Ebix – The Taxman Cometh

DECEMBER 13, 2018 – Ebix’s Mumbai office was “searched” by Indian tax authorities in Q3 2018. In other news, Robin Raina claims Ebix has never “been on the wrong side of any regulatory or tax authority”.

The Taxman Cometh – Report Download Link

Viceroy released its preliminary report on Ebix – titled Goodwill Hunting – on 11 December 2017, the contents of which we also discussed at the Kase Learning conference in New York on December 3, 2018.

This report will address the totally inadequate response Ebix issued on December 12, 2018, which was substantially an attempt at authority bias by CEO Robin Raina. Accordingly, we will also shine a light on the statements Raina decided to include in this press release, which we believe to be extremely misleading.

  • Ebix acknowledged our report via a press release on December 12, 2018, however CEO Raina would rather issue a hollow press release than address the issues Viceroy have raised in our preceding report.
  • Robin Raina claims Ebix has “never been on the wrong side of any regulatory or tax authority”. This is inconsistent with:
    • Ebix’s Mumbai office being subject to an undisclosed “search” by Indian Tax Authorities for suspicion of tax evasion in late August 2018;
    • Ebix currently subject to a tax audit by the Australian Taxation office since at least 2016;
    • Ebix historically settling an IRS dispute for >$20m;
    • Ebix being subjected to a prolonged SEC investigation;
    • Ebix being subject to a possible ongoing DOJ investigation;
  • Contrary to Raina’s claims, it appears his conduct was subject to regulatory scrutiny even prior to his rise to CEO. Ebix’s former auditor, Arthur Anderson, was charged by the SEC for improper conduct and fraud relating to the audit of Ebix’s revenue recognition practices at a time where Raina was VP of Sales and Marketing and COO.
  • Robin Raina claims Ebix has had “no difference with any statutory of consolidated auditors across the world in the last two decades”. This is objectively, and verifiably false, as we have already reported.
  • Ebix detracts attention to concerns raised through reinforcement Ebix – The Taxman Cometh 2018.12.13of its commitment to stock buybacks, of which it has announced US$330m since 2015 and only fulfilled US$187.169m.
  • Viceroy is writing to the Debt Providers shortly with these and other material concerns.

Viceroy’s original report can be found here:

https://viceroyresearch.org/2018/12/11/ebix-goodwill-hunting-2/

Ebix’s press release on December 12, 2018 can be found here: https://www.ebix.com/press-release/ebix-ceo-decides-to-take-salary-in-ebix-stock-instead-of-cash-the-company-commencing-purchase-of-ebix-stock-under-100-million-usd-repurchase-commitment-over-the-next-6-to-12-months-period

Ebix – Goodwill Hunting

Accounting irregularities, undisclosed tax investigations, auditor shuffling, poison pill to protect short sellers: welcome to Ebix.

DECEMBER 11, 2018 – Following on from our presentation of the same title, Viceroy are releasing our preliminary report on Ebix (NASDAQ:EBIX). Our investigation has uncovered accounting discrepancies dating as far back as 2008 to present day as well as several other red flags.

Report Download Link

Filings.zip – Download Link

  • Numerous accounting discrepancies in years 2013 to 2018 regarding the recognition of goodwill and acquisitions within the Ebix group. These discrepancies have largely gone unnoticed due to the delay in local filings being signed off and the multi-jurisdictional nature of these transactions.
  • Over the course of our investigation we uncovered evidence of what we believe is a scheme to incorrectly book revenue and earnings. We believe this is done through the shuffling of assets from one subsidiary to another while improperly booking internal revenues, and contingent consideration “cookie jar” accounting.
  • We are limited by the recency of the available subsidiary filings. We believe this behaviour continues to take place. Ebix’s acquisition spree in India further muddies the waters.
  • Ebix announced a change in auditor to T.R. Chadha from Cherry Bekaert (of MiMedx fame) after reporting material weaknesses regarding purchase and income tax accounting, pursuant to appointing a big four accounting firm in Q1 2019.
  • T.R. Chadha has never audited a US-listed entity and was auditor of several Indian Ebix subsidiaries in which there appear to be several accounting discrepancies.
  • Cherry Bekaert was subject to a scathing PCAOB inspection just weeks before its replacement.
  • Ebix’s subsidiary structure is excessively convoluted and opaque. The subsidiary structure includes holding companies in geographies where obtaining financials is near impossible. Many subsidiaries are held under a UK entity, Ebix International Holdings, which has only ever filed locally as a dormant company and recently received a warning of compulsory dissolution for failing to file accounts.
  • Ebix’s joint venture with Vayam Technologies, Ebix Vayam, accounts for 25% of Ebix’s receivables and only customers are Vayam Technologies themselves. Vayam appears never to have settled its receivables and the entire JV is funded by Ebix at an 8% interest rate, payable in receivables. This appears to be a scheme through which cash is injected in to make paper gains of margin plus 8%.
  • Ebix CEO Robin Raina is entitled to a massive payout in the event of an acquisition at the expense of shareholders. This poison pill protects short-sellers from takeovers by attaching an unreasonable premium to the company. This arrangement and its predecessor are currently subject of ongoing shareholder litigation.
  • The company’s debt-fuelled acquisition binge in India was originally intended to create and list an Indian payments entity. This appears to have turned into an unfocused rollup, with more and more scattered businesses being added to the Ebix stable. Despite these additions, Ebix does not break out its revenues from these disparate income streams.
  • Ebix’s has been subject to an undisclosed tax audit by the Australian Taxation Office since 2016, we believe due to the transfer of Telstra eBusiness Exchange assets to Ebix Singapore, and non-arm’s length transactions.

Due to the delay in availability of subsidiary accounts, and the rapidly expanding nature of the company’s operations we are unable to quantify a base downside. We believe it is highly likely given the progress of the shareholder litigation that regulatory authorities including the SEC open or reopen their investigations into the company. Accordingly, we believe that Ebix carries a high investment risk.

NEPI Rockcastle – Mucking Out the Stable

On November 28th, 2018 Viceroy Research released a report regarding NEPI Rockcastle (JSE: NRP) detailing what we believed to be overinflated profits in the company’s Romanian operations. NEPI issued a response to our research and hosted a call for concerned investors.

NEPI Response 2018.12.06 – Download Link

NEPI Dutch Filings – Download Link

Unusually NEPI provided some clarity in terms of their accounting treatments. We maintain our belief that NEPI is fundamentally overvalued with reservations regarding the sustainability of distributable income, the tax treatment in foreign jurisdictions and the status of the overall company. This we will update on.

  • NEPI Rockcastle have not sought to deliver any scope of investigation in response to a request by investors in August 2018, and claim it is the prerogative of investors to identify the exact issues they want investigated. It seems clear what issues 10 of South Africa’s largest financial firms sought clarity on: potential trading of associated companies, suspicious capital raising activity and property transactions.
  • Per our original report, we were of the opinion that transfer pricing is not an adequate explanation as to why statutory losses are incurred in Romania. This is due to transfer pricing legislation in Romania and the EU. On further investigation, these hard currency, unsecured, intra-group loans are disclosed in NEPI’s Dutch subsidiary at rate of 8%-12%, compared to the Romanian mortgage rate of 4.5-5% and safe harbor limit of 4%. This is a stark contrast to the CFO’s description, in which she did not provide the figures, but guided the rate was between 4% to 8%.
  • Having obtained the filings of Dutch subsidiary, NE Property Cooperatief UA, we find it untenable how a local CFO or Financial Controller locally can advocate a “fair” and arm’s length transfer pricing interest rate on unsecured loans of 8%, formerly 12%. Essentially, the equity holders at the local level are being punished for an excessive and non-arm’s length priced loan. We make this assumption based on local Euro borrowing costs within Romania with an LTV of circa 28% as disclosed by NEPI.
  • NEPI uses the entirety of its funds earmarked for deferred tax payments to inflate its distributable earnings figure. In effect, the company is likely improving their dividend figures at the expense of future disbursements.
  • New anti-abuse legislation will materially hamper NEPI’s transfer pricing model going forward in Romania, Netherlands, and across the EU. Given the extent of transfer pricing, this will impact NEPI’s distributable earnings.
  • Taking a step back, it is delayed outgoings, not earnings, that substantiate ~20% of distributable earnings. The Romania tax channeling is in fact one of many adjustments that allow this unsustainable dividend practice. Other items that deserve scrutiny include the dividend contribution of stocks, the antecedent dividend add back and the sale of financial investments.
  • At a property yield of 6.77%; after accounting for cash costs, interest costs, taxes, and the stock trading at a premium to NAV, we fail to see how NEPI can justify a 7.5% dividend unless holders choose to take their dividend as scrip, which is dilutive and makes future dividends even harder to justify. Accordingly, we maintain our view that the stock is fundamentally overvalued.
  • Of concern is that large money managers, including retirement money managers PIC, have continuously chosen to take dividends as scrip.
  • SENS trading data shows entities associated with the Resilient stable associate Roque Hafner traded large amounts of NEPI shares at least for the period between May 2016 and May 2018. Hafner was implicated in the media as being involved in the Resilient insider trading scandal and several Hafner entities used to trade Resilient shares also traded NEPI shares.

We reiterate our belief that NEPI Rockcastle’s shares carry a high investment risk and are fundamentally overvalued, which will become increasingly unattractive over time given what we believe are unsustainable distribution practices.

Ebix – Goodwill Hunting

The Alchemy of Creating Profits

Ebix Presentation – Download Link

Viceroy’s presented Ebix at the Kase Learning Conference on December 3, 2018. We will shortly release a full report into our findings.

Summary red flags:

  • Change in business model (IT providers to insurance v. finance sector) without visible synergies or management experience.
  • Accounting discrepancies suggests EBIX is booking external revenues on transactions between its subsidiaries: this occurred in 2014, 2015, 2016, 2017 across multiple geographies (UK, Singapore, India, Dubai, Mauritius).
  • The company has a growing unbilled receivables balance:
  • 50% from by EBIX’s India JV (Ebix Vayam Technologies) whose only customer is the JV partner (Vayam): it appears to have no other customers, and 446 days of receivables.
  • Rapid change of company auditors, most recently the replacement of Cherry Bekaert with T.R. Chadha, an Indian auditor with no history of auditing a major US-listed entity.
  • Unnecessarily intricate and opaque subsidiary structure, with very little insight provided to investors. Many assets are being held in opaque geographies and have been transferred with no disclosure or justification.
  • The CEO has financially engineered an >US$825m “poison pill” to prevent any takeover by mandating a large payout to himself in the case of such a takeover.

 

Response to statement by NEPI Rockcastle

November 28, 2018 – Viceroy published its report on NEPI Rockcastle on November 28, 2018. NEPI Rockcastle have subsequently issued a preliminary response to our report.

Viceroy Response 28 Nov 2018 – Download Link

We note that our data was sourced directly from NEPI’s filings, government records, and court records. Where we have conducted calculations, our analysis and workings have been show in full. Investors have the ability to determine the veracity of our analysis and conduct their own due diligence.

We are not of the opinion that NEPI has consistently proven transparency towards shareholders, the latest example of which is the outright refusal to engage an independent party to investigate potential trading of associated companies, suspicious capital raising activity and property transactions, at the request of 10 of South Africa’s largest financial institutions (including Government fund managers).

In stark contrast to any “reasons” NEPI provides for accounting discrepancies, investors should also note with extreme caution that the Company failed to provide details of outgoings, arrears, management matters, negotiations, rent reviews, to its valuers, Cushman & Wakefield. This was not an issue for all its other geographies.

Further to this, analysis of NEPI’s Romanian portfolio accounts show the company has, on average, 80 days of accounts receivable. This is indicative of substantial rent arrears, and fails the company’s claim of a 99.9% collection rate. These issues are independent of where earnings have been recognized, if this should indeed be NEPI’s response, and would not account for discrepancies in taxes paid in foreign jurisdictions.

We look forward to NEPI’s comprehensive response to our report.

 

NEPI Rockcastle – Horsing around in the Stable

Irreconcilable international earnings, enriching management through M&A, hoodwinking investors through misleading analysis via rejection of independent investigation.

Report – Download Link

Letter to Auditor – Download Link

Romanian Subsidiary Filings – Download Link

NEPI Rockcastle (JSE:NRP) is a JSE-listed entity holding one of the largest real-estate investment portfolios in Eastern Europe. Viceroy’s investigations have uncovered numerous inconsistencies within NEPI Rockcastle’s financial reporting and major links to an established financial fraud:

  • Local filings for NEPI’s Romanian subsidiaries suggest company figures are massively overstated for at least the past 3 years. Romania is NEPI’s largest geographical income segment in which consolidated 2017 group accounts show net profit before tax of EUR 284.87m (2016: EUR 221.90m). Local income statements show these companies operate at losses of over >EUR 40m (2016: >EUR 50m) for the same period.
  • Viceroy believe corporate or tax-effective structure or transfer pricing does not adequately explain the substantial differences in Romanian earnings generation as NEPI’s reported income tax expenses in Romania also do not match local filings. Given the criminal implications of misrepresenting tax numbers to the Romanian tax office, we assume NEPI chose to instead mislead its shareholders.
  • NEPI’s recent acquisition of Rockcastle was immediately followed by a massive write-down of subsidiary loans reflecting uncollectable debt from SPVs. When taken together with the purchase premium for the business of almost 80%, it is clear that the only winners in the Rockcastle acquisition were Resilient Stable insiders.
  • NEPI’s former chairman Corneliu-Dan Pascariu was involved in Romanian real-estate venture CEEIF, funded by the Peregrine Financial fraud perpetrated by Russell Wasendorf Sr. NEPI purchased Romanian assets from CEEIF before the Peregrine Financial fraud came to light. Court filings establish that CEEIF and several subsidiary development & holding companies were utilized by Wasendorf Sr. to embezzle cash.
  • Despite having financial recourse for beneficial ownership of ~11% of CEEIF’s purported book value of >EUR 60m, Peregrine’s Receiver, Michael M. Eidelman, had no interest in pursuing these recoveries. Eidelman’s investigations alleged CEEIF was insolvent, did not discount asset values to CEEIF’s pro-rata minor stakes, hid assets and liabilities from its balance sheet, and had no audited financial statements. Given Pascariu’s involvement as a major shareholder and financier through Unicredit, at which he was chairman at the time, it would have to have been extremely neglectful to not detect this activity.
  • NEPI shareholders issued a written request on 8 August 2018 for an independent investigation into potential trading of associated companies, suspicious capital raising activity and property transactions. NEPI rejected demands for an independent investigation, instead establishing a subcommittee of its own members to investigate themselves, and their predecessors.
  • Even without considering the above points, NEPI is fundamentally overpriced when compared with peers.

Based on our analysis, we see a significant downside to NEPI’s share price driven by an unwarranted overvaluation and the likelihood of substantially lower-than-reported earnings. Were NEPI to trade in-line with peers we believe shareholders would face an 25% downside, however, given the suspected extent of financial misrepresentation, we believe the company’s shares are worth substantially less.

We believe stakeholders should reinforce their demands for an independent forensic investigation into the company’s operations and veracity of its financial consolidation and tax compliance. Until such time, Viceroy believe NEPI carries a high investment risk.

For more research into the Resilient Stable, readers should refer to the leaked internal memo by 36One Asset Management which we believe was published around the end of 2017. A Scibd link to this report is below. Viceroy have no business relationship with 36One Asset Management and have never discussed NEPI Rockcastle with them.

Open Letter to MiMedx

OCTOBER 15, 2018 – Request for investigation into perceived/potential conflict of interest.

Viceroy – Open Letter to MiMedx

On July 2, 2018 MiMedx announced the resignation of MiMedx CEO and Founder, Parker H. Petit, and the appointment of Mr. David Coles, a Managing Director of Alvarez & Marsal , as the company’s interim CEO.

The appointment of Mr. Coles follows MiMedx’s engagement of KPMG and King & Spalding, who we understand have been tasked, amongst other things, with conducting an independent internal investigation into MiMedx sales practices .

Viceroy understands that a key element of these internal investigations concerns MiMedx’s conduct with the United States Department of Veteran’s Affairs (DVA); specifically, the allegations of channel stuffing and the subsequent indictment of DVA physicians utilizing MiMedx products. These physicians are in the process of cooperating with the US Attorney General’s case in relation to the charges alleged in the criminal filings including receiving bribes and inducements, and over-use of MiMedx product within the VA.

Viceroy Research has been made aware of links between other Alvarez & Marsal and a cohort of individuals allegedly exercising undue influence over the DVA, colloquially referred to as the “Mar-a-Lago Crowd”.

Given the depth of investigations occurring at MiMedx relating to the company’s conduct with the DVA, Viceroy believe the appointment of Alvarez & Marsal represents an irremediable conflict of interest to MiMedx’s ongoing internal investigations, and to the investigations we understand are ongoing within the DVA and other federal regulatory entities.

We have addressed a separate letter to the Department of Justice and the DVA’s ethics committee outlining what we believe is a serious conflict of interest and undue influence within the DVA of several parties.Further, we believe that it is irresponsible that this group, when exposed by journalists, was saved from a congressional hearing by longtime friend of former MiMedx CEO Petit, Senator Jonny Isakson, who has benefited greatly from donations from MiMedx and Petit.

Enclosed is a brief report detailing our investigation into this matter. A more comprehensive report will be published post VA OIG approval. The PCAOB and Investigators has stated that “When an auditor is confronted with multiple indicators of problematic revenue recognition … he or she must get to the bottom of the relevant issues, including digging into management’s representations.” We stand ready to assist in this effort and sincerely appreciate your attention to this extremely important matter.