Gowex – A blow struck against lackadaisical overseas regulation


This week Spain’s Gowex has filed for bankruptcy admitting that at least its last four years of accounts were more or less made up. It’s founder and CEO has resigned, its shares remain suspended, and he has tried to claim all responsibility and wishes to take the consequences.

The first whisper we heard against Gowex was at a conference in January, when rivals voiced incredulity over the scale of revenues that Gowex claimed, at €183 million. Some rivals had been around for longer and yet had a fraction of the revenues.

The second was a lot more than a whisper when a US financial institution called and asked us to investigate Gowex, but then changed its mind saying “We do not believe a world Gowex says.” We thought that was unusually aggressive and tried to keep an open mind.

We took a swift look, trying to get to the bottom of the story, and what turned up, over and over, were the exact same words repeated time and time again, as if all the news came from a single press source and were just cut and pasted. CEO and founder Jenaro Garcia was quoted all over the place, but it was always the same precise quotes. The only Spanish analyst report we could find said that Gowex now funded about 25% of its WiFi installations, and that also came alongside a quote that we now know we cannot trust, from the same founder.

We asked a few people who had met him and they said he was arrogant and would not explain the business model to them either. But still we tried to keep an open mind, after all some people are just like that.

Last October was our first story about Gowex, when a release told us that it had cut a deal with the City of New York through its Economic Development Corporation, to launch more hotspots and to share them with the public and with street level businesses in a network it called “We2” which it claimed were like a set of Homespots for downtown NY. It claimed to already operate 2,000 hotspots and said it would turn existing “private” hotspots found in shops and restaurants, into public hotspots, which can be accessed for free by users registered on the We2 network. It also said it would build more hotspots.

That level of activity fitted in with the amounts of money it discussed in its accounts. Building hotspots in New York is expensive.

But there were a few alarm bells because we would not quite work out its business model. It said that We2 was a cooperative platform based on hotspots from multiple operators and that it would offer some level of cellular offloading, and that 500 New York merchants had contributed their own WiFi to the system.

At the end of every release was a Gowex claim that it now ran 80 smart cities and these would grow to 300 by 2020. Nowhere could we find a complete list of these cities.

It had already built out this idea of “smart Cities” which as far as we can see is just WiFi for all, in San Francisco, Miami, Dubai and Paris, and more recently announced deals in Macedonia in Skopje, the capital, including airports, as well as in restaurants and bars in another 16 cities.

Gowex also claimed to have deals with AT&T, Deutsche Telekom, Oi Brazil, PCCW and Boingo. We were aware that AT&T was looking for offload in the New York area, so this made some kind of sense.

When we heard that it had done a deal with Newcastle, as a part of the Go Digital Newcastle project in the North East of the UK we called up the council, which told us that Gowex was funding the project. But when we went into it, it was in fact being funded partly by the UK government under an initiative called Broadband Delivery UK, under a plan to bring superfast broadband to the city.

The scheme was actually being delivered by Newcastle City Council and we suspected at the time that normal maintenance and purchasing payments of Newcastle council might be reported as revenue for Gowex, although it is perhaps naïve to think that a company that has decided to fabricate its revenues needs any genuine basis in fact in order to extract a revenue number.

Gowex at the time looked to us like something cynical, but not necessarily crooked, in that it may have been booking future maintenance fees as revenue and it may have been booking the 100% of revenue of hotspots which it actually just aggregated, rather than the tiny aggregation charges it was making.

For instance in Newcastle it was helping businesses prepare applications for government funding to build more Hotspots, and then providing the hotspot using local labor, and running the Government funding through its own books as revenue . We thought that it was just very good at knowing where all the funds were.

The interesting thing is that municipal WiFi was big news 10 years ago and it seemed a nice idea that one of those older specialists had finally worked out how to make money at that game. It seemed to be that the local UK representatives were knowledgeable and beat out rival offers from BT and Virgin.

But it is easy to win deals when the profitability of those deals are no longer important, and it will come as shock to many of the Gowex employees that their business is now bereft of funds.

The scheme seemed to come to the end when a specialist short selling research house called Gotham City Research decided to look into Gowex and began calling customers and in particular spoke at length to the New York project which it says involved just €200,000 of orders, although it was reported as both €7.5 million and then reduced to €2 million by the founder, when challenged.

The concluding report on its web site said that Gowex was worth nothing and that over 90% of Gowex’s reported revenues do not exist and that it probably had revenues of just €10 million. The number of owned hotspots was closer to 5,000 rather than the 100,000 it often cited.

The big weakness here is not the nature of the business. WiFi businesses are not inherently crooked or weak. We think WiFi is on the rise and note that many WiFi monetization businesses have recently landed funding as WiFi takes on a second life. Instead, if anything is to blame here outside of the founder himself, it is the lack of financial reporting requirements on the Spanish MAB alternative market. The annual report was signed off by a single accountant, likely a friend of the CEOs, and the CEO himself. The CEO’s wife was said to have signed off the annual report.

The confession by the CEO seems designed to keep the focus of blame on himself, but it is hard to see how the accountant, and the CEO’s wife, can be ignored in any continuing investigation. There will be a call for heads of any organization that advised this business, or had sight of its accounts.

The assets of the company could eventually be sold, but there is such a taint on a business that ceases trading on such a situation, it is more likely that the hard assets, such as equipment and live hotspots will be sold for next to nothing and the business contracts will all end up having to be re-negotiated and re-allocated, leaving a sour taste in the mouth of the municipalities that selected Gowex Wireless as a trading partner, and a shortfall in their internal budgets. This seems to mean that the final of value will be close to zero from the $726 million valuation that the stock had before it was suspended.

That still leaves us with Gotham City Research which exposed the malfeasance, since it has shorted the stock and made quite a lot of money from the timing of the exposure. We’re pretty sure than under some investor legislation, what they did was trade on insider information, that should have instead been reported to the police. The definition of what is insider information varies depending on what jurisdiction you are in and it may be that US laws are okay with how it behaved. But given that it has acted for profit at a time when a huge number of investors have lost all of their money, it is likely that investors will be calling for action against Gotham as a way of recovering at least some of their money.


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