After Gotham City Research released a scathing report on Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) questioning the company’s earnings and setting a price target of 2p, Quindell saw its stock price quickly drop from 39p to less than 24p. Two days later, it has come back with a detailed refutation of Gotham City’s allegations, but its complicated rebuttal leaves the impression that a thorough look at the company’s books might be warranted.

Quindell

Rationale behind Quindell’s complex transactions unclear

One example is Gotham City’s claim that between 2009 and 2010, Quindell PLC’s (LON:QPP) (OTCMKTS:QUPPF) largest customer was ClicksUs4.com, a company owned by Quindell CEO Robert Terry.

“Gotham’s representation of the Clickus4.com relationship is based on partial information and is misleading,” Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) writes in its defense. “ClickUs4.com was not originally an entity owned by Robert Terry, it was in fact a 100% owned subsidiary of Quindell.”

Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) explains that ClickUs4.com was a shell company that was used to acquire assets from other companies. First Quindell sold the shell to Terry for £1, then Terry sold it to vendors for £1. Clickus4.com would then trade stock for assets, and Quindell reacquired Clickus4.com in exchange for Quindell shares, and then consolidated Clickus4.com onto its balance sheet.

There may be good reasons for doing this, but they aren’t obvious. Most of the rebuttal reads the same way – lots of complex transactions that may be the result of entrepreneurs using aggressive tactics to grow their young tech company, or it could a sign of something worse. As Dan McCrum at the Financial Times points out, that Quindell has gone through three different auditors in as many years and listed via reverse merger are also red flags, even if they’re not evidence of any wrongdoing.

Gotham City critics cite the Ebix short

Gotham City’s interest in the matter is clear – they are short sellers hoping that other investors will accept their thesis and cause the price to plummet. Critics point to Gotham City’s Ebix Inc (NASDAQ:EBIX) short which was made public last June and caused the tech stock to fall from $19.72 to $9.52 in a day. But since then Ebix has slowly recovered, bouncing between $16 and $17 for the last two months.

Now investors have to decide whether they believe Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) is being unfairly attacked and is trading at a discount, or if this is a stock there better off avoiding. Quindell doesn’t do itself any favors by taking a defensive tone and presenting strange, complex transactions as if nothing could possibly be suspect.