How Gowex Chief Went From Defiant to Disgraced in Five Days

Jul 10, 2014 10:58 am ET

(Updates with Garcia summoned by court in final paragraph.)

July 10 (Bloomberg) -- It was 10:37 a.m. on July 1. Jenaro Garcia was preparing for a meeting with Madrid’s mayor aimed at fostering Spain’s entrepreneurial spirit when a message popped up on his phone. A short seller in New York had just released a report saying that Let’s Gowex SA, the company Garcia founded 15 years ago to offer Internet access via Wi-Fi hotspots, had overstated its revenue almost tenfold in recent years.

Garcia denied the accusations and threatened legal action against the report’s author, Gotham City Research LLC. Gowex employees and its auditor made Batman jokes about Gotham, named after the Caped Crusader’s fictitious burg. And Garcia continued his usual routine, posting on Twitter, “Gooooood morning Madrid!!!! Perfect day for a jog.”

Then he said the report was on target.

On July 6, Gowex announced that Garcia had been stripped of his powers. The previous day, the board said, Garcia told directors that he took responsibility for falsified financial accounts for at least four years. Gowex would file for creditor protection, putting an end to what had been seen as a rare success story of Spanish entrepreneurship.

The events of the past week were recounted by a dozen people who knew Garcia. They asked not to be identified discussing private conversations. Garcia and Gowex didn’t respond to calls and e-mails requesting comment.

‘New Rules’

Just days before the scandal broke, the 46-year-old said in a June 25 interview that Gowex was expanding fast and would soon provide Wi-Fi to 20 percent of the world’s population. His office overlooking Madrid’s Paseo de la Castellana, a tree-lined boulevard that’s home to some of Spain’s premier companies, could barely contain some 200 people he said he employed, with desks pushed into hallways and dozens of jeans-clad young people buzzing about.

“We have set new rules of play, new business rules,” Garcia said in the company’s conference room. “I don’t want to sound arrogant because it’s not my style, but in the extreme this is what happens. Gowex is building projects all around the world. Gowex is going places.”

Garcia peppered the conversation with the names of the cities where he was keen to provide Wi-Fi in public spaces -- San Francisco, New York, Bordeaux, Hong Kong. He spoke of a recent trip to Congo to sign a deal. (“Africa is the next China GOWEX is growing there,” he tweeted in March.) He talked of negotiations with Cisco Systems Inc., meeting with “a senior vice president who speaks directly to Chambers” -- John Chambers, Cisco’s CEO. Cisco declined to comment.

Futures Trading

Advertising was to be the biggest source of revenue for Gowex once Garcia reached 600 cities, up from the 91 he said he already served. That goal, he insisted, would be achieved by 2018.

Garcia said in an interview last year that he trained as a futures trader and worked as an asset manager, then founded Gowex in 1999 just as dot-coms were starting to flame out. In 2010, he took the company public on Madrid’s MAB, an exchange for smaller enterprises. Its market value jumped almost 40 times, peaking at 1.9 billion euros ($2.6 billion) on April 3. Gowex reported a sevenfold increase in revenue over three years, reaching 183 million euros in 2013.

While Garcia traveled the globe touting a stream of contracts on Twitter (“Gooood morning London!!!!” and “Gooooood morning NYC!!!!!” were typical), according to the Gotham report he vastly overstated their value.

Contract Discrepancies

Gowex said New York City was paying it 7.5 million euros for a contract, then told Gotham it was worth 2 million euros, according to the short seller’s report. New York’s Economic Development Corp. said it’s really worth $245,000. Garcia told Gotham that Gowex’s network had over 100,000 hotspots, but the report says the real number is closer to 5,000. Gowex initially called Gotham’s report a mix of facts and lies. Its July 6 statement didn’t address the discrepancies cited by Gotham.

“It sounded like the business was working fine and the service they offered was good, but then you don’t expect the CEO to be cooking the books,” said Pedro Nueno Iniesta, a professor of entrepreneurship at IESE Business School in Barcelona who says he was familiar with the company.

One of the companies through which Garcia controls Gowex sold shares in the first half of the year, bringing the founder’s stake below 50 percent, according to a regulatory filing late yesterday.

Selling Autos

The stock market had long appealed to Garcia. At 14, he bought his first shares with cash his father gave him, Garcia told Spanish broadcaster TVE last year. At 19, he started a business selling cars he imported from other European countries to pay his way through law school in his hometown of Madrid, according to his curriculum vitae on the social network LinkedIn.

After completing an MBA at Complutense University in Madrid, Garcia moved to Miami where he worked as a derivatives trader and money manager at top securities firms, his CV says.

The prospectus for the Gowex initial public offering shows a much more limited resume. It says Garcia worked as a stock trader in Miami for a firm identified as TC Investments and then founded an Internet service provider that worked with financial companies in Spain.

Credibility Crisis

As Gowex’s stock headed toward its peak this spring, analysts and investors started to doubt whether the company’s growth -- even inflated, as it turns out -- warranted such a surge. At least two analysts who covered the stock told Bloomberg News they were concerned about a lack of transparency. They also noted that they never met with or spoke to Florencia Mate Garabito -- Garcia’s wife, listed as the company’s investor relations manager. Mate couldn’t be reached for comment.

It wasn’t just investors and analysts who were duped. Last November, the Federation of European Stock Exchanges picked Gowex as “best new listed company.” In March, Spanish Prime Minister Mariano Rajoy handed Garcia an award for creating a company that “thought globally.” And in May, Gowex won the top annual award from Spain’s Marketing Association -- though the group now says it has withdrawn the honor.

“Gowex falsified information,” the marketing association said in a July 7 e-mail explaining its change of heart. “It didn’t follow the ethical conduct that should, in our view, be present in any business or marketing practice.”

Garcia will testify as a suspect in Spain’s national court on July 14.

--With assistance from Adam Ewing in Stockholm, Amy Thomson in London and Macarena Munoz and Charles Penty in Madrid.