The Mysterious Case of Quindell

Following the announcement (in March 2015) that Quindell plc was selling its professional services division to Slater & Gordon for £637m, the trolls who had claimed Quindell was worth zero were left scrabbling wildly to restore credibility. “We are puzzled…but stranger things have happened,” said one. “S&G is committing corporate hari kiri,” said another.

Quindell was subjected to a full-blown short-sellers’ offensive in April 2014, knocking the market cap from an all-time high of £2.7bn to a post-attack low point of £205m.

The Quindell story is an opportunity to examine the trolls’ six-point model. Here’s how it works:

·         Pick stocks whose valuations are based on expectation of high growth.

·         Do no fundamental research into product, market or competition.

·         Pick on the elements of any early-stage company’s accounts that stand out (debtors, one off charges etc, that sink into the background with once cashflows grow) and accuse the company of dark deeds. Many mainstream journalists, without the resources or will to research for themselves, will repeat or reflect the accusations.

·         Distort everything the Company says and accuse it of lying. A troll is unregulated and can lie or twist with impunity. It is extremely difficult, though, for a plc to engage in such asymmetric warfare. It cannot fight back with inaccuracies (even if it wanted to, the sanctions are very tough) and its advisers generally tell it not to engage with the troll. The absence of response tends to favour the troll.

·         By several trolls working together a perception of a “market view” is created. However most of a plc’s shareholders are regulated and conservative and remain silent

·         In illiquid thinly traded stocks the mere weight of short selling (typically) 5% of the register can destroy a share price quickly.  (It is insane that pension funds who are long of small-cap stocks loan out their shares. Big institutions, like Fidelity, who have millions of shares lying around, often lend them out for a fee – often to short sellers, who use them as collateral to borrow more on a leveraged basis to short the stock. The likes of Fidelity are doing their investors a disservice because short selling an illiquid stock has a disproportionately negative effect on the price. So they are effectively taking a small fee to allow the shares they own to drop in value.)

That’s the model. And who benefits? The trolls, the hedge fund shorts, the brokers who trade it all. Who loses? Real investors, the real economy and the company’s employees, since the target’s ability to trade, grow and create wealth and employment is damaged.