Bloomberg News

Ebix Shares Drop Following Accusations of Inflated Earnings

July 01, 2011

July 1 (Bloomberg) -- Ebix Inc. dropped 6.4 percent yesterday following news of a lawsuit accusing the business software provider of padding its 2009 fourth quarter revenue by $200,000.

Ebix fell $1.30 to $19.05 in Nasdaq Stock Market trading in New York and its market capitalization declined by as much as $114 million during the day. The Atlanta-based company, which has denied any wrongdoing, said following the stock drop that its board of directors approved a plan to expand a share buyback program from $45 million to $100 million over the next year.

“The board made the determination to increase the share buyback plan limit after reviewing Ebix’s consistent cash flows,” the company said in a statement.

Ebix, a business software provider whose acquisitions have made it one of the fastest growing small-cap companies, inflated earnings by overstating accounts receivable, according to an executive who sued Ebix after it bought his firm.

The size of the overstatement was approximately $200,000, according to a complaint filed May 24 in federal court in Columbus, Ohio. It allegedly occurred in the fourth quarter of 2009, representing almost 1.7 percent of Ebix’s net income of $12.1 million for the period on revenue of $31.3 million.

Shares in Atlanta-based Ebix, which provides data processing software to the insurance industry, climbed from $3 in January 2007 to $29 in March of this year. Among the 800 firms with market capitalization between $500 million and $2 billion, Ebix surpassed all but ten in terms of market-cap growth over the past four years, according to data compiled by Bloomberg.

During that same period, short interest in the stock has grown at the fourth fastest rate. After Ebix shares dropped 14 percent this year through June 15, the proportion of the company’s stock sold short surged to a record 27 percent, according to Data Explorers, a New York-based research firm.

“When a quarter or more of the shares have been sold short, it’s certainly indicative that investors question the legitimacy of the company’s reported results,” said Lynn Turner, former chief accountant of the U.S. Securities and Exchange Commission.

Billing Irregularities

The allegations of billing irregularities come from Steven Isaac, former chief executive officer of Peak Performance Solutions, and two directors of the firm, Earl Gallegos and Richard Freeman. The three men sold the company to Ebix in September 2009 for $8 million. Peak produces risk management and compliance software for the insurance industry.

Robin Raina, Ebix’s CEO, said the overstatement was only $150,000, and that it was discovered by Ebix management early in 2010 and corrected immediately.

“That revenue is from the first quarter of 2010. In the second quarter of 2010, we called it uncollectible,” Raina said. “Their complaint, it’s completely wrong.”

He also said the sum involved was insignificant for a company projected to generate more than $170 million in revenue for 2011. Ebix, which had a market capitalization of $803 million as of yesterday, reported full-year 2010 net income of $59 million on revenue of $132.2 million.

The company said in its last annual report that it had outpaced the Nasdaq Stock Market in total cumulative return for shareholders, turning a $100 investment made in 2005 into 10 times that by the end of 2010, compared with just a $20 gain for the market.

Fired Employees

The Peak directors claimed that, after Ebix acquired their company, it fired five of their employees including the person responsible for billing Peak’s clients. Ebix then took over its billing operations.

“Ebix was consistently unable to tie customer payments to specific invoices, and so Ebix was unable to determine which customers had made payment for which projects,” the directors said in court papers. “Ebix does not have sufficient internal accounting controls to allow their books and records to be relied on.”

Raina said that Ebix’s auditors signed off on the company’s books and approved its internal controls.

Target of Short Sellers

Questions about company growth are a staple of Ebix’s quarterly earnings conference calls. Ebix has acquired 13 firms since January 2008, according to securities filings.

The roll-up strategy, as well as the lack of any apples-to- apples breakdown among revenue streams following acquisitions, has drawn the attention of short-sellers, who have pushed Ebix’s short interest ratio into double digits in 16 of the past 18 months, according to data compiled by Bloomberg.

On March 22, a self-described short-seller attacked Ebix on the Seeking Alpha website under the pseudonym “Copperfield Research.” Short-selling is the practice of selling a borrowed security in anticipation of a price decline.

The blog post criticized the company’s growth strategy, its accounting practices, turnover among its auditors and even Raina’s charitable works, which involve the construction of housing in the slums of his native India.

Two days later, on the afternoon of March 24, Ebix’s shares suddenly plunged to $22.52, down 24 percent from the previous day’s close of $29.72, an all-time high. Ebix’s market capitalization shrank from $1.2 billion to $878 million.

Suspicious Circumstances

Raina, 44, said the Financial Industry Regulatory Authority was looking into the suspicious circumstances surrounding the anonymous blog posting and the wave of selling that followed about 48 hours later.

“I’ve never seen anything like that,” said Jeff Van Rhee, who follows the stock for Craig-Hallum Capital Group. As to the unusual nature of the selling, which began all at once in the middle of the afternoon, that remains a puzzle, he said.

“It was tick, tick, tick, and then the explosion, like a flash mob,” Van Rhee said. “It makes you scratch your head.”

As CEO of a small-cap company in the business-to-business space, Raina isn’t a household name in the U.S. In India, he is a celebrity, a native son who found fortune in America and used it to fund the home-building effort in his homeland.

On its website, the Robin Raina Foundation said it has built 1,157 homes for underprivileged families in Bawana, part of a $15 million project to construct 6,000 residences. The website features testimonials from 24 Indian celebrities, including Bollywood superstars, singers, fashion models and cricket players.

Peak Directors Suit

The Peak directors sued after Ebix management refused to pay an earn-out, or incentive tied to the sale, of $1.5 million this year. The denial was made on the grounds that Peak didn’t meet its target of $6.5 million in revenue for 2010 to trigger the payment, according to court papers.

The Peak founders claimed they met the target. As an example of what they described as the confused state of Ebix’s billing operations, they said Robert Kerris, Ebix’s chief financial officer, produced an unaudited spreadsheet in April putting their 2010 revenue at $5.9 million, while Sean Donaghy, the company’s controller, gave them numbers which added up to $6.5 million for the year.

Both Ebix executives deducted the disputed $200,000 in accounts receivables from the 2010 sum of Peak’s revenue, according to the complaint. Peak’s management claimed the bogus billings had been produced by Ebix in the last quarter of 2009, before the earn-out period began.

A Difference

Isaac and his co-founders said Ebix generated $6.7 million in bills for Peak’s clients during 2010, creating an $800,000 difference between Peak’s accounts receivable balance for the year, and the $5.9 million that Ebix’s finance chief told them had been applied toward their earn-out.

The directors also claimed other oddities in Ebix’s billing practices, such as negative revenue from various Peak customers during 2010, and an alleged failure by Ebix to pay unemployment compensation premiums in the state of West Virginia. That lapse cost Peak $65,000 in revenue because it wasn’t allowed to operate in the state until the matter was resolved, they said in the complaint.

Raina said in an interview that he had no doubt his company would prevail in court over the earn-out claims.

“It’s a black-and-white issue,” he said. “They had to hit $6.5 million. It’s pure revenue. Nobody contested anything until the last day. It’s in eveybody’s interest to have as much revenue as possible.”

Similar Suit

The Peak directors’ allegations that Ebix mishandled the accounts receivable balances of an acquired company aren’t unique. A lawsuit filed in San Diego federal court in April 2010 by shareholders of ConfirmNet, a San Diego-based company acquired by Ebix in November 2008, featured a similar claim.

Those investors alleged that $92,280 of ConfirmNet’s legacy accounts-receivable balances in 2008 were never collected by Ebix and were never written off in 2009 or in early 2010, when the lawsuit was filed.

The ConfirmNet investors also said Ebix tried to deduct $213,393 from its 2009 earn-out payment on the grounds that the company had overstated its 2008 revenue by more than $100,000. In April, a judge ruled in ConfirmNet’s favor on the issue of the earn-out, while tossing out a third ConfirmNet claim about the timing of revenue from one specific client. The parties reached a confidential settlement June 20.

According to Raina, Ebix agreed to pay $383,000 to avoid further legal costs in the 14-month-old lawsuit.

Accounts Receivable

Raina said he is focused on the accounts receivable issue.

Because Ebix switched its own internal billing software program in the first quarter of 2011, the accounts receivable balance grew at a faster rate than it had recently, he said. In April, Raina added three new full-time staffers to the two people who already worked in Ebix’s billing department, he said.

The case is Isaac v. Ebix Inc, 11-00459, U.S. District Court for the Southern District of Ohio (Columbus). The ConfirmNet case is Irving v. Ebix, 10-00762, U.S. District Court for the Southern District of California (San Diego).

--With assistance from Phil Kuntz in New York. Editors: Peter Blumberg, Glenn Holdcraft

To contact the reporter on this story: Greg Farrell in New York at

To contact the editor responsible for this story: Michael Hytha at

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