Shorting vigilante Gotham City pulls no punches

Batman, when breaking up criminal gangs, would let one member sneak away into the moonlight to spread the word to other baddies that the caped crusader meant business.

The spectacular collapse into bankruptcy of Gowex, the Spanish wireless internet company, less than a week after being accused of being a fraud by shortseller Gotham City Research will

strike fear into corporate wrongdoers across the globe.

For Daniel Yu, the lead researcher of Gotham who in his short career has become a figure of hatred for the boards of the companies he has attacked, proudly declares his modus operandi is

driven by the desire to uncover the truth.

"The way we make money is by telling the truth – unlike our targets who make money by lying," Mr Yu told the Financial Times. "We were willing to do this for free. We thought that this would

be our first public service report, but fortunately we were able to short the shares," he said, referring to the fact that he had made a bet on Gowex's share price falling in value.

While Gowex's shares are still suspended by the Spanish market regulator since Mr Yu published his report, they are now likely to be worthless following an admission by its chief executive

and founder Jenaro García Martín at the weekend that he had invented its accounts over several years.

But how did a US-based short-selling outfit come to enact its particular brand of market vigilantism on an obscure company listed on a junior part of the Spanish stock exchange?

By February of this year Gowex had seen its value surge to almost €2 billion, up more than 1,000 per cent since the start of 2013 and placing it on the fringes of being eligible for Spain's

Ibex 35 index by market capitalization. It was one of the best-performing shares in the world.

Some investors in the US wanted to know what was leading to these high returns, and began to arrange meetings with Jenaro García Martín, Gowex's founder and chief executive who had been

lauded in Spain as exactly the type of young entrepreneur who could lift the country from its economic crisis.

At first glance, Gowex was a staggering success story. By providing urban wireless internet access across the world it had managed to more than triple its sales in three years, while

maintaining operating margins at more than 20 per cent. All this while few of its competitors had been managing to turn a profit.

According to one investor who met Mr García Martín this year, the Gowex founder told him confidently that the company ran 200,000 WiFi hotspots across the world. Gotham City meanwhile

claimed in its report that he told them the number was 100,000, while a research report by the Spanish broker JB Capital Markets had the total at 35,000.

Investors who met him to discuss Gowex's prospects said Mr García Martín came across as a nervous figure who would talk engagingly about his company's potential to grow, but grew uneasy as

soon as he was pressed on any concrete details.

"He seemed really talented at public relations and selling a story, but every time you tried to get him to commit to a detail or number, such as the hotspots, he stopped talking," said one

investor. "It was strange as a Gowex not disclosing how many hotspots it had is like a supermarket not disclosing how many supermarkets it has – it made no sense".

Another investor who met the Gowex founder when he was visiting the US remembered how he would openly talk of the tech behemoths that were interested in buying his company, name-dropping

Facebook and Google as potential acquirers.

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Other details about this seemingly miraculous company also puzzled his inquisitors. Some began to question how a company of its size and sales was using an entirely unknown auditor, called

M&A Auditores, which had only two other small clients and was run by a father and son.

The first time Gowex began to attract the attention of short sellers was in February this year when Valiant Capital, a West Coast-based hedge fund, begun to build up a bet that its shares

would fall, declaring to the Spanish regulator that it had borrowed and sold about 1 per cent the company's stock.

Valiant's public short position, however, had done little to halt Gowex's upwards march. As late as last month Mr García Martín was invited to speak at a conference for small and medium

sized-companies organised by Credit Suisse in London.

It was only when Gotham unleashed its full report that Gowex shares went into freefall, realising about a €20 million profit for Valiant, based on calculations using publicly available

information, and an unknown amount for Mr Yu.

Gotham meanwhile claims there will be more frauds that it plans to reveal in the future. Management teams beware. As the shortseller said on Monday in its formal response to Gowex's

admission: "It is not who we are underneath, but what we do that defines us.

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