Ebix Inc., a major provider of software and e-commerce products for the insurance industry, saw its stock price fall more than 25 percent Thursday, Feb. 21, after a research report critical of Ebix’s financial reporting began to circulate online.
The company’s shares fell further Friday morning before starting to rebound during late morning trading.
The report, from an investment and research firm called Gotham City Research LLC, appeared on the blog section of investment and research website Seeking Alpha as well as on Gotham City Research’s own website.
The report slams the Atlanta-based Ebix’s financial statements as “unreliable, inaccurate, and incomplete.” The report further argues that Ebix’s tax strategy does not appear sound. It alleges, for instance, that the software maker did not properly disclose to U.S. regulators a $65.8 million related-party loan to a Singapore-based subsidiary. (Gotham City Research states explicitly in the report’s disclaimer section that the readers “should assume that as of the publication date of this report, Gotham City Research LLC stands to profit in the event the issuer’s stock declines. We may buy, sell, cover or otherwise change the form or substance of its position in the issuer.”)
On Friday morning, Ebix Inc. issued a statement rebuking the report’s allegations, saying that the company has reviewed the “unsubstantiated report.”
“Management believes that to the best of its knowledge Ebix’s financial reporting, including, among other things, the company’s accounting for and reporting of intercompany loans, is appropriate and complies with all SEC reporting requirements,” according to the Ebix statement.
Popular investment website The Motley Fool called the report “a short attack” and says the Ebix has faced similar attacks in the past. It says there was a critical report in March 2011 from a firm called Copperfield Research. And last November, a news item surfaced that suggested Ebix may be under investigation by the Securities and Exchange Commission, which Ebix later called inaccurate.
The following is the Gotham City Research report’s summary that appeared on Seeking Alpha:
We read over 10,000 pages of documents from Sweden, Singapore, India, Australia, New Zealand, & the United States pertaining to the company. We consulted with professionals from the disciplines of forensic accounting, law, transfer pricing, background investigations, finance, and software. We found assets not adding, cash disappearing, and management misrepresenting. The more we looked, the more we found reality to be far worse than the prior critics had made it out to be.
For example, we discovered a $66 million undisclosed related party loan, $67 million accounting irregularity in long-lived assets, and Australian revenues at a fraction of what the SEC filings disclosed, per the Australian filings. We concluded that (i) Ebix’s financial statements are unreliable, inaccurate, and incomplete, (ii) their tax strategy does not appear sound, and (iii) the stock should be halted.
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