What was the cause of Quindell's share-price slump?

Quindell Portfolio's share price regained some lost ground on Wednesday morning trading after plummeting 40% in response to a scathing research note published by Gotham City Research on Tuesday.

AIM-listed Quindell was up 10.31% at 26.2p at 11:40am with a 0.25p spread. Before its rollercoaster ride on Tuesday, the shares were trading around 40p before diving to the low 20s. It recovered before plunging once more. Quindell, which has a market capitalisation of £1.4 billion, closed at 23.75p on Tuesday.

In its research note, Gotham City Research claimed Quindell's shares are worth "no more" than 3p, with between 42% and 80% of Quindell's profits being "suspect". The research company made a number of claims, including that the outsourcing company for software, consulting and technology sectors was "little more than a country club until 2008/2009, yet Quindell somehow began reporting Microsoft/Google-esque profit margins in 2010/2011".

The paper alleges that 41% of Quindell's 2011 revenues came from an "undisclosed related party controlled by a Quindell executive", that between 26-43% of the company's revenues come from subsidiary Clickus4.com, with over 10 acquisitions having no "economic substance". It also claims that the group's largest customer is itself, with 61% of its 2013 revenue coming from its subsidiaries.

However, in its disclaimer, the research company states: "You 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".

Response

Quindell was quick to rebut the claims on Tuesday and said that it was exploring what "immediate action can be taken against Gotham City Research".

"The board rejects the assertions raised in this note and considers the note to be highly defamatory, deliberately misrepresentative and entirely rejects the conclusions that are made," the company said.

"In the company's annual results for the year to 31 December 2013, released on 31 March and prepared following the appointment of the company's auditors, KPMG, Quindell reported revenue of £380.1 million and pre-tax profit of £107 million.

"Since that time, the company has released a 2014 first-quarter trading statement, which referred to gross sales for the group totalling £162.9 million and the group having cash at 31 March of approximately £150 million. The board remains confident of meeting or exceeding market expectations in all key performance indicators in 2014 and all other initiatives being pursued remain on track."

Investor view

Users on the Interactive Investor discussion board were predictably divided on the publication and subsequent share-price activity, with some investors getting out as fast as they could, some taking a contrarian approach and others holding on to see what substance the "sensationalist" claims had.

'Dice1950' said: "That note is pretty damning, to the extent that I think there must be some truth behind it, otherwise they are really sticking their necks out... If you managed to trade the huge fluctuations today, good work and well done to you. However I fail to see how any sensible investor would buy in here until the share price settles and some of the questions are answered.

"This will no doubt initiate a lot of industry discussion. This could go either way the rest of this week. Last time round we saw low single figures, which is when I brought in. Today though is not the time."

The user also said that buying into Quindell simply because its share price dropped "is not a basis for investing, it's gambling".

However, 'Nimomastik' was one of many to question the credibility of Gotham City Research. "Do they have a real website? The one I've just looked at could have been written by student within a day. Are they a real company? Can they prove what they are saying? Are they saying the auditors lied?" the user asked.

Many users were unsure of the impact of the note, with some suggesting that even if the claims are false, "the damage is done".

"Been in a couple of times, but now out," said 'spankaroo'. "Was tempted, but decided to read the note. Some of it is just plain wrong, but other bits, hmmm. Lots of allegations and some are going to be difficult to dispute by Quindell. Mr Terry is going to be very upset and the whole move to fully listed could be delayed and chance of him selling down part of his holding. Has the tide gone out and now only the naked bums can be seen?"

Some users were concerned at the market's reaction to the note, not just the fall in share price.

'Mjolnir1' said: "Something has been bugging me all day since this Gotham City fiasco was published. I mean I looked at their website - pure Mickey Mouse. Absolutely shoddy. They didn't even publish proper contact details - no number or address. What's been bugging me is how such a poor-quality outfit publishing such drivel could have such a huge impact on the share price. I mean the City can't be that naive to fall for this can they?

"Fundamentally nothing has changed (that we know) with the company so how could these stupid comments from what seems to me to be a website created as a secondary school kids IT homework project create so much damage?"

Earlier in the day, 'mkjust' said: "You [users] seem to be assuming that the Gotham blog was all that pushed the share price down - it wasn't - in my opinion it was a co-ordinated shorting ring at work - and Quindell seem to concur."

'Fruit n veg' highlighted: "I noticed a couple of very large trades around 12:15 this afternoon, totalling about 15 million shares. Fifteen minutes later all hell broke loose. These trades will need to be checked as to who originated them.

"There are people here much more computer-savvy than me, whom I would urge to look at what happened today and report their suspicions to QPP directly and copy to the Nomad. They need to get to the bottom of this shorting attack and collar the culprits.

"I will be very surprised if this 'blog' and coordinated shorting is not related to the impending roadshow in the US," the user added.

'Cattclan' agreed with 'mjolnir1's' sentiment: "What worries me for future investment return is the fragility of commitment by investors here... one could read from today's share price movement that many current, or now ex, investors were in fact not investors at all but speculators/gamblers whatever you want to call them - Gotham City (classic name there by the way) pop out of nowhere and shovel a load of negative noise and everyone bails before thinking twice... I've just finished reading the full 72 pages... this was being ditched within minutes of the release, how could anyone have made an informed decision within such a short time frame?

"Hence returning to my initial statement I'm worried only because of the type of 'investor' that appears to be holding/held this... some people have made a lot of money today on this debacle."