Gotham’s Batman of Short Sellers Takes Down Spain’s Gowex

The insolvency of Spanish Wi-Fi provider Let’s Gowex SA has drawn attention to a secretive New York short seller named Daniel Yu, who compares his work to the heroic deeds of Batman.

Yu, founder of Gotham City Research LLC, named his firm after the city where the comic-book hero fights crime. Like the Caped Crusader himself, Yu is protective of his privacy and declined to reveal his age, educational details or the number of people who work for him. In interviews with Bloomberg News, he said he devoted himself to betting against troubled companies after getting burned by an investment in mortgage lender Freddie Mac in 2008.

“If you pay close attention to Batman, he always worked within the spirit and the letter of the law,” Yu said by phone from New York on June 23. “He’s not a vigilante. He realizes that the authorities have scarce resources and limited personnel. We are driven by the desire to show people that the world doesn’t belong to seemingly untouchable wrong-doers.”

Gowex, the Spanish Wi-Fi provider, said yesterday it will file for insolvency and its chief executive officer resigned after admitting he reported false financial results for at least the past four years. Gotham City Research said the company’s wireless sales were at most 10 percent of what was reported, sending the stock to a 46 percent plunge on July 1. The shares had surged 312 percent from the end of September to an April peak.

Quindell Short

That was not the first time Gotham City Research struck. In April, the short-selling firm’s questioning of Quindell Plc’s profits triggered a 39 percent one-day drop in the U.K. technology company. That time, Yu chose a stock that jumped more than 600 percent from a 2013 low through February. The New York-based short seller said as much as 80 percent of profits at the company were “suspect,” while questioning how a former country-club operator was able to report “Google-esque” margins.

“They’ve gotten bolder,” said Roger Lawson, who represents private investors as chairman of ShareSoc. “It’s been getting worse in the last year. They’ve come to realize that as long as you’re sitting in a foreign jurisdiction you probably won’t get sued. Companies don’t want to take these firms to court because that will just bring more publicity.”

Rebecca Sanders-Hewett, a spokeswoman for Quindell at Redleaf Polhill Ltd., reiterated yesterday that Gotham City Research’s note was “highly defamatory, deliberately misrepresentative and the company entirely rejects the conclusions that are made.”

In the U.K., publishing such negative stock research is rare and defamation laws can land short sellers in court. Yu is confident he’s on the side of justice.

“For a lot of these companies, the truth is their enemy,” Yu said in an interview yesterday.


The board of Madrid-based Gowex said yesterday it accepted the resignation of Jenaro Garcia, its CEO and founder. Before he took full responsibility for the fake accounts, Garcia said on July 1 that Gotham City Research was “mixing facts with lies” and that the company would “look into the legal consequences.”

Gowex’s fast growth, with a market value that surged from 49 million euros ($67 million) when it went public in 2010 to as much as 1.9 billion euros this year, was viewed as a rare success story in Spain. The stock was also one of the best performers on the MAB exchange, an alternative funding source for small companies in line with a government drive to promote financing options for businesses.

Gowex Reaction

In a response to Gowex’s downfall, Yu said yesterday that Gotham City Research and Spain were “fortunate” that Garcia confessed.

“What of the 99.99% of other financial frauds, in which the CEOs and companies do not confess, when faced with allegations?” he asked.

Regulators should pay more attention to short sellers’ messages and investigate the companies they question, Yu said. CEOs and investment banks are just as biased as short sellers, he added.

“Gowex completely validates the critical role that short selling plays in the financial markets and the fact that regulators’ initial response should not be to shoot the messenger,” Yu said.

In the U.S., Gotham City Research has issued reports on Blucora Inc., Tile Shop Holdings Inc. and Ebix Inc. Blucora and Tile Shop are down more than 20 percent this year, while Ebix has fallen 21 percent since its high in March.

Research firms such as Gotham City, Prescience Point and Muddy Waters LLC study a company’s financial statements and try to profit by borrowing shares and selling them with the aim of buying the stock back at a lower price and pocketing the difference. Gotham City said in its report last week that it will make money from a retreat in Gowex shares.

‘Make Believe’

“I’ve never seen so much attention paid to these little research companies,” said Karl Loomes, a London-based analyst at SunGard’s Astec Analytics, a securities-lending data and research company. “What they’re saying is the whole business model is make-believe. That’s very different from your Goldman Sachs or your HSBC saying there are some headwinds to earnings. The logic goes, well how many other little companies have these issues?”

The number of Gowex shares borrowed and sold to speculate on declines reached a peak of 2.3 million on July 2, representing about 18.3 million euros in bearish bets, according to data from Markit Group Ltd. and Bloomberg. Short selling in the stock has increased from almost 570,000 at the beginning of April.

About 2.7 percent of Gowex’s outstanding shares are currently sold short, up from 0.8 percent in April, data from London-based Markit show.

“Short sellers are our first line of defense against the pump-and-dump artists,” said James J. Angel, a finance professor at Georgetown University whose research focuses on equity markets and regulation. “We need to have negative information incorporated into the stock prices to make sure they’re properly priced. And most of the time they’ve done their homework. They’re not right all the time, but they’re usually right.”

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