GLOBO exposé by Quintessential Capital Management.
It’s a Greek Parmalat
By Quintessential Capital Management – Investigative Research Team
Mechanics of the Scheme
Based on the evidence obtained through our extensive research, we believe strongly that most or all of the allegations concerning Globo Plc are well founded and, if anything, they tend to underestimate the gravity and scale of the irregularities being committed.
The most important part of the scheme involves so-called “satellite companies”. These are
essentially empty shell companies, located in various countries (especially Cyprus, Panama and Greece), which Globo uses to generate fictitious sales and costs in order to inflate revenue and profitability. The resulting fictitious financials are then mixed up with legitimate ones to give the impression of a larger and rapidly growing company. We suspect that, fabricated financials make it possible to raise additional funds from creditors and shareholders with the objective of acquiring legitimate companies and, presumably, to dilute the "fraudulent" part of the business over time.
See the report here at SHAREPROPHETS:http://www.shareprophets.com/partners/GBOBR.pdf
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12 comments
I think it is too early to draw a conclusion on this matter, and I have not had time to read the Quintessential document in full as have been at a conference and AGM all day, but even a quick glance at it tells me they are over egging the case. For example, they claim that the company capitalises software development costs when other similar companies do not. Well there are now specific accounting rules that require capitalisation of some costs, and Globo only has limited discretion in that regard.
As before, I just point out where comments made by others are inaccurate or biased. Even Ed has not got it quite right. Globo Plc is surely registered in the UK (albeit it was originally a Greek company) and a major proportion of its operations are now in the USA, and it is listed on AIM in the UK. This means it is subject to UK laws and regulations.
But I totally agree with Ed's comment that those companies most discussed on bulletin boards are indeed those that may be most risky - if nothing else because they can easily become the target of speculators (as they are highly liquid) and hence vulnerable to stock promoters and shorters of all descriptions.
Although I haven't directly validated any of the claims in the report, I'm surprised that those long the stock haven't. Probably an element of hindsight bias here, but given the number of red flags it does seem rather elementary to call a few of the companies listed on the Globo website and see if they actually have an active relationship with them - particulary if you've got a big chunk of money on the line.
The thing for me is that suppose Globo (LON:GBO) is totally legitimate and has not done any of the activities alleged in this report then they have been idiots to:
- Change auditors for a second time over a disagreement over audit scope and associated fees. It doesn't matter if you think the costs are excessive you just pay up when the alternative is a third auditor in as many years.
- Overplay their hand in terms of listing companies on their website that they don't seem to have an active commercial relationship with.
- Not generate any free cash flow when this is a clear metric that investors use to measure success.
- Try to raise a junk bond when they are sitting on a big cash pile.
So even if you have a completely honest management you have one that is incompetent in running a listed company. There are simply no metrics that would make me want to invest long term in such a company.
I also think it shows that when you are faced with these sort of red flags/management errors you can't rely on others to do your homework. I remember asking one of the fund managers at Mello2014 about his former investment in Quindell since I was surprised that someone so highly rated didn't think there were red flags with the company. The answer revealed how much he relied on a checklist mentality to invest and didn't really look into the detail of every company. Quite understandable when you cover the whole small cap world with a large fund. But a dangourous assumption to make as a private investor that just becasue a particular fund has invested in a company that they must have done extensive due dilligence on all aspects of management competence and honesty.
I'd suggest it's only essential to do detailed research on a company if you intend the ride out a declining share price, for example if you're a value investor. A momentum investor will exit as the party begins to show signs of fading.
For example I made a really nice profit on the Spanish firm Let's Gowex where I rode the appreciating share price over an extended period. I bailed out as the momentum failed and the share was later exposed as a large fraud.
I'm not looking to invest in fraudulent companies but some approaches might offer you better protection against a total loss.
Best of luck
Phil
Not a foolproof method since not every fraud/failure has a declining trend before suspension or a big drop (e.g. Quindell dropped 50% in initial response to Gotham report yet was quite strong in the run up to it) and momentum itself suffers from occasional rapid reversals but certainly something to bear in mind if one finds oneself in a share that appears to be very good value but starts to have doubts raised about it. Better to bail on any weakness.
Cheers,
Mark
From page 11 of the Quintessential report:
"Globo disclosed its “partners” prominently on a dedicated page on its website. We have
identified, analyzed and approached the majority of Globo’s claimed suppliers and resellers.
Despite the fact that we know part of Globo’s business to be authentic, we have been unable to confirm even a single legitimate partner."
Try:Insight (UK) LtdInsight (UK) Ltd
Accounts for year ended 31/12/2014 show:
Sales £424M (not all in Cyprus, Greece or Panama)
Employees: 802 (not all Greek)
Auditor: KPMG (not the Greek branch)
If Ramridge is correct and "It doesn't matter if the allegations are true or not" then expect a lot more action from the mudslingers - true or not - it doesn't apparently matter if it makes money for them!
Is GLOBO perfectly legitimate? I don't know. Are the accounts questionable? Certainly, but no more than many companies who are regarded as perfectly legitimate but are not regarded as prime meat for shorting.
Bonitabeach
Disclosure: Long GBO.
No doubt Insight is legit, but the claim from QCM is they tried to buy the product and couldn't. On Insight's page Globo's product is a "contact us" thing, have you tried to contact them pretending to be a buyer and got a positive answer, or is this a dormant relationship?
It is interesting to go back and read the commentary under a few of the SCVRs where Paul covered Globo (30/4, 7/7 and 29/7 for example). If I may paraphrase what Paul was trying to tell us, it was that we didn't need to own Globo. His reward was to be accused of writing "malicious nonsense" amongst other accusations.
It's difficult enough for private investors to discover the bear case for stocks when there are so many vested interests out there on the bull side. Its even harder when the director of an organisation, which is supposed to stand up for private investors, is aggressively trying to shout down the bear case.
(Disclosure: Short Globo)
The thing that always amazes me is how many so-called experts - i.e. funds - call these things wrong.
Looking at recent major interest notifications, the following funds have traded in Globo recently:
Forum European Smallcaps
Inflection Point Investments
Standard Life Investments
Forum have even been increasing their holding.
Ed, don't know if you read all the postings here - but when will the shareholding functionality be added to Stockopedia (I think you mentioned this over a year ago)? It would be so useful to see what funds (and also notable investors) own shares in which companies, and for me, I'd be able to add companies to my bargepole / investable lists, with one criteria being who owns shares in them.
Maybe these funds use Stockranks, no questions asked :-).
It doesn't matter if the allegations are true or not. Sufficient mud has been slung and a lot will stick. This is the start of the end game for Globo.
The people I feel sorry about are the foot soldiers who are likely to lose their shirts, because they had a rudimentary trust in the system, viz. the toothless and gutless regulators, auditors and with one exception (Paul) the financial analysts.
Regards, Ram
With no direct involvement (just watching and hopefully learning) I see that trading is now suspended, http://www.investegate.co.uk/aim/rns/suspension---globo-plc/201510230800052200D/
I hope this is not premature, but well done to Paul and others who saw this company for what it was.
No surprise to readers here. I've been flagging up Globo as a likely fraud for about the last three years - it was blindingly obvious from the accounts, if you know what you're looking for.
PP.