Who’s to blame when Spanish small investors get swindled?

Gowex, Pescanova, Nueva Rumasa: respectively, the rising star of Spain’s technology sector; a leading seafood processor; and the latest version of a holding company that was expropriated more than three decades ago. All three companies swindled investors out of millions and evaded the oversight supposedly exercised by Spain’s financial and markets authorities. What went wrong?

Gowex was exposed by New York-based market analyst Gotham City on July 1. Since then, investigators have discovered a complex network of front companies, fictitious contracts and bank accounts in tax havens around the world where the company’s directors had salted away millions of euros.

“I was totally convinced that Gowex’s success was built on real foundations. It was the star performer in the MAB [Spain’s alternative stock market], it had installed wi-fi in several cities, its accounts were brilliant and it was conquering the international market. A few days before the scandal broke I sold all my other shares and put the money into Gowex,” says one investor, who prefers to remain anonymous. “I initially invested €95,000, but as the share price rose, I invested another €20,000.” He lost his life savings when the company went belly up.

Like many small-time investors, he blames the Spanish stock exchange commission for not monitoring Gowex properly. “The most outrageous thing about this affair is that this took place in a country where there are supposedly legal guarantees, that is part of the European Union, and where markets are supposed to be regulated and supervised. The MAB is essential for encouraging funding for companies that are growing, and Gowex was the biggest player. It’s not like I was putting money into Rumasa,” he adds.

Rumasa, which at one point employed 65,000 people, was expropriated by the Spanish government in 1983 for tax evasion and financial irregularities. The owner, José María Ruiz-Mateos, was imprisoned on charges of currency smuggling, fraud and tax evasion. After his release, he founded a new holding company, Nueva Rumasa, and attracted many small investors, such as C.D., the former head of an oil company who put €50,000 into the company.

But in February 2011, the 10 largest companies within the Nueva Rumasa group were declared in default and unable to make payments to their creditors after Spanish Social Security, the Royal Bank of Scotland and others requested that liens be placed on the companies’ assets.

C.D. admits to being “fascinated” by Ruiz-Mateos. “He was unfairly prosecuted. He tried to finance his business after the banks turned their backs on him. His companies had no problems for 20 years: no strikes, no scandals. I assumed he was solvent – I believe that his children and grandchildren are to blame for what happened.”

So far he has recovered just €3,000 in interest, and says the courts are unable to make any progress. “This is an institutional fraud, due to the fact that the stock exchange commission has allowed a company to issue bonds that was not in any state to do so,” he says. In fact, the stock exchange authorities issued several warnings to investors that the bonds could not be traded.

Last year produced yet another scandal, this time involving seafood processor Pescanova. In July 2013, auditor KPMG produced a damning report showing how Pescanova was painting a brighter picture of its monthly accounts than merited by reality by transferring invoices to subsidiaries, paying less in tax than really due by billing sales through other companies owned by front men, and by massaging the figures on the group’s financial debt and operating profits.

All these practices were registered in the company’s emails and discovered by KPMG in the computers of Pescanova managers. The dismissed chairman of the group, Manual Fernández de Sousa, was not blind to what was going on, given that he was one of the recipients of several of these emails. He was aware of the system of front men used to create companies to hide stakes that the group held in subsidiaries and in order to swap invoices.

Again, many small investors were caught out. “I invested €30,000 between 2011 and 2012. I wanted to support a Galician company. It sold food, and seemed like a safe bet. The shareholders’ meetings made everything seem fantastic, and the company’s results just kept getting better. I never imagined for a moment that a company like this could go bust,” says a retired civil servant, speaking anonymously. He has lost all the money he put into the company, and like so many others in his situation, blames the stock exchange authorities. “How is it possible to get away with the kind of audits Pescanova was carrying out? The state has to accept some of the responsibility for this.”

But Miguel Ángel Bernal, head of the Institute of Bourse Studes (IBE), says the stock exchange authorities cannot detect fraud. “The problem is the way that audits are carried out, as well as the way that investors value companies,” he says. “But the biggest problem is that most people who invest lack even a basic understanding of how the stock exchange works.”

Bernal identifies some similarities between the three companies: boards controlled by one or two people, with no outsiders; turnover figures that don’t match the average in their sector; and in the case of Gowex and Pescanova, under-capitalization (Rumasa was not a publicly traded company). He also says that tougher auditing requirements are needed: “The companies who carry out these audits need to be checked, and they should be required to provide data on all their work, perhaps having to have their audits corroborated by other firms periodically.”

The Spanish Association of Minority Shareholders in Traded Companies (AEMEC) is to call on the European Parliament to revise the roles and responsibilities of stock exchange authorities, says AEMEC’s spokesman Antonio Valverde. “The problem with Spain is an institutional vacuum regarding the defense and protection of the interests of minority shareholders in publicly traded companies,” he says.