How Globo lied and cheated its way to the top of Aim

Earlier this morning, five months after the market valued Globo at £229m, shareholders in Globo PLC got the news their securities are cancelled. What the hell happened here?

Earlier this morning shareholders in Globo PLC got the news they’d been dreading since October 22nd, the day the company’s shares were suspended:

“The Joint Administrators do not anticipate that there will be any return from the administration for the shareholders of Globo Plc, and therefore they consider that it is appropriate that the securities are cancelled”

What a disaster! Five months ago the market valued Globo at £229m. What the hell happened here?

Great name

First, some background. Globo was set up in Greece by a champion windsurfer named Costas Papadimitrakopoulos, and it floated on Aim in 2007. It sells security systems which allow companies to store data securely on mobile phones.

And for years, Globo was a real Aim success story.

The product sounded very clever and useful. Profits piled up. Investors were very happy with their returns. Superficially, everything seemed great.

Globo was a particularly popular share for ordinary investors. You can understand how they were caught up in it. In June, investors valued the company at £229m.

But there were warning signs too. Globo didn’t generate a lot of cash. Its shares were dirt cheap relative to its profits. And it attracted a lot of “short sellers” – specialist investors who bet that a company is overvalued (you can access an up-to-date list of companies with the biggest “short positions” at this link).

Greeks bearing shares

It all hit the fan a couple of weeks ago. A short seller called Quintessential Capital Management released a new report alleging that 40 “resellers and partners” listed on Globo’s website had never heard of Globo.

When the FT asked Papadimitrakopoulos about the allegations he fobbed them off… then hung up the phone, picked it up again, called his broker, and sold £12m worth of his Globo stock. A couple of days after that he, the COO and the CFO resigned. And the shares were suspended.

Now the auditor’s report has been released and everything has fallen apart. And Globo’s shareholders are left with nothing.

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A problem for small cap investors

It’s a nightmare scenario for any penny share investor. As I’ve written before, penny shares are weird. They have a few unusual characteristics:

  • They’re more volatile…
  • They’re more likely to go up in value…
  • They’re easier to research…
  • … BUT they’re more vulnerable to fraud

Why do I say they more vulnerable to fraud? Well, big companies have a squad of professional analysts scrutinising their every move, so it’s harder for them to get away with dodgy behaviour (though Valeant, Volkswagen, Enron and Tesco show that it’s not impossible!).

Small companies might only be covered by one stockbroker, and a small number of private investors. Less scrutiny means more opportunities for bad behaviour.

So if you want to make the most of the big returns on offer from investing in penny shares, you should have a strategy for dodging the dodgy penny shares.

Here’s what I do: before I even consider a small company, I run it by my software filter. The filter is specially set up to scan companies for 17 different characteristics. It cuts out “junk stocks” – stocks that are not generating much cash, not making profits, and so on. That leaves me with a shortlist of quality small companies.

I feel a lot more secure choosing from my shortlist than from the whole market, because I know they’re legit businesses making real money. The filter doesn’t remove the risk of fraud, of course. But it’s a great start.

(If you’re interested, I explain in detail how the filter works here.)

Before I go today: on Friday, I made my big announcement about Risk and Reward.

Risk and Reward is the new and improved, bigger and better, successor email to Penny Sleuth.

Suffice to say, it’s going to be great.

I need you to do one thing though, in advance of the launch this Monday. It takes less than a minute. I need you to “whitelist” the new Risk and Reward email address, so your computer doesn’t mistake it for spam.

You’ll find instructions for how to whitelist an email address at this link.

And the new email address is [email protected]

I’m keen to hear what you love and hate about Penny Sleuth. I’ve loads of ideas for Risk and Reward, but I’m sure that you have some thoughts of your own. I’m all ears! [email protected]

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