Quindell investors – get your heads out of the sand right now

Cast your mind back to April, if you will.

Aim-listed Quindell (LSE:QPP), the insurance claim outsourcer (or financial sorcerer, as it turned out) was just about to hit the FTSE 250 possibly even nudging the dizzy heights of the FTSE 100.

The only thing was, an American vigilante outfit called Gotham City questioned Quindell's books. Were the figures all they appeared?

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At the time, I wrote an article commenting on Gotham's research. I suggested there were some damn good points in there. For example, how was this business making such fantastic profit margins when we all know the underlying business of insurance claims can't be that profitable?

And why was nearly half of the business's revenue coming from businesses it owned? Why had it gone through three different auditors in as many years? And of course, how could such a supposedly profitable business be generating negative operating cashflow?

The article didn't go down well with some readers. I guess Quindell shareholders were feeling pretty bruised.

I left the subject with the notion that "only time would tell" whether Gotham was a Batman-style goodie or a nasty baddie, issuing its own rubbish sell-note in order to make cash out of a short position.

Well, time has told. The shares have lost nearly 90% of their value. It's certainly time to check in on this one again.

This really stinks

Now, Gotham made some bold assertions about Quindell. Essentially, it stated that this business was a Ponzi-like scheme.

It's still too early to tell if that really is the case. But things certainly aren't looking good. Its corporate advisers have clearly got cold feet. Joint broker Cannacord has dropped its client.

Even its City PR firm has walked away. This thing really stinks!

Worse, the guys sitting at the top of the pile have been busying themselves selling shares. The only thing is, they didn't want to tell the markets what they were up to.

Get this: at the beginning of November, the (now former) CEO and CFO declared they were buying Quindell stock. They said they were using an arrangement with a third party (think City pawnbroker) to lend them money collateralised on their existing shares.

Sounds complicated, right? It is. And in my experience, where there's complication, there's often obfuscation.

To cut a long story short, these guys handed over £8.5m worth of stock to the broker. The directors transferred shares to the broker and took the money. They then used a small amount of the proceeds to buy stock in the company, thereby declaring that directors had, in fact made purchases in the company! Nothing could be further from the truth.

The deal was that the directors would buy the stock back in a couple of years. As I say, it was a pawnbroker kind of deal. But it now turns out these directors will not be buying the stock back, and they have no commitment to do so.

As I say, this whole thing stinks.

There's a lesson to learn from this

Now that Quindell has been forced to make a clarification on these share purchases' (read: sales) is damning. No wonder the shares have tanked. And to be honest, were it not for the furore surrounding this particular company, then I'm sure that no clarification on the share deals would have been proffered.

The point is to beware of director purchases. If it's reported that a director is making a share purchase, but that purchase is financed by handing over a whole bucketload of his own shares to a third-party (the pawnbroker), then the chances are it's a director sell.

I mean, if you transfer the title to another party, you take the cash and are then free to spend it as you will (with no legal commitment to buy back the stock from the City pawnbroker) then of course it's a sell. The City regulators need to get on top of this scam.

And as for Quindell shareholders, I strongly suggest it's time to get your head out of the sand. It's increasingly looking like Gotham's concerns about a business built on sand were well founded.

The fat lady hasn't yet warbled her last words, but the omens are looking very bad. The City rats are deserting this ship. The captain and first mate are already in the raft, and it's going to be hugely interesting story if (when?) the ship actually sinks.

In the meantime, look out for those director purchases'. I have to confess, this scam is a new one on me. Still you live and learn!

In the original version of this article, published on 1 December, I said Cenkos had pulled its buy rating on this stock. That was wrong. Though the analyst charged with covering the stock, Andrew Bryant, has left Cenkos, the fact is that as of today, 3 December, the buy rating is still in place.