Plus500 suspended after shares hit by US hedge fund Cable Car Capital's short position

22nd May 2015 09:42

Shares in online retail-focused broker Plus500 were suspended on Friday after falling by more than a third on the day and around 70% over the week due to speculation about regulatory issues and after several major short positions came to light.Shares in Plus500 were down by 37% by 10:00 BST, with sector peer TechFinancials also suffering from read-across, but larger IG Group breaking through all-time highs as traders assumed clients would switch to a more robust provider. Over the course of the week Plus500 shares have fallen by two thirds, from 750p to 275p.They were reinstated on Friday afternoon after the AIM-listed company confirmed that the Financial Conduct Authority had demanded it appoint a Skilled Person to conduct a review of its anti-money laundering (AML) and financial sanction systems and other related regulatory controls.On Monday Israel-based Plus500 had suspended more than half of its UK customer accounts after all clients were asked to provide enhanced identification in order to comply with stricter anti-money-laundering rules. House broker Liberum calculated that between a third and half of customer could leave as a result of the freeze. This led to the stock declining 36% on the day.On Friday Plus500 said: "The Skilled Person's review is normally a confidential process but in light of recent events the board believes it is prudent to inform the market of the review."It explained that the recent requirement for extra AML documentation had come about as the FCA had prohibited the company from allowing all transactions for existing customers or taking on any new clients until the AML information had been provided and recorded.San Francisco-headquartered Cable Car, which has written a 10-part take-down of the Israeli company, said it was short Plus500 with a price target of 76p, the company's stated amount of cash per share.Investors Valiant Capital Management and Ennismore Fund Management have taken short positions, Bloomberg noted.The note from Cable Car's portfolio manager Jacob Ma-Weaver, a former Amici Capital, McKinsey and Dodge & Cox analyst, dismissed Plus500 as a "bucket shop" that offers customers derivative interests without transacting on an exchange. "Shockingly, that's not illegal in Europe."He went on to note that Plus500's 2014 accounts had restated 2013 revenues, reducing them 80% from £63.8m to £12.8m."Plus500 has yet to explain this restatement or reclassification of revenues in a regulatory filing. That omission alone leads me to believe trading in Plus500 shares should be suspended until the company clarifies its accounts," Ma-Weaver said.Furthermore, Gotham City Research, a firm run New York short seller Daniel Yu that gained attention for its attack on AIM-listed Quindell, said on Wednesday that it was "wary" of Plus500, predicting the shares will decline further.Gotham one of many who posted a link to Cable Car's website on Twitter on Friday, where it said "it seems we are not alone in observing Plus500 accounting irregularities".On the other hand...But, taking a more sanguine view, share tipping service Motley Fool advised its readers, "if underlying problems emerge, Plus500 shares could fall a lot further. But that's a negative view for a firm that was previously operating successfully under UK financial regulation."What if the firm has simply been told to tighten up its procedures, without any wrongdoing being found? If so, Plus500 could rebound sharply and prove a very profitable investment."On Tuesday, Numis had also taken a more balanced look. A note to clients observed that it was business as usual for 75% of Plus500's clients as both the Australian and Cypriot subsidiaries are unaffected by the review to client on-boarding processes.When combined with the circa 45% of Plus500 UK clients that are allowed to trade, "implies 70-75% of clients have been unaffected".Analysts said that, according to Plus500, the Australian regulator ASIC has already completed a full review of the business last year and was happy with the group's procedures while the Cypriot regulator CySec requires that all procedures are verified in advance of a licence being issued there."Plus500 has flown in a number of additional staff to the UK to accelerate the verification of accounts and it expects to have the majority of the higher value clients verified in the next couple of days while the remaining clients may take up to a month to do so."Sector peer catches the Plus500 coldMeanwhile, binary options platform providers TechFinancials, which floated in London in March, has seen its shares trade down more than 25% this week to below its IPO price for the first time.Originally placed at 27p, TechFinancials shares had climbed to as high as 48p in April before settling back somewhat.Forex website Leaprate reported that despite "no new news' on the compay, nor anything regarding its OptionFair binary brokerage subsidiary, which accounts for about half of TechFinancials' overall business and financials, several City traders had cited "a change in heart toward upstart online trading companies following the problems experienced by FCA-regulated Forex and CFD broker Plus500".There is, as Leaprate added, no reason to believe that any Plus500-like issue might hit TechFinancials nor any other online forex, CFD or binary broker for that matter.