotham City Research said that Gowex’s shares (which had reached the price of €28 per share on March 28, 2014) were actually worthless. It claimed that 90% of the company’s sales had not actually occurred and that estimated real sales were worth less than €10 million compared to the €182.6 million reported by the company in its 2013 accounts. That’s a big discrepancy. In fact, it’s too big. Where did they get this information? Was it confidential information or perhaps privileged information that was inaccessible to the rest of the market? Why did all other analysts continue advising people to buy Gowex shares? Or was it actually libelous information designed to weaken the share on the market and take advantage of its drop in position over the short term? The speed of subsequent actions confirmed in just a few days what nobody had dared to think: the worst predictions in the report were true. It was a case of David against Goliath. A company acting in the spirit of Batman, almost Quixote-like, was once again perfectly right. It did not have access to classified information. It had merely used the available information in a critical way and had questioned whatever deserved questioning. It had previously done the same to four other international quoted companies. A New Player in the Town In this way, a kind of anonymous hero has emerged to make people aware of fraudulent corporate situations by making up for the deficiencies of regulators and traditional analysis companies. There’s a new player in town. “We were victims of these corporate fraudsters. We believe this isn’t right, and that the world needs someone to expose these crooks,” in the words of Daniel Yu, the company’s founder. Yu responded by email to The Wall Street Journal in an article published on Wednesday, July 9, 2014. “And so, just as Batman catches criminals (and then submits them to the authorities) using little more than his wit and some nice gadgets, Gotham City Research was born.” However, not everyone thinks Gotham City was being altruistic when it issued its report, given its past practices of benefiting from company failures. We could start a discussion about Gotham City’s real motives: the spirit of the comic book hero or the lucrative spirit of any company. If they’ve broken any laws, the justice system will have to take action. But let’s not avert our attention from what really matters.

Car on the set of The Dark Knight Rises, Christopher Nolan's final Batman movie (2011). Photo: Timothy Krause
Car on the set of The Dark Knight Rises, Christopher Nolan’s final Batman movie (2011). Photo: Timothy Krause

The fact that Gotham City had a vested interest does not make these two basic questions less important: Was what they said in the report true? and Why didn’t those responsible for supervising and protecting all the people who risked their money with Gowex do their job? Before we shoot the messenger, let’s make sure we completely understand the message. Especially as we discover in amazement that the founder of the company had been very carefully orchestrating his actions to falsify his accounts for years. Someone should have been able to detect what the messenger is telling us now, regardless of its intentions. But it’s not just the regulators who need to learn a lesson. As individuals, we should all think about our own behavior and what we can take away from this situation:

  1. We have to do our homework and think with a critical spirit before making investments and not just take what the market says for granted. “Do not accept answers from the company as unquestionable truths,” recommends Gotham City Research to investors so they do their homework and analyze all the data in detail. They did not have more data than anyone else. They just did their homework and made a good interpretation of data that simply didn’t match.
  2. We should trust in common sense and shy away when companies use complex mechanisms to justify their unbelievable results. One of the basic investment principles used by Warren Buffet is never enter into a business you don’t understand.
  3. We should not forget the importance of street wisdom. Distrust snake charmers who promise things that are not possible, even if they are able to fool the ambitious and the naive. Don’t believe things that are simply not possible. Moderate your ambition and desire for magic dreams.

In the meantime, organizations should continue cultivating and strengthening the values of corporate transparency and corporate governance . Public authorities should help end impunity and demand that companies and directors take responsibility for their actions so it is not so profitable for them to commit fraud. The spirit of the comic book hero can be seen behind the words in the Gotham City Research press release, issued right after the founder of Gowex confessed: “May Truth, Justice (and not vengeance), Restoration and Redemption prevail.” Do we have a new messenger and protector? “We believe it is foolish to bet against humanity and human ingenuity over the long term,” they said. In any case, each of us should take care not to act naively over the short and long term, but with wisdom and common sense. And in the meantime, regulators should seriously try to do a better job.