Gotham "gutter rats" slammed as Quindell takes legal action

Legal action has been initiated by outsourcing company Quindell Portfolio against Gotham City Research in response to a research note published earlier this week, which it calls a "coordinated shorting attack".

In a statement released on Friday, the company reiterated that it considers the publication to be "highly defamatory, deliberately misrepresentative and entirely rejects the conclusions that are made".

The research company made a number of claims, including that Quindell's shares are worth "no more" than 3p, with between 42% and 80% of its profits being "suspect". Quindell's share price dropped in Friday morning trading by over 5% to 23.68p, after edging back up from its 40% plummet on Tuesday.

"The board notes the short positions that were taken in the company's shares prior to the publication by Gotham City Research and also the reference in the report admitting to readers that they should 'assume that, as of the publication date of the report, Gotham City Research LLC stands to profit in the event the issuer's stock declines'," Quindell said.

Short selling is the sale of a borrowed stock motivated by the belief that its price will drop, which will allow it to be bought back at a cheaper price to make a profit.

The software, consulting and technology outsourcing company, which has a market capitalisation of £1.5 billion, expects to update the market with a more detailed response later today.

Investor view

Most users on the Interactive Investor discussion board were pleased with the update.

'Fruit n Veg' said: "Legal action has been taken. That is a good start. It is a warning that this scam is actionable and that one or more market participants have already been targeted. Quindell should spare no effort in tracking down those within reach of the authorities."

'Westie11' agreed: "Hope the gutter rats are squirming in their lairs. About time this kind of slander was followed up with severe penalties."

'Don Van Vliet1' said: "The key is to rebut the headline findings. Addressing the historical trivia is of secondary importance at this stage, as it simply has no bearing of where the company is today and how it is presently structured. Banging on about a country club and [founder and executive chairman] Robert Terry's wife is a desperate red herring. I personally would have been embarrassed to have included that in the report had I been the author - it immediately strips away any gravitas it might have had."

However, in response, 'winningstreak' said: "It did not strip away 'gravitas' on this occasion, at least not in the eyes of the private investors' who couldn't sell quick enough."

But 'Don Van Vliet1' said: "Not for one minute do I (or do you) believe that 99% of the private investors had even read the report by the time they sold. In fact I'm not sure that many would have even read the headline findings in full. They saw two things - the words 'quicksand' and 'target price 3p'. In fact I would go so far as to say that even today probably only 5-10% have read the report in full and I'm being generous.

"In the space of an hour the shorters managed to take out a whole raft of automatic stop losses, which, in turn, triggered more sells, which, in turn, spooked private investors who saw a plummeting share price, who, in turn, sold in panic, which, in turn, took out more stop losses. It was a vicious self-fulfilling downward spiral. Classic herd mentality and undiluted panic, nothing more. Rationality played no part in this."

'Andy0000' agreed and was concerned fighting the claims would also harm Quindell.

"I can't see a way round this that doesn't hurt the business though. There is an implicit warning is this debacle. When you invest on AIM your cash is never safe. It really is the Wild West.

"The other point is that this becomes self-fulfilling as management time and resources are divert to this non-productive activity. Our accounts will have exceptional legal and accounting fees at next update."

Although 'Fruit n Veg' agreed, he believes Quindell cannot stand by doing nothing.

"I take the point but I don't think the company can ignore any abuses if the alleged abusers are within reach, i.e. in the UK. It sends the wrong signal if they are seen not to be acting. The costs will be factored into financial expectations."

Some users believe institutional investors hold the key for share-price recovery. "The stability of the share price will depends on one factor in my opinion; the support of the institutional investors," said 'Pipos'.

"They will have been speaking to and meeting the board of directors, they are the ones who can support or let the share price go with their buying or selling activity. There are several tactics they can use to help, such as stock recalls to squeeze the shorters and or just buying more stock. But the choice is theirs of course depending on how they view the attack and the allegations," the user added.