Subsequent to my last blog post which covered the attack by Quintessential Capital Management (QCM) on Globo, this morning the company has made three further announcements:
- After an emergency board meeting, the CEO (Costis Papadimitrakopoulos), and the CFO (Dimitris Gryparis) have resigned and the COO has been suspended. A committee of non-executive directors has taken over after “certain matters regarding the falsification of data and the misrepresentations of the Company’s financial position” were brought to their attention.
- The joint corporate broker, Canaccord Genuity, have resigned.
- The company advised that Costis has sold 42 million shares (more than half his previously reported holding) and pledged another 10 million under a loan agreement. The company does not yet possess all relevant information about these dealings.
This certainly appears to validate many of the claims by QCM and the outlook for shareholders is undoubtedly bleak, with the shares continuing in suspension of course.
One focus of the new board and of investors will undoubtedly be the role of auditors Grant Thornton in this debacle. As QCM suggested, is this another Parmalat? That was an Italian dairy company which ten years ago was the subject of a major fraud where Grant Thornton were the auditors.
One problem all investors have is that they normally have to rely on what the management of the company say, and on what the auditors report (who also typically rely on the word of the directors to some extent). If there is consistent misrepresentation then it can be difficult to detect. But some commentators such as Paul Scott who writes for Stockopedia have been consistently negative about some aspects of the Globo accounts, and he must be thanked for his warnings. However, other commentators have been positive on the company and tipping it as a “buy” until quite recently (for example in Investors Chronicle as late as this October by respected commentator Simon Thompson).
Neither I nor ShareSoc give buy or sell recommendations of course, but we have covered the company in the past. For example as long ago as January 2012 was the first mention in our newsletter where I declared my interest at the time and subsequently described it as a “double whammy of risk” in February 2012. Reports on all the Annual General Meetings of this company have been available to ShareSoc Members and the questions posed by shareholders covered many of the issues raised by negative commentators. My concluding comments in the last report were negative on the debt raising and I substantially reduced my holding at that time. But regrettably I have sometimes criticised some of the complaints about Globo and the shorting attacks but it did not seem an unusual business profile for an early stage software company in my experience. For example the comments on capitalisation of software development costs were dubious as I pointed out in the previous blog post. Like others though, I did rely to a large extent on the statements by the directors and the accounts as published.
Now if there is a clear fraud as seems quite likely at this time (e.g. overstatement of revenue, even assuming the reported cash held is accurate), then what do investors do? To a large extent they need to rely on the company directors to pursue those persons responsible (although shareholders can pursue “derivative actions” in some cases if the company does not). That might include actions against the auditors if they were grossly negligent but such actions are exceedingly difficult.
It might be useful to form a committee of shareholders to support the remaining directors in stabilising the company and pursuing recovery of losses if possible. Any private investors who were significant holders of shares in this company might like to contact ShareSoc for some advice on this matter and further support. You can register your interest in this matter and receive further information on this web page: www.sharesoc.org/campaigns/globo/