Here's the bottom line:
- Last year, EBIX was investigated for improper accounting practices.
- They failed to 'come clean' completely with what happened.
- The company is not on a solid foundation, and the stock has suffered.
EBIX was once a fast growing company cited by Forbes, Fortune, and other financial publications. Last year the company was embroiled in a scandal that wasn't completely resolved, at least to the satisfaction of some. In case you've never heard of the Johns Creek, GA based firm, here's a summary of what they do from their website:
Ebix is a leading international supplier of on-demand infrastructure exchanges to the insurance, financial, and healthcare industries. In the Insurance sector, the Company’s main focus is to develop and deploy a wide variety of insurance and reinsurance exchanges on an on-demand basis, while also, providing Software-as-a-Service ("SaaS") enterprise solutions in the area of CRM, front-end & back-end systems, outsourced administrative and risk compliance.
The market cap is as of this writing 1.2 Billion and shares are trading at $38 down from a peak of almost $84 one year ago. Here's a chart showing this movement:
The reason for the drop was the firm was caught with their hands in the corporate cookie jar, in legalese that means: “booking external revenues on transactions between its subsidiaries.” This caused a number of law firms such as Glancy Prongay & Murray to investigate wrongdoings according to press releases, but nothing materialized in the matter. This isn't (EBIX) first tussle with the legal system in USA, there have been cases alleging insider trading, as referenced by AJC:
Rennes, by selling for $77.20 per share ahead of the October announcement, appears to have avoided a potential loss of about $245,000, the AJC found.“The timing is certainly suspicious,” said attorney David Chaiken, who spent nine years as a federal prosecutor for the Atlanta U.S. Attorney’s office and now works in white collar and government investigations for Troutman Sanders. “A quarter of a million dollars is going to catch a prosecutor’s eye, definitely, or an SEC enforcement attorney.”
When EBIX did hire a new auditor to resolve the accounting issues, the new auditor found issues with internal controls, which caused the stock to drop further:
On March 1, 2018, Cherry Bekaert LLP, the Company’s outside auditor, expressed an adverse opinion about Ebix’s internal controls over financial reporting. The group reported, in part, that it had found (A) numerous accounting discrepancies regarding recognition of goodwill and acquisitions, and (B) evidence it believes demonstrates that Ebix is perpetrating a scheme to incorrectly book revenue and earnings.
Then there are cases going back as far as 2011, it seems like this company is attracted to litigation and risk like a magnet. Or, perhaps, there is something that is still yet to be uncovered properly, such as bad management. Does EBIX have proper internal controls? It seems that they haven't done anything to address the issues of these multiple cases.
Viceroy research has done an excellent job of researching this issue, their detailed reports are available here.
The last trick of tricky executives was the hiring of RSM, as they claim them to be the '5th' largest accounting firm, as if they were part of the "Big 5" - there is no more Big 5 now there is only the Big 4.
One of the notable conclusions in Viceroy's research, there are many, is the incentive based pay of the Indian based accounting firm RSM. India is vastly different than USA. What goes on in India, stays in India.
Incentive based pay means that they will be paid if the audits are made to a degree that are approved by management, i.e. the one who writes the checks. It may be legal in India, but it certainly is not in the united states.
Indian-Americans that work in high paid Wall St. jobs have the tendency to push the limits of what's legal, as evidenced by the case of Raj Rajaratnam, seen leaving prison to his fancy Manhattan condo valued in the millions of dollars. Then there is the case of Hotelier Sant Singh Chatwal that finally pled guilty to 'campaign fraud' which is bribing corrupt US politicians, in this case Democratic Senator Hillary Clinton and fellow Democrat in crime Chris Dodd.
This type of abuse of the US system is evidenced in Viceroy's report of the Raina "Foundation", available here. According to the Georgia Secretary of State, the license of the Robin Raina Foundation, Inc. is Expired as of 11/9/2014. The domain name rainafoundation.com is owned by Ebix Inc. according to WHOIS records. Clearly, this foundation is not a genuine foundation, but another example of fraud, a means by which the beneficiaries can siphon off funds from investors while claiming to be 'do gooders.' This is the focus of an ongoing investigation into the Clinton Foundation.
EBIX and it's executives are masters of smoke and mirrors. They are players in the great game of quarterly results and making things look like, on the surface in the US, everything is OK. But the sad reality, when you look at the facts, it seems like they are a one trick pony, and that trick is grey area accounting fraud. When your auditor is paid based on performance, it means they will do whatever you ask them to in order to be paid. That's not an independent audit, that's a white wash.
Based on publicly available research we believe that EBIX will continue to face challenges and the stock will suffer. For example, if the auditors are on the take, how about stock authors that are paid to promote the stock? EBIX has proven it will stop at nothing to bribe their way to success. That may be very American, however times have changed and markets now demand real innovation, not just self-promotion using any means necessary. EBIX does have a real underlying business there is no question about that. However, based on their continued behavior of manipulation, it's likely that the stock is overvalued. Also, if we were investors, we would want to see all the upper management replaced, with people unrelated to the events of the past few years. As it stands, EBIX is a stay away or a sell if you have, or a potential short - if you have the patience for the fraud to be uncovered.
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