From the Financial Times:
The Gowex case focuses on the ethics of raising doubts, writes Izabella Kaminska
Short sellers, beware – the price also risesJuly has always been a dangerous month for Spanish bulls.‘Stung by the collapse of former stock market darling Gowex, the Spanish government sought to reassure jittery investors.’
Financial Times, July 8
The four-legged kind only have the matadors of Pamplona to worry about. But the stock market had to deal with another caped crusader: a US research firm called Gotham City Research .
And the prey?
An operator of WiFi hotspots called Gowex, which Gotham accused of being a fraud. Its board admitted this week that the company had falsified its accounts. The shares plunged and were later suspended. Short sellers linked to the research outfit stand to make big gains.Someone has found a way to profit from the adage that stock prices can go down as well as up?
The trick is to borrow shares from a regular investor and sell them on the stock market. Then, if the price falls, you can buy the shares back for less and return them to the lender.
Pulling a skeleton out of the cupboard and rattling it under investors’ noses can’t hurt.
Gotham’s research alleged that Gowex may have overstated its revenues by 10 times and exaggerated the number of WiFi hotspots in its network. According to one investor, Jenaro García Martín, then chief executive, had claimed that the company ran 200,000 of the wireless zones. When talking to Gotham City, he allegedly put the number at 100,000. Some analysts said there were even fewer than that.That sounds like a red flag.
It produced a violent reaction in the price of Gowex shares. The company filed for bankruptcy last week. Whether any of the business can be salvaged remains to be seen. Shareholders have almost certainly been wiped out. The board of Gowex said it had accepted Mr García Martín’s resignation after he took full responsibility for fake accounts. The Spanish market regulator is also under scrutiny, having apparently missed serious accounting problems at a company whose equity was once worth €1.9bn.
I’d be more inclined to believe an allegation that came from a newspaper hack rather than someone who could make millions if the shares fall.
Fair enough. Newspapers have published some impressive exposés – journalists played a large part in exposing the Enron fraud, for example. But one could argue that a well-resourced short seller protected by a corporate shell can risk defamation suits more easily even than the more solvent members of the fourth estate. If short sellers bring wrongdoing to light, they have a role to play.
Isn’t it illegal to accuse companies of being frauds if you are shorting their shares at the same time?
Not necessarily. You can usually express an opinion about a company whether or not you have a financial interest – although there’s always the risk of being sued for libel or malicious falsehood. If a lot of money is at stake, damages claims can be huge. When Gotham turned on Quindell, an insurance claims processor listed on London’s Aim, alleging that some of its profits were “suspect”, the company denied wrongdoing and said it would take the researchers to court....MORE
Another wrinkle, and one I have not run into in way too many years at the market, via ZeroHedge:
As The SEC Finally Gets Involved In CYNK, One Short Has A Big Problem
It took the SEC only a week (after we first reported on it) to get involved with a company that does not exist, and whose stock rose nearly 30,000% in a few days, on a few thousand shares traded, hitting a nearly $6 billion market cap before it was finally halted for trading...
...Case in point, this sad individual who on that bulletin board of epic retail investor comedy, Yahoo Finance, has explained their problem: it appears some brokers actually did allow shorting of CYNK, at a cost. A rather high and recurring cost it would appear.
Here's another example of someone who thinks they know what they're doing running into problems:
Guy Who Wrote Book on Surviving Running of the Bulls Gets Gored by Bull
Two man have been badly injured during the third day of the Pamplona bull run
A Chicago author who co-wrote the book “How to Survive the Bulls of Pamplona” was gored Wednesday morning during the Pamplona bull run, the festival’s website reports.
Bill Hillman, 32, tripped and fell while participating in the third run of the weeklong San Fermin festival. The bull, the heaviest of the six animals released, gored him twice in the right thigh. Hillman, who has been running in the festival for over a decade, is said to be in a stable condition....TIME
