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Ebix Accounting Practices Said to Be Probed by SEC

(Corrects amount of shares held by CEO as of Sept. 27 in 41st paragraph of story published Nov. 5.)

Nov. 5 (Bloomberg) -- Ebix Inc., the insurance software company that said it was targeted by short sellers last year, is being investigated by the U.S. Securities and Exchange Commission for its accounting practices, four people with direct knowledge of the probe said.

The SEC investigation, conducted over the past year, is focused on revenue recognition, internal controls and the accuracy of the company’s public statements to shareholders, said three of the people, who asked not to be named because the probe wasn’t public.

Robin Raina, Ebix’s chairman and chief executive officer, said his company wasn’t under SEC scrutiny.

“You could not be more off the mark -- that is a complete lie and at least not known to us in any manner whatsoever,” Raina wrote in an e-mail to Bloomberg News.

There is no indication that charges of any kind are imminent, given that the company has not received a “Wells Notice,” or warning from the SEC that it is prepared to file charges.

“We’ve received no notice from SEC enforcement that they’re investigating us,” said John Jordak, a lawyer for Ebix at Alston & Bird LLP.

Justin Jeffries, the SEC attorney said to be leading the investigation, didn’t return phone calls seeking comment on the probe. Kevin Callahan, an SEC spokesman, declined to comment.

The SEC probe comes as Atlanta-based Ebix is fighting at least four lawsuits accusing it of inflating income levels or mishandling internal accounting issues.

Class Action

In September, U.S. District Judge Richard Story in Atlanta ruled that Ebix must face a class action, or group lawsuit. Story said in his ruling that investors’ claims of misrepresentations and omissions of facts by Ebix and its management team were specific enough to allow the case to move forward.

Jordak, Ebix’s outside counsel, said the company planned to defend itself in the case.

“Ebix is entirely comfortable with the disclosures it made,” he said.

Ebix faces a second investor lawsuit that was filed in federal court in Manhattan and transferred to Atlanta.

In March, Ebix lost its bid for dismissal of a lawsuit in federal court in Columbus, Ohio, by the former owners of Peak Performance Solutions Inc., a company it acquired in 2009. In May 2011, Peak’s owners sued Ebix, claiming sloppy accounting procedures deprived them of a $1.5 million earnout promised at the time of sale.

Short Sellers

The lawsuits, which revolve around Ebix’s statements of revenue and earnings, may provide investors with a detailed view of the internal accounting practices at the company, which has been in the cross hairs of short sellers since early 2011.

On March 22, 2011, an anonymous blogger writing under the name “Copperfield Research” posted a critical analysis of the company’s earnings on the website Seeking Alpha. The article described Ebix as a “house of cards.”

Two days after that blog post, Ebix’s stock fell 24 percent to $22.52, on volume of 15 million shares. In the days before the sell-off, average volume had been less than 1 million shares. The company’s market capitalization shrank to $878 million from $1.2 billion that day.

Ebix, in a statement dated that March 25, said, “It is management’s opinion that this post misrepresents and distorts facts not relevant to the company’s current financial position, long-term growth prospects and management policies.”

The company said in the statement that, “The Seeking Alpha post appears to have been issued specifically to cause a decline in the company’s stock price to support the increase in the short interest in the company stock, and purchases of stock options related to these short positions.”

Stock Buybacks

In the three months after the March 2011 sell-off, the company bought more than 1 million shares of its own stock, out of some 42 million outstanding. By October 2011, the company said it had purchased 3.4 million shares of its stock.

As of Nov. 2, the short interest in Ebix stood at 9.6 million shares, while average volume in October hovered below 200,000 shares a day. Thus, the company’s short interest ratio, or the amount of time it would take for traders shorting the stock to cover their position if the price rose, is 50.1 days. The average short interest ratio for the Nasdaq global market securities in September was four days.

Since 2008, Ebix has more than doubled its revenue and net income after acquiring 15 businesses and folding them into its own operations. The acquisitions cost more than $166 million, according to company records and court filings.


In 2008, Ebix reported $74.8 million in revenue and net income of $27.3 million. In 2011, the last full year available, the company reported $169 million in revenue and net income of $71.4 million. The company is scheduled on Nov. 8 to report third-quarter earnings.

In 2007, before the acquisition spree began, Ebix carried $36.4 million in goodwill on its balance sheet. By the end of 2011, that ledger entry increased to $259.2 million.

Three former employees of Ebix, who were interviewed by the SEC in the matter and asked not to be identified, questioned the quality of the company’s earnings. In interviews with Bloomberg News, they noted Ebix’s strategy of booking U.S. revenue to units based in Singapore and India, where the company enjoys low tax rates.

Since the Seeking Alpha article, several lawsuits have been initiated against Ebix. The class action, filed in Georgia in July 2011, argues Raina and his team made false and misleading statements to investors about the company’s earnings, which set the stock up for its dramatic plunge the previous March.

Earnout Claims

The lawsuit filed in May 2011 by the former owners of Peak Performance Solutions brought to light alleged discrepancies in the way Ebix managed its accounts receivable, one of many topics highlighted in the Seeking Alpha blog post. Peak’s former owners accuse Ebix of unfairly reneging on the $1.5 million earnout promised when it was acquired for $8 million in 2009.

Last April, a businessman who sold another company to Ebix sued over claims that he was shortchanged on the earnout that was promised when the deal was struck. Earnouts are bonus payments to the sellers based on a company’s performance after an acquisition.

Joseph Ott sold Acclamation Systems Inc. to Ebix in 2008 for $22 million. Ott said in his lawsuit in state court in Pittsburgh that Ebix owes him $2.9 million in earnout payments. Ott’s lawyer, Mark Dausch of Babst Calland Cements & Zomnir PC in Pittsburgh, declined to comment on the case.

Jordak, Ebix’s lawyer, declined to comment on either of the earnout lawsuits.

‘Legally Insufficient’

In its most recent annual report, for 2011, the company described the class action and a derivative complaint as “legally insufficient.” It told investors that, “In the opinion of management, the ultimate likely disposition of these matters will not have a material adverse effect on the company’s business, consolidated financial position, results of operations or liquidity.”

Ebix hasn’t amended that statement since the September court ruling allowing the class action to proceed. The company’s disclosures “speak for themselves,” Jordak said. He declined to comment on whether the company planned to update its position in this week’s quarterly earnings statement.

In the “risk factors” section of its annual reports, Ebix has warned investors that the company might have to recognize an impairment of goodwill and that it might have “exposure to greater than anticipated tax liabilities” related to potential tax law changes that could affect the rates it pays on revenue booked in India and Singapore.

Internal Controls

In the 2011 report, after the lawsuits challenging its accounting practices, Ebix added a new risk factor regarding internal controls.

“If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud,” the company said in its 10-K report. “As a result, our stockholders could lose confidence in our financial results, which could harm our business and the market value of our common shares.”

Asked about the addition of this fraud warning, Jordak said the company’s “public filings and risk factors speak for themselves.”

Ebix’s annual growth rate has generated positive publicity for the company and Raina. This year, Forbes magazine ranked it as the sixth-fastest-growing technology company in the U.S. The previous year, Ebix made Fortune magazine’s list of America’s fastest-growing companies.

Homes, Film

In his native India, Raina enjoys celebrity status. He has based the company’s software development workforce in the industrial city of Noida, near New Delhi.

His philanthropic efforts, conducted through the Robin Raina Foundation, support slum-dwelling children, and he has committed $15 million to build 6,000 concrete homes for the urban poor in Bawana in North Eastern Delhi.

As part of his effort to highlight the difficulties of the region, Raina produced a 25-minute documentary film, “Dilli,” about the plight of the urban poor.

On the website of his foundation, Raina writes, “I want to make charity fashionable and cool.”

According to Ebix’s most recent proxy statement, Raina owns 3.67 million shares of Ebix, accounting for 9.3 percent of the company’s shares, as of Sept. 27. That number includes 2,231,560 shares of stock, and options to acquire an additional 1,440,000 shares.

The investor case is In Re Ebix Inc. Securities Litigation, 11-cv-02400, U.S. District Court, Northern District of Georgia (Atlanta).

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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