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Should You Sell Quindell PLC On Gotham Report?

It might not be the most widely known company but, after the shares more than trebled in the last year, Quindell (LSE: QPP) has got investors talking. Chatter is in overdrive after the shares moved in the opposite direction yesterday — plunging 39% on a damning note from Gotham City Research (‘who?’ is a good question here).

The claims made against Quindell are numerous, from doubts over acquisitions that “lack economic substance” to profits that are “suspect”.

You might wonder how this escaped the market until now? Shares are always priced efficiently, of course — an adequate reflection of all available information. Well, not quite. Usually, I’d argue that investors are inherently unreasonable, as well as greedy and emotional, and hence the market is as well.

A word I didn’t use in that description is “deceitful”, but it’s potentially apt here, given that Gotham City Research may (or may not) have benefited from the fall in Quindell’s share price. Gotham’s website has a disclaimer that states: “As of the publication date of our articles, we may have long or short equity positions in the companies covered.”

To explain, a long/short equity strategy is often favoured by hedge funds. If a long position is held in a company then the hope is that the value of the shares will appreciate. Conversely, a short position banks on the shares declining. Theoretically, if a short position had been taken out on Quindell, then the seller who had borrowed and sold the shares would then hope to buy them back at a lower price, banking the difference.

We should assess whether Quindell’s fall was justified. Quindell issued a statement rejecting all assertions, commenting that they are “defamatory” and “deliberately misrepresentative”. Quindell, which is preparing a more detailed response for release later in the week, added that it is taking legal advice and reporting co-ordinated shorting activity to the authorities.

RACQuindell’s revenue soared 133% to £380m in 2013 spurred by its technology business, which includes telematics devices. Earlier this month Quindell signed a contract with the RAC to market telematics (or “black box”) car insurance — which builds a picture of how well a motorist performs, then offers personalised premiums which should lead to a fairer prices.

Multiple fund managers are on board, including Fidelity, M&G and Investec, amid hopes that the technology will be widely adopted in the UK and North America.

Personally, I’d hold Quindell for now and keep an eye on how some of the big fund managers react.

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Mark does not own shares in any company mentioned.