Editor’s note: This article was first published in May 2015, as a news piece from 21 May 2015; Monday, Wednesday and this week refer to that week. The share-price moves, the 50% fall and the analyst estimate are from then.
In just four days, the broker Plus500 has lost 50% of its stock market value, for several reasons. First, the firm has been forced to freeze, en masse, the accounts of more than half its clients because of the British government’s anti-money-laundering rules. The fact is that this broker was not in the habit of asking its clients for the documents required to trade.
In other words, it made things easy in order to sign up more clients, without considering that in the long run that ease of signing up clients could turn into a massive loss of clients.
Although the news broke on Monday, accounts from people whose accounts have been frozen for more than two weeks are now emerging. They can neither trade on the platform nor withdraw their money, and many of them say the broker did not act properly by freezing their accounts without prior notice and, once they were frozen, without giving a proper explanation of what was going on.
Some of them weren’t even sent an email to tell them their account had been frozen, and when they asked for an explanation, they were simply told “we’re sorry, your account is under review”, with no further explanation and without asking these clients to provide more documents to speed up the “restoration” of their accounts.
That kind of behaviour means many of these clients are anxiously waiting for the moment their money becomes available so they can withdraw it and say goodbye to this broker for good.
The word most often used to describe how clients feel about the way Plus500 has handled the situation is simply “frustration”.
The second blow
In the middle of all this mess, Gotham, the well-known research firm that uncovered the Gowex fraud, has appeared on the scene.
It seems Gotham already had Plus500 in its sights over certain cash irregularities in previous years, reminiscent of MF Global, another broker that went bust in 2011.
But Gotham’s question is simpler: “How many investment services firms can afford to freeze their clients’ accounts and stay in business?”
Clients have long memories, and when it comes to money, they never forget this kind of behaviour.
A helping hand for Plus500
In this whole scenario, and after the big fall in its share price on Monday, the hedge fund Odey Asset Management appeared on the scene and took the opportunity to buy 1.8 million Plus500 shares, giving the broker a vote of confidence.
Although this halted the fall in the share price, it did so only briefly, as the shares kept plunging over the following days. There are also rumours that Gotham could reveal certain information about the broker that it has not yet made public, which could push the share price down even further.
An analyst estimated on Wednesday that the account freeze could cost the company more than $38 million in lost revenue, not counting the subsequent exodus of clients, on top of the more than $460 million that has already been wiped off its market value.
The third blow
On Wednesday the investment bank JP Morgan did not hesitate to sell 476,180 Plus500 shares, reducing its stake in the company, a move completely opposite to Odey Asset Management’s.
That news sent Plus500’s shares from the start of a rebound into a new fall.
In the end, this company has both the investors who hold Plus500 shares and the clients who trade through this broker on tenterhooks.
So the big investment question arises, with two possible scenarios:
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This situation could be an excellent buying opportunity, as it might all turn out to be just a scare, and the shares will eventually recover.
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This is the beginning of the end for Plus500.
Which one do we go with?
Update 22/05/2015: Plus500 has suspended trading in its shares on the London Stock Exchange.
Further reading
- Show me the money: lessons from Enron and Gowex every investor should learn
- How Warren Buffett warned you about Gowex
Featured image: Elias Gayles, CC BY 2.0, via Flickr.
