Madrid, Spain – 02/07/2014 – as published by The Wall Street Journal. 

Stock Drops After Report by Investment Firm Gotham City Research

The stock of Spanish tech company Gowex reeled for a second straight day Wednesday in the wake of a scathing report by a New York investment firm, while the selloff spread to other companies in Spain’s junior stock market.

Gowex’s stock plummeted 26% Wednesday following a 46% decline a day earlier, after investment firm Gotham City Research LLC issued a report on Tuesday alleging that 90% of Gowex’s reported revenues were nonexistent and saying the stock was worthless.

In a statement Wednesday, Gowex, which provides free Internet hot spots in cities, said its previously reported results were accurate, and said it was considering retaining additional auditing firms “to reinforce transparency.” In a statement Tuesday, Gowex CEO Jenaro Garcia called the Gotham report “emphatically false” and threatened legal action. Mr. Garcia said Gotham’s “only objective is to damage the value of our shares” to obtain benefit for itself as part of a short-selling investment strategy. Short selling is a strategy often used by professional investors to bet against companies by selling borrowed shares.

Gotham didn’t respond to requests for comment. In a disclaimer accompanying its Gowex report, Gotham acknowledged that it “stands to profit in the event the issuer’s stock declines.” Gotham has previously issued other negative reports on stocks in which it indicated it might have a short position.

Gowex’s shares, closed Wednesday at €7.96, down from Monday’s close of €19.95. Almost €900 million in Gowex’s market cap was wiped out in two days.

Gotham’s Gowex report focuses on the company’s business model and says “Gowex is too good to be true.” Gowex provides free Wi-Fi hot spots in locations such as airports and restaurants—a low margin business that, according to Gotham couldn’t plausibly generate the €182.6 million revenue reported by Gowex in 2013. In its statement Wednesday, Gowex reaffirmed its revenue figure.

Gowex trades on Spain’s Alternative Stock Market, Madrid’s junior stock market, where it had been one of that bourse’s few successes since going public in 2010. Since the release of the Gotham report, other stocks on the junior market have also tumbled, including telecommunications firm Eurona, which lost 2.9% Wednesday after falling 7.7% Tuesday.

Overall, the alternative market, founded in 2008, has fallen short of expectations that it would serve as a funding source for startups, analysts say. “You have to remember it was started amid what has turned out to be the worst economic crisis in Spain since the Spanish Civil War,” of the 1930s, said Ignacio de la Torre, a specialist in finance at Spain’s IE Business School. “The economic backdrop has been horrible.”

—Carlos Perea contributed to this article.