Gotham City Research Unmasks Gowex but Stays in Shadows
Short Seller's Founder Says It Spent Eight Months Researching Spanish Tech Firm
Like the superhero that serves as its inspiration, Gotham City Research LLC cultivates an air of mystery.
But the self-styled fraud fighter, whose research brought down a Spanish technology company this month, is part of a growing cadre of such shadowy crusaders.
Gotham is among a handful of short-selling firms that has sprung up in recent years, using the Internet to amplify their criticisms of targeted companies.
When their campaigns are successful, they can force companies to play defense and cause stock prices to fall. The short-selling firms typically profit from the drop in share prices.
But some of the firms also deliberately operate in the shadows, raising questions about their motives and tactics.
Some of the firms borrow heavily from the playbook popularized by Carson Block's Muddy Waters LLC. Mr. Block, an American who previously worked as a lawyer in Shanghai, first came to wide notice in 2011 when he took on Chinese timber company Sino-Forest Corp., against which Canadian authorities subsequently filed fraud allegations. Sino-Forest has gone through a court-ordered restructuring and now is a private entity.
Mr. Block declined to comment through a spokesman.
"These guys have established quite a lot of credibility," said Alexander Ljungqvist, a professor of finance and entrepreneurship at New York University's Stern School of Business who has written about short sellers. "Investors clearly are taking them seriously," he said.
Still, outside the short-seller community and investment websites, few had heard of Gotham before this month. Last Tuesday, the firm released a 93-page report calling for Let's Gowex SA GOW.MC -26.05% shares stock to go to zero, alleging that more than 90% of its revenues were "suspect."
Within days, Gowex Chairman and Chief Executive Genaro Garcia had resigned and acknowledged falsifying accounts. Gowex, which provides Internet hot spots in cities around the world, has said it might file for bankruptcy protection. The company had a market capitalization of €1.4 billion ($1.9 billion) as recently as a week ago.
Gotham largely declined to step into the limelight this week. The company was founded by Daniel Yu, a Massachusetts Institute of Technology graduate and former hedge-fund analyst, according to people who know him.
In an email, Mr. Yu declined to disclose the firm's size, how it makes money or provide details about himself. One of the few areas on which he was willing to elaborate was Gotham's history, saying the firm got its start when he and some others lost money investing in companies that were deceitful or committed fraud.
"We were victims of these corporate fraudsters. We believed this isn't right, and that the world needs someone to expose these crooks," Mr. Yu wrote. "And so, just as Batman catches criminals (and then submits them to authorities) using little more than his wit and some nice gadgets, Gotham City Research was born."
Mr. Yu wrote that Gotham had spent eight months working on Gowex. He wouldn't say how much Gotham had made off its call, saying it was "dwarfed" by Mr. Garcia's "cumulative profits earned by defrauding [Gowex's] investors."
"Daniel's achievement here wasn't just identifying fraud, it was the meticulous documentation to the point where Gowex had no chance" of recovering, said hedge-fund manager John Hempton, of Australian firm Bronte Capital, who is friendly with Mr. Yu. "That's no small achievement."
Mr. Ljungqvist and some short sellers say the number of such firms seems to have increased in the past few years, but that it is hard to track their numbers.
Other firms active in this area include Prescience Point LLC, Glaucus Research Group California LLC and Gravity Research. Prescience and Gravity didn't reply to requests for comment.
Glaucus, founded in 2011, prides itself on its transparency, said Soren Aandahl, the firm's director of research. He said Glaucus's research reports disclose how the firm is positioned. "You don't want people to discuss whether you're flip-flopping behind the scenes or to question your motives," he said.
Still, Mr. Aandahl declined to elaborate on other arrangements Newport Beach, Calif.-based Glaucus might have for profiting from its research, saying the focus should rest on the merits of that research.
He also said short-sellers shouldn't be held to higher disclosure standards than other investors.
Companies are under increasing pressure from short sellers, though the exact contribution of firms like Gotham—as opposed to hedge funds that bet against companies, for example—is unclear. This year through July 8, there have been 83 campaigns against 70 companies, according to Activist Shorts Research, a subscription database expected to launch later this month. That compares with 60 campaigns against 49 companies a year ago.
Activist Shorts Research includes as short sellers individuals it has determined reliably influence stock prices, but it doesn't break out campaigns by type of short seller.
The firms are controversial. Supporters say they democratize research, providing a needed counterweight to the bullishness of Wall Street analysts and ferreting out malfeasance. Critics say the firms aren't always accurate, operate with little transparency, making it difficult to engage with them, and cost companies money that could otherwise be returned to shareholders or invested.
There is also the concern that some of these shops share their research with a favored few before publication.
One winner from Gowex's collapse: Valiant Capital Management LP, a San Francisco-based hedge fund founded by Christopher Hansen. Per European Union rules requiring investors to reveal short positions above a certain threshold, Valiant disclosed on Feb. 3 it was short Gowex shares.
Ruby Sekhon, Valiant's general counsel, said Tuesday that Valiant wasn't a client of Gotham's and that Valiant long ago placed a short bet against Gowex. Based off its last public position, Valiant has a roughly $24 million profit on its Gowex short.