Gowex collapse leaves egg on many faces

July 7, 2014

By Fiona Maharg-Bravo

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The collapse of Gowex has ramifications beyond Spain’s junior stock market for riskier companies. The Spanish wifi provider has said its chief executive admitted falsifying the accounts, days after investment firm Gotham City Research attacked the company. With Gowex held up as the poster child for Spanish entrepreneurialism, its impending failure will make life harder for other small firms.

The fall from grace began on July 1 when Gotham produced a 93-page report saying 90 percent of Gowex’s revenue did not exist, and claiming the company’s largest telecom customer was in fact itself. Gowex responded with a vigorous rebuttal of the claims. But the report still wiped out over 60 percent of Gowex’s shares over two days, or 870 million euros, before the stock was suspended. Now Gowex says it is to file for bankruptcy in the wake of the CEO’s revelations.

The tale is a blow to Spain’s fledgling alternative market, the MAB, which has had 23 listings since 2009. MAB says its regulation is in line with other neighboring junior markets. It is not clear that tightening the rules is the solution. The point of these markets is to help smaller companies get access to capital without jumping through too many hoops. And fraud is always hard to police.

Still, the damage to credibility goes far beyond Gowex’s exuberant chief executive, Jenaro García Martin. He hobnobbed with senior politicians as the company received numerous awards, including “best new listed company” from the Federation of European Stock Exchanges and the European Commission. Gowex’s auditor may have been obscure but Ernst & Young, its registered market advisor responsible for helping it meet information requirements, is anything but. Analysts recommended its shares and smart, international investors snapped them up.

Right now, Spanish assets in general are in vogue – especially sovereign debt. Pescanova, another fraud case on Spain’s larger stock market that came to light last year, did not obviously lead to increased risk aversion. But Spain’s smaller companies – the key to genuine economic revival – are having a harder time accessing bank and equity finance. Gowex is a story they can really do without.

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