LETS GOWEX SA (OTCMKTS:LGWXY) (BME:GOW) has formally filed for bankruptcy in Spanish courts today, and former CEO Jenaro Garcia Martin could face up to 10 years in prison on charges of false accounting, distorting financial information, and insider trading, reports Julien Toyer for Reuters. His passport has been seized and he has been ordered to pay €600,000 in bail within 15 days. The judge said that the combination of a heavy prison sentence and millions stored in a Luxembourg bank account made Garcia Martin a flight risk, though he could have simply left the country before coming forward if that was his intention.

LETS GOWEX LETS GOWEX SA LGWXY GOW
LETS GOWEX SA LGWXY GOW

Let’s Gowex story is short selling at its best

At its best, short selling reveal price inefficiencies and helps the market to correct, and Gotham City Research’s incredible takedown of LETS GOWEX SA (OTCMKTS:LGWXY) (BME:GOW) is one of the best examples we’ve had in years. When Gotham City Research initiated coverage with a $0 price target, its stock price immediately tanked, as so often happens when investors are spooked by a scathing short thesis.

Most of the time, the company denies all the charges, the stock price gets a bit of support from the longs who see an attractive entry point, and the short campaign grinds on – Muddy Waters short on NQ Mobile Inc (ADR) (NYSE:NQ) and Gotham City Research’s short on Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) are good recent examples.

Amazingly, Garcia Martin decided not to put up a fight and just one week later admitted to cooking the company’s books for the last four years before stepping down as CEO and the LETS GOWEX SA stock price fell from €24 to zero as Gotham City had predicted, if considerably faster than they must have expected.

Gotham City Research next short thesis will spark a sell-off

But one of the main criticisms of short sellers is that their success gives them the ability to move markets in a way that normal financial analysts can’t. Quindell PLC (LON:QPP) (OTCMKTS:QUPPF), for instance, announced earlier today that its revenues had doubled in the first half of the year, sending its stock price soaring. It’s business model is complicated, it’s something like a business processes firm that has been acquiring personal injury law offices (among other things) and streamlining their services, and having started as a country club doesn’t help matters.

Even if Gotham City Research turns out to be wrong about Quindell PLC (LON:QPP) (OTCMKTS:QUPPF), which is far from being settled, people will remember the epic fall of LETS GOWEX SA (OTCMKTS:LGWXY) (BME:GOW) the next time Gotham City publishes a short thesis, and many investors will unload their shares worried that taking the time to digest the analysis will mean losing value on a falling stock.