How short-sellers cleanse financial markets
From Hedge.lu
Firms Involved
- Let's Gowex
- Gotham City Research
Year of the event
2014
Description of the case
In July 2014, Gotham City Research published a detailed report[1] denouncing Gowex as being a fraud, and announcing a price target of "€0.00 per share". Gowex was a Spanish telecommunications and equipment company providing wifi in public places and was boasting 100k hotspots installed mainly in Spain. After meticulous research, Gotham City Research only counted around 5k of them. They built a comprehensive report which exposed Gowex for blatantly overstating their revenues and profits. Just days after the publication of the report, the CEO recognized the fraud, and Gowex was filing for bankruptcy. In less than a week, the billion and a half of market cap of Gowex were reduced to ashes.
Take-aways
- Low audits fees and contracting with an obscure accounting or audit firm can be a sign of fraud. Gowex was identified as a potential target because of its auditors[2].
- Exposing frauds can be a very profitable business for short-sellers
