How a Spanish star fooled the world

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IOL jenarogarcia Bloomberg News. Jenaro Garcia, the former chief executive of Lets Gowex, right, exits after attending the National Court in Madrid, Spain, on Monday, July 14. Gowex said it would file for insolvency. Photo: Bloomberg.

For almost 10 years, Spanish internet company Let’s Gowex said it was making money by providing public wi-fi in cities around the world.

Most of the contracts, it now emerges, never existed.

Instead Gowex chief Jenaro Garcia Martin used a series of tricks to fool company employees, investors and regulators.

The discovery of the deceit last month crippled the company and undermined credibility in Spain’s stock market just as the country recovered from a four-year recession.

The 46-year old entrepreneur has been charged with financial crimes, including false accounting.

Spain’s judicial system does not require a formal plea and Garcia Martin has not given one.

But testifying before Spain’s High Court on July 14, he admitted manipulating the company’s accounts and explained how he had used a network of about 20 shell companies to generate a paper trail of fake business and fake contracts that he used to raise capital.

Interviews with the former tech star, employees and regulators, as well as court documents, show how some of the dodges behind his deception were surprisingly basic.

To help cover his tracks, Garcia Martin reported fake revenues from shell companies owned by relatives and his housekeeper among others, he told the court.

Former Gowex staff told Reuters that he paid taxes on profits the company never made.

Once, one ex-worker said, Spanish officials wanted to check a project where Gowex claimed to have provided public wi-fi using four-wheel drive cars.

Garcia Martin used the internet in his own car to make the project seem real.

“My goal was that within two or three years, when we could make the jump to the Nasdaq, that it would all come together,” Garcia Martin told the court, according to audio and video recordings reviewed by Reuters.

Garcia Martin said his falsifications were initially aimed at trying to cover up for losses incurred after making overdue payments to another firm that had sued Gowex for unpaid bills.

Now Gowex, once valued at more than $2 billion (R21bn), has filed for bankruptcy; an investigating judge is examining if it has moved funds abroad.

The rise and collapse of what was once one of Spain’s most celebrated start-ups is an exceptional chapter in Europe’s faltering attempts to claim a share of a global technology industry largely in the hands of the US and Asia.

Gowex isn’t the biggest corporate collapse of late in Spain, a country hard-hit by Europe’s debt crisis.

Several big firms have gone bust, and former executives of Pescanova, a fishing firm, are under investigation after the company said it had faked its accounts for years.

But Gowex resonates because it had so many international investors and clients.

In addition to the criminal investigations into Garcia Martin and his wife and cousin, the court is investigating Gowex’s former chief financial officer and an external auditor who oversaw the accounts for years.

Investor groups are considering class action suits to claw back some of their lost money.

Stock market regulator CNMV said it had properly conducted its oversight, which does not include assessing a company’s audited accounts.

The story is also one of ambition and personal loss.

Garcia Martin says his youth was marked by family tragedy, which fuelled his dreams.

Even now, though the judge told him he could face 10 years in jail, he believes he can become a successful global entrepreneur. “I regret the damage that I have caused pursuing my dream,” Garcia Martin said at the end of last month.

“I continue to be the master of my destiny and for this my priority is to repair this damage and this is my next great project.”

Garcia Martin’s professional resume is peppered with inconsistencies.

He wrote – on his LinkedIn page, in biographies used at conferences and in financial documents used for Gowex’s public listing and capital raising rounds – that he took a Masters in Law at Madrid’s Complutense University in 1992.

Records from Madrid’s Autònoma University, however, show Garcia Martin studied a law degree there until 1993.

He says he worked in “import-export” for Smith Barney from 1993 to 1995, and almost concurrently (1992 to 1996) as a financial analyst for Prudential Securities.

He also says he was a strategic consultant at Spain’s telecom firm Telefonica from 1995 to 1998.

The companies all declined to comment.

 

Spectacular growth

Garcia Martin says he broke 24 bones in the car accident that killed his parents and brother in 1986.

When he left hospital, he began supporting himself by importing cars from Germany.

He says he was proud of having bought his first share in Telefonica when he was 14 and of spending hours selling music tapes at Madrid’s El Rastro flea market.

Garcia Martin founded the firm in 1999.

Known as Iber-X until 2008, it started as a telecoms broker that provided a place for companies to buy and sell voice minutes and bandwidth capacity. For several years, the firm did relatively well, employees said.

As a non-listed company, it was under no obligation to make financial statements public.

But Garcia Martin needed capital. According to his testimony in the July 14 court hearing, he began to misrepresent the real state of the firm’s accounts when a lawsuit knocked the company into a “downward spiral”.

Neo Sky, a telecoms company, had sued the-then Iber-X for payment of e142 334.33 (R2.02 million) in telecoms circuits rent in 2004.

Garcia Martin’s firm – now called Gowex – was ordered to pay compensation, which he said cost it cash and customers.

Garcia Martin registered several firms and presented them, according to his court testimony, as clients in Gowex’s books.

Among them were two companies administered by Gowex’s chief financial officer Fernando Martinez Marugan, according to filings from Spain’s company registry office.

The shell companies acted as fake customers on contracts that Gowex could show to lenders, investors, and government officials who signed off on subsidies.

“Basically, we started with three companies and what we do is: One company bills to Gowex, Gowex bills to another company and the third company bills to the previous one. It is a triangle,” Garcia Martin told the court.

“Basically, the structure enabled us to make capital increases.”

By 2010, the year Gowex made its much-touted debut on Spain’s alternative market, the web of shell companies had grown substantially.

The previous year Gowex had reported revenues of e35m and a net income of e2.9m.

But Spain’s property bust and the growing euro zone debt crisis were hurting the wider economy.

As Gowex prepared to go public, its international competitors Boingo, Towerstream and iPass turned losses.

Gowex pushed on, selling 18 percent of the company for e6m.

The shares jumped 20 percent on their first day of trading.

Some investors and analysts later expressed scepticism about the company’s performance.

In a note in March 2013, NFinance Securities analyst Pierre Schang said he was “disturbed” that Gowex was turning big profits while competitors were registering losses or much smaller profits. Schang did not answer a request to comment further.

Others questioned the firm’s amateurish corporate structure, with a board composed of Garcia Martin, his wife, Florencia Mate, and chief financial officer Marugan.

Mate and Marugan have both been charged in relation with the accounting deception.

Florencia Mate told the High Court she was unaware of the scheme, while Marugan said he was part of it but had no other option because he feared Garcia Martin.

Both ignored requests for comment.

Gowex grew fast.

Its reported revenues jumped more than five-fold, profits rose 10 times to e29m, and its market value skyrocketed.

At his court hearing, former chief financial officer Marugan said only about 10 percent of the company’s revenues were real.

In its initial public offering documents, Gowex said its nine biggest clients accounted for revenue of e26.3m – 91 percent of the total.

Six of those firms – worth a combined e24.5m in revenue – were actually linked to Marugan or trustees used by Garcia Martin.

The lies continued after the listing.

Garcia Martin and Marugan would misrepresent the size – and in one case even the existence – of business deals, they said in their court testimony.

For example, Gowex said in 2011 it had signed a e12m contract to provide wi-fi in public places in Buenos Aires, including the city’s underground network.

While Gowex and Buenos Aires authorities did have talks over a potential deal, the transaction was never agreed on and both the municipality and the Subte metro company told Reuters that they had never signed any deal.

The firm said last year that it had installed 1 953 free wi-fi hotspots in New York City in what it called a landmark deal in its expansion.

But the New York City Economic Development Corporation said the agreement to provide coverage in areas of the city such as Flatiron and Roosevelt Island was worth just $245 000, a fraction of Gowex’s overall reported revenue that year.

Such contracts enabled Gowex to seek bank loans and qualify for official subsidies.

It used the cash to pay salaries, running costs and taxes.

In the end, it was activist US investor Gotham City Research that uncovered the deception.

On July 1, it said Gowex accounts were false and set a target price of zero on the stock.

In two days, the company’s market value dropped e870m.

After the Gotham City report, Garcia Martin was defiant.

He said he would sue the firm and hire a “prestigious” auditor to show the company’s accounts were accurate. He also kept pushing for more loans.

But on the morning of July 4, Gowex’s bank accounts were blocked. – Reuters



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