Monthly Archives: May 2015


Your Capital (still) at Risk Part 12: Legal Consequences 1

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Customer complaints suggest Plus500 often treats users unfairly and in possible violation of law. I believe Plus500 will face material legal consequences for its treatment of customers, marketing activities, and disregard for local regulatory requirements.

After publishing this series, I have been contacted by several former Plus500 customers who believe they were defrauded by the company. One individual in the Netherlands shared a long and extensively documented complaint, which was submitted to the FCA and the Financial Ombudsman in April.

The current AML-related inquiry by the FCA is unlikely to be an isolated event. In light of the company’s actions toward its customers, I strongly suspect that the additional scrutiny stems from multiple such customer complaints.

When a gambler visits a casino, the gambler gambles with the knowledge that the house has an edge. When a novice trader trades with Plus500, the trader knows the odds do not favor long-term success at highly leveraged CFD trading. However, the trader expects that the platform is organized in a way that is fair and objective, and that prices will accurately reflect developments in the underlying securities. A review of customer complaints suggest several ways in which this may not be the case.

In this post, I’ll use a case study of complaints from a single Dutch affiliate forum to set out a few ways in which it appears the company has crossed the line. Thank you to MM for translation assistance. The forum in question is hosted by affiliates of Plus500 and offers Netherlands-based customers of Plus500 a Dutch-language venue to discuss their experience.

Note that many customer complaints are by novice traders. They sometimes mix legitimate concerns with misunderstandings of typical financial contract terms. That does not change the basic facts of their complaints. Suitability considerations and regulatory requirements generally place the burden for properly documenting the terms and conditions of a trading platform on the company, not its users.

I’m sure affiliates will explain away some behavior documented below as being part of industry norms, but the argument is not that Plus500 is necessarily the worst offender among all platforms. Being mostly fair, or fair to most users, is not sufficient. If Plus500 has in fact manipulated its platform to the disadvantage of some users, there will be significant consequences. At a minimum, Plus500 takes advantage of inexperienced traders. If the customer complaints are accurate, it also cheats them.


  1. Arbitrary expiry procedures
    Customers note that Plus500 sets arbitrary expiration dates for contracts that do not match the underlying instruments and are not always clearly communicated or adhered to. Expiry terms are not well-documented, and Plus500 sometimes expires existing contracts early, without prior notice. Contract expiry typically occurs on a weekend at the last Plus500 quoted price on Friday (not necessarily the relevant underlying price)—this is how Plus500 records profits on Saturdays. Plus500 retains sole discretion to roll contracts to the next expiry. Customers opening positions in a new contract do not have transparency into which futures series is used to determine opening prices.

    Trader Rokil
     complains about an unannounced early expiration in Coffee, resulting in a loss. Trader Fredkroket says this happened to him in Bitcoin as well.

    Trader Snarf complains about an expiry date unexpectedly set one week before the expiry date of the underlying front-month contract at CME. Administrator Armijn admits he also missed an expiry date once and lost money because it was written in fine print on the second page of an instrument. Trader Navras replies with the same experience.
    Plus500 retroactively changed the expiry date of an outstanding Bitcoin contract, resulting in a loss for Trader Peacock. Trader Linda mentions a similar experience with Facebook. She claims her trade history on that instrument was erased.


    Trader Freedom Capital
    on an English-language website describes how a Bitcoin contract with a November 30, 2013 expiration date was closed in mid-November and replaced with a daily expiration (with higher costs) without notice. 

  2. Inopportune cancellation of withdrawals
    A basic principle of dealer-model CFD brokerage is that customers cannot owe the brokerage more money than they have on deposit. However, because Plus500 takes a long time to process withdrawals, it sometimes uses the delay to its advantage. Customers have reported withdrawn amounts, which were already debited from their Plus500 accounts but had not yet been transferred, being cancelled and returned without warning, placing the funds at risk to cover open positions. Other customers have reported suspicious timing of rejected withdrawal requests, despite proper documentation, that occurred within minutes of new positions being opened.


    Trader Thomasson
     reports funds he had already withdrawn were returned to his account to cover a margin deficit. The withdrawal was still ‘pending’ but had already been debited from the account for several days when he went below margin. Plus500 used the withdrawn funds to cover the margin deficit, but this amount was insufficient so the positions were closed at a total loss of both the withdrawn amounts and other monies on deposit.

  3. Difficulty closing positions
    Several users have reported unexplained, system errors that prevent positions from being closed while in a profit position. In other instances, profitable positions remain open and exposed to market risk because Plus500 chooses not to make quotes available on the platform at its discretion.

    Trader GBG could not close a USDRUB position at a profit one hour before the stated closing time of the market. He tried unsuccessfully for an hour, the market closed, and the next day his position changed to a loss and could once again be traded. Plus500 support responded that the ruble was unavailable for trade due to ‘low trading volume’ despite external trades taking place in the underlying. GBG has complained to the FCA and changed brokers.

    Trader Verlangen complained that he could not close his position at a profit; the close button did not work. After his trade entered a loss position, he could close it again.

  4. Miscellaneous platform inconsistencies and policies
    Traders cite a variety of arbitrary rules and actions by the company that work to their detriment, including closed accounts, price divergence from the underlying, and different withdrawal limits for different users. Some traders claim prices quoted on Plus500 demonstrate higher volatility than the evolution of the underlying, resulting in additional losses for leveraged traders. As discussed in Part 8, traders worry about the definition of “scalping” in the User Agreement. While Plus500 appears to ultimately resolve scalping complaints in favor of the users who push back (after several months, in the case of two different Singaporean users), how many more inexperienced traders simply go along with it when they are told that their profits are illegitimate?


    Trader Linda
     concludes that with a definition like “a systematic trading strategy” Plus500 can call just about anything scalping. Plus500 support is quoted: “Please note that scalping has no specific time definition. A trader is considers as scalper when using a systematic trading strategy of holding short-term positions. Please be aware that when examining a scalper we look at the overall trading activities, rather that just on a certain position.”


    Discussion about scalping
    ; traders worrying if trades under ten minutes are considered scalping.Trader Ikbener somehow managed to open two accounts and made EUR 4,500 from his sign-on bonus. The profitable account was closed, and he was not allowed to collect the profit.
    Trader Johanserv
    complains about inexplicable differences between quotes at Plus500 and on other financial sites.


    Trader Pokemon
    asks about the minimum amount of money he can withdraw. Administrator Armijn and Linda figure out that it is different for all users. For the administrator himself, the minimum has increased over time; he speculates that it might reflect higher bank costs. Trader Linda concludes that it is completely unclear how and why Plus500 determines the minimum withdrawal sum for various users.


    Trader Vijo
    complains that Plus500 closed his account after two years of trading, without announcement or reason, and made a new one for him while not transferring all of the money or positions on his old account. Plus500 support stated that his new account was reopened at Plus500′s Cyprus subsidiary, Plus500CY. The miscalculation of money in the old account was never fully explained.

The message to Trader Vijo from Plus500 support, dated February 23, 2015, confirms that Plus500 has been transferring UK-regulated client accounts to Cyprus, as reported on LeapRate and Business Insider last week. Trader Vijo’s experience confirms that Plus500 has been attempting a regulatory arbitrage for months before the recent voluntary action. Why would Plus500 transfer EU clients to Cyprus while under investigation by the FCA? This action strongly suggests the company is trying to take advantage of the EU passporting mechanism from a jurisdiction with less stringent oversight. Full email reproduced from the thread below:

Hello, 

We reviewed your account and would like to inform you That as you already agreed by accepting the New User Agreement, due to a regulation change – from The Financial Conduct Authority (FCA) to the Cyprus Securities and Exchange Commission, your old account was closed on 02.16.2015 and the balance of (€ -157.67) was Transferred to a new account with the same email address, but under the new regulation. 

You can still have access to your previous account under the email: old_mail@emailadres.nl and your old password, for information and taxation Purposes, for 30 days after the opening of your new account. After That period the old account (old_mail@emailadres.nl) will be closed and you will be trading into account: mail@emailadres.nl. 

This change did not have any effect on your account’s trading only the change in e-mail. 

Your current account is exactly the same as the old one, simply under a different regulation. 

Regards 
Erikka 
Customer Support 
Plus500 CY Ltd 
1 Siafi Street 
3042 Limassol

In addition to the above individual experiences, the customer complaint to the FCA documented an extensive list of ways in which the Plus500 User Agreement is inconsistent with Dutch Law and the UK’s Unfair Contract Terms Act. It also highlighted numerous ways in which the trading platform is risk-enhancing and unsuitable for novice traders. Minimum order sizes and thresholds are in some cases larger than the tick size of the underlying instrument. Default order sizes are very high relative to customer account balances. Plus500 also upgrades most users to a “Gold account” after a short period of activity, setting the default order size and leverage limit to a much higher level.


I am not an attorney, but I have four theories of how legal liability could attach to Plus500 as a result of these and other actions, some of which were referenced in Part 9. While customers have been contacting journalists, short sellers, and the FCA, they really should be in touch with a competent multi-national law firm. The allegations just among Dutch customers alone appear sufficient to support a class action suit. This is a situation where a determined prosecutor or advocate could make a real difference for customers who have lost money unfairly.

  1. Class action complaint by customers: I recognize that the United States is a much more litigious society than Europe. Here, there would already have been multiple shareholder derivative actions based on all the things people were upset about at the AGM. However, the allegations documented above are serious and warrant investigation. If a court determined that Plus500 acted abusively, restitution and punitive damages could be significant.
  2. Foreign regulatory fines and claims: Plus500 operates without a license in many parts of the world, as detailed in Part 11. Any customer losses attributable to the platform are in theory null and void, as the company operated without authorization and could not enforce its user agreement. While it might be difficult or impossible for a foreign regulator or court to enforce a judgement upon Plus500, the risk remains. Plus500 operates using currencies and the international banking system in ways that may bring it into the regulatory net of other countries, including the US.
  3. Local marketing violations: Plus500 notes in the Admission Document that its affiliates may run afoul of local securities marketing requirements. It does not note explicitly that it accepts affiliate marketers located in jurisdictions where it is not authorized to operate, including the United States. Affiliates who receive revenue sharing arrangements are in effect participating in a multi-level marketing scheme and receiving up to 30% of the turnover of an unlicensed broker-dealer. The US SEC and Department of Justice are not likely to look kindly upon US persons profiting from the operations of a foreign securities firm that is not authorized to operate in the US, while using US means of commerce to promote that entity. Local authorities have been notified.
  4. UK or Cyprus regulatory fines or loss of registration: So far, the FCA has not shown itself to be particularly punitive. At the AGM, Plus500 said there was no evidence that the FCA will issue a fine for Plus500′s AML procedures. However, if the allegations by customers are true, there may be meaningful consequences for other behavior.

With that, I will reiterate the question I raised in Part 10: Would you do business with Plus500?


Your Capital (still) at Risk Part 11: Unanswered Questions 9

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Cable Car remains short Plus500 with a revised price target of 52 pence (GBP 0.52). Plus500 faces material legal liabilities and has yet to address its undisclosed Belize activities, filings inconsistencies, and misrepresentations regarding customer losses.

Below, I will address the wholly inadequate response from Plus500, which was published in an RNS last Wednesday.

Before I do, however, I have one small mea culpa. In publishing such a large volume of material, I inadvertently neglected to translate Plus500′s stated cash balance of $88 million from USD to GBP. As a result, I published a price target that was too high. Using the updated cash balance of $92.2 million and an exchange rate of 1.53 GBPUSD, Plus500 has approximately GBP 0.52/share of cash on hand today. The per-share lifetime value calculations in Part 3 are similarly expressed in USD and are thus too high by the same factor. Consequently, I now value the cash plus potential earnings from the current customer base at GBP 0.84-0.98. This estimate is based on the potential profitability of the customer base as of Q1 2015 using 2014 ARPU and margins. It does not include remediation costs, reduction in trading activity, or loss of users due to the ongoing account freeze, all of which are likely to be significant.

I regret the error. If any other aspect of this series is factually misrepresentative, I will gladly correct the record.

I continue to believe that if the questions raised in this series are not adequately addressed, the company will ultimately cease to continue as a going concern and hence reiterate the stated cash balance as my price target. In addition, I believe Plus500 will face material legal consequences from its marketing activities, geographic presence, and treatment of customers. More details are in Part 12.


The company’s statement is reproduced below:

The Board is aware of recent press and blog commentary regarding Plus500′s accounting policies and business model and rejects the assertions made as misrepresentative and baseless. The Board reiterates that the Company’s accounts, along with those of its subsidiary, Plus500UK Limited, have received unqualified audit opinions from PwC and the directors are comfortable with the disclosures made therein.

 

In response to the specific issue raised in respect of the restatement of Plus500UK’s subsidiary accounts and the implication that Group revenue is substantially over-stated or a substantial amount is generated in unlicensed jurisdictions, we clarify that both assertions are incorrect.  The application of the new Financial Reporting Standard 102 resulted in the reallocation of gross revenues attributable to Plus500UK’s customers to Plus500 in the Company’s 2014 results. This also required the 2013 results to be restated.  The reallocation has no impact on Group consolidated revenue.

While I was hardly expecting a detailed, 10-part follow-up to the questions raised by this series, this response is rather anemic. Plus500 has addressed one concern raised in the report. Now what about all the others?

Notwithstanding PwC’s unqualified audit opinion, I question how the Board could possibly be comfortable with the 15 inconsistent disclosures identified in part 4, which have been forwarded to the FRC for review. Presumably, PwC did not also audit Geostrading, the mysterious Belize-based subsidiary the company has yet to acknowledge. Are the directors also comfortable with the historical operations of that entity? With respect to revenue generated from unlicensed jurisdictions, perhaps the Company could clarify how its purported European revenue in 2010-13 exceeded the gross revenue recorded at Plus500UK, the only licensed subsidiary at the time. Are any members of Plus500′s affiliate program related parties?

The basis for each statement made in this series has been painstakingly documented; I stand behind every assertion and challenge the Board to identify any claim that is baseless. I further pledge to correct any misrepresentation, as noted above.


With regard to the restatement of Plus500UK subsidiary revenues, I speculated in Part 4 that there were several possible reasons for the restatement:

  1. Revenues at the Group level were overstated.
  2. The inter-company agreement was modified or terminated.
  3. The FAS 102 transition (FAS 102 is a modified form of IFRS that replaced a previous UK GAAP standard) required revenues to be reported net of payments to the parent, instead of gross.

The company says that the third explanation, which I suggested was the most charitable possibility, is the case. Very well then. Net revenue presentation in the subsidiary will unfortunately reduce transparency and make it more difficult to reconcile Group revenues going forward, but if that’s what accounting rules require then so be it.

The subsidiary accounts remain somewhat puzzling. PwC’s own summary of the differences among old UK GAAP, FRS 102, and IFRS does not suggest any inventory or financial asset fair value reporting changes that appear to require restating a cost of sales item as an offset to turnover. It is also unclear why the adoption of FRS 102, which did not modify revenue recognition, would result in a switch from gross revenue to net revenue reporting in the first place. The variable treatment of “introductory commissions” is also odd considering the only categories of funds payable to the Parent under the inter-company agreement are 78% of dealing spread revenue above $300,000, 5% of credit card transactions, and the profit/loss on offsetting hedge transactions. Credit card transactions are reported as a separate cost item. Why is the bulk of introductory commission recorded as a reduction in revenue while a portion is recorded as a distribution cost?

In any case, investors will ultimately have to trust that the accountants know what they’re doing here. I’ve highlighted why their work deserves scrutiny.


Additions and amplifications

Brevity is clearly not my strong suit: the latter half of this series received noticeably less traffic than the first few posts. If you’re still with me, there are several very important points raised in the latter half of the series that I would like to emphasize and update.

  • In Part 6, I documented the magnitude of revenue reported from customers outside of regulated jurisdictions (line C). The amounts were particularly egregious in 2010-11 when Plus500UK was the only regulated subsidiary, but even in 2013 the extra-legal amount significantly exceeds revenue reported at Plus500AU (approximately $3.2 million). To be clear: $67 million (27%) of the company’s reported revenue from 2010-2013 came from customers in locations where Plus500 did not have legal authorization to operate. This is significantly more than disclosed in the Admission Document and annual filings.
  • In 2013, estimated revenues from customers in Europe were also disclosed. They have been added to lines D and E in the table below. Similar geographic disclosures were not made in 2014, so it is no longer possible to track the contribution from unregulated jurisdictions and Europe overall. However, the inconsistency in Plus500′s disclosures remains. For the period from 2010-13, Plus500 claimed European customers generated $40 million more gross revenue than was actually reported by Plus500UK.
  • I cannot think of a charitable explanation for this. One or more of the following must be true: Group revenue was overstated, customers in Europe were served by an unregistered subsidiary, or the geographic disclosure deliberately overstated the proportion of revenue generated in regulated jurisdictions.
Comparison of Group and Plus500UK turnover 2010 2011 2012 2013
A. Group reported revenue 24,211  50,028  56,127 115,088
B. Plus500UK reported revenue, translated into USD 1,553 28,993 44,692 99,864
C = A – B. Revenue generated elsewhere 22,658  21,035  11,435 15,224
Plus500UK as % of Group reported revenue 6.4%  58.0% 79.6%  86.8% 
D. Stated revenue from EEA/Gibraltar customers 18,667 42,874 49,785 103,832
E = D – B. Missing revenue from regulated customers 17,114  13,881  5,093 3,968 
  • In Part 7, I focused on 10pips.com, an unlicensed Plus500 clone that operated until mid-2010. It turns out it was not the only one. MeVideoCY also operated a very similar site called Omitrade.com from 2009 until at least March 2011. Not only is this site unregistered and undisclosed by the company, but there are several violations of securities advertising rules on the site, such as referring to sign-up bonuses as “free”. How many other unlicensed sites did Plus500 operate? Is Plus500 operating unlicensed websites today?
  • A correspondent reminded me that in Part 7, I omitted Norway from the long list of regulatory authorities that have warned against Plus500.

In Part 8, I commented that I have no way to asses the merits of individual claims of unfair treatment on the Plus500 platform. In Part 12, I try to remedy this by investigating some specific allegations of abusive practices and considering the potential consequences in more detail.

 

On to Your Capital (still) at Risk Part 12: Legal consequences –>


Your Capital at Risk Part 10: Competition 22

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Plus500 claims to be a client of Interactive Brokers. I haven’t been able to verify that.

If you’ve read this far, I hope I have at least conveyed why I take statements from the management of Plus500 with a grain of salt. Given the company’s history of unlicensed operations, inconsistencies in its filings, and its exaggerated marketing claims, I want to leave you with one simple question—would you do business with Plus500?


Neither would I. And I was surprised by the notion that my own custodian would. In Dan McCrum’s piece after the Swiss Franc peg was was removed in January, Gal Haber told the Financial Times that Plus500 uses Interactive Brokers when it needs to hedge. This immediately struck me as odd—Interactive Brokers has a competing CFD offering. Unlike Plus500, Interactive Brokers charges a fixed commission rather than a spread-based fee, and my understanding is that although the firm acts as principal, it makes offsetting trades in the underlying instruments. In other words, Interactive Brokers is not a bucket shop.

Why would Interactive Brokers facilitate the growth of a competitor? Why wouldn’t Plus500 have hedging relationships with the major banks (e.g. Barclays) that hold its customer balances? Moreover, the size of the notional exposures Plus500 claims to need to offset, even occasionally, would make Plus500 a very significant client for Interactive Brokers.

Given the business risk associated with working with a company that has admittedly operated outside the law in some jurisdictions—including places like Singapore and Hong Kong where Interactive Brokers’ business is growing rapidly—it seems like a questionable business decision for them to maintain a client relationship with Plus500.

Since Cable Car’s clients custody with Interactive Brokers, I care a great deal about their reputation. Naturally, I relayed some of my concerns about Plus500 to the company. The response was interesting. Interactive Brokers is a large firm, and its US representatives may not have complete visibility into every client worldwide, especially if the client may have been referred by an introducing broker. That being said, they could not confirm that Plus500 is a client.

Whether or not Plus500 works with Interactive Brokers, they clearly don’t trade enough to merit much attention. This stands to reason. The simplest explanation for why Plus500 was profitable during the Swiss franc debacle is that they simply didn’t hedge at all. Amusingly, the Plus500 hedging policy document is an empty redirect to the homepage. Customers were net long EURCHF; Plus500 was net short. Any negative customer equity balances did not reflect money Plus500 owed to any third party. Instead, Plus500 would have booked the customer’s entire account balance as trading revenue.


 

This concludes my series on Plus500. I look forward to feedback from readers and clarifications from the company. If there are any errors or omissions in these posts, please do not hesitate to let me know so that I may correct them. Thank you for reading.


Your Capital at Risk Part 9: Worldwide Web

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Gotham City Research is on my mind as I write this. I have no affiliation with Gotham and have never met Daniel Yu, but he’s been in the news lately for comments about Plus500.

In addition, Gotham keeps me mindful of the fact that the Internet is global. Even though British libel judgments are unenforceable in the United States, I have no wish to be sued for expressing my opinions in good faith. I have written these blog posts in a deliberately restrained manner and intentionally not directed my comments at UK persons.

Plus500, on the other hand, has no such qualms about making its marketing materials accessible in jurisdictions where it is not authorized to operate, including the United States. The company states in the Admission Document (p.47) that it has run afoul of advertising regulations:

In the past, the Group has been in breach of, or may have been in breach of, and there is a risk that going forward the Group may not be in full compliance with or may be in breach of, the laws and regulatory requirements regarding the promotion of investment activities in some of the jurisdictions in which it advertises. Any non-compliance with such applicable laws or regulatory requirements could subject members of the Group or its directors and/or employees to disciplinary action, criminal penalties, civil lawsuits and/or fines. Further, there is a heightened risk of the FCA imposing a sanction on Plus500UK as a result of repeated instances of non-compliance with the financial promotions regime. Any such action could have a material adverse effect on the Group’s reputation, business, financial condition and operating results.

The Admission Document (p.46) notes that activity by its affiliates could subject the company to similar risks:

Further, the Group has not investigated the local laws and regulations which may apply to its affiliates’ activities or the relationship between the Group and its affiliates, and the Group has no visibility or control over whether the affiliates are conducting their advertising activities in accordance with such laws and regulations. There is a risk that liability for activities of affiliates which are in breach of local laws and regulations could attach to the Group and result in civil, criminal, regulatory or other penalties being imposed upon the Group or its directors, or that such activities could result in or contribute to action being taken against the Group by a regulator in any relevant jurisdiction.

Unfortunately, most affiliates use free web-hosting services or Domains by Proxy registrations that make it very difficult to ascertain the identity and location of their owners. However, in at least one instance there appears to be evidence that a Plus500 website, or one operated by an affiliate, is hosted in the United States. The screenshot below is from domaintools.com:

500traders.com Hosting Data

The hosting provider in question, A Small Orange, operates a web server in St. Louis that hosts several gambling-related domains, likely for the same affiliate marketing customer. Not only are several of these domains advertising services illegal under US law, they also appear to violate ASO’s terms of service. ASO did not respond to a request for comment. In an interesting coincidence, ASO’s parent company is Endurance International Group (EIGI, no position), the most recent target of Gotham City Research.

A full reconciliation of Plus500′s marketing activities to local investment promotion regimes is beyond my limited resources, but suffice it to say that 500traders.com is hardly the only Plus500 marketing website that could attract customers from jurisdictions where the company is unlicensed.


Crazy Marketing

The Whois record for 10pips.com suggests a possible undisclosed related party. “yossi sh” does not appear to be a real person, but crazymarketing.com is one of 65 domains registered to a Vadim Drabkin, who attended the same university, Technion, as the Plus500 founders. We already know that 10pips.com was operated by Plus500; it is unclear why it is now registered to one of Plus500′s affiliate marketers. Note the @investhead.com email address. Investhead.com is currently a defunct website, but it redirected to 10pips.com in 2011 and later displayed affilliate advertising for Plus500, among others, until late 2012. This indicates that Vadim Drabkin has been acting (and possibly being compensated) as a member of the Plus500 affiliate program while also controlling one of Plus500′s assets.

In short, one of Plus500′s affiliates owns a domain name that was operated by the company.

 

Domain: 10pips.com
Record Date: 2014-01-11
Registrar: GODADDY.COM, LLC
Server: whois.godaddy.com
Created: 2008-08-22
Updated: 2013-03-29
Expires: 2014-08-22

Record:
Domain Name: 10PIPS.COM
Registry Domain ID: 1515596000_DOMAIN_COM-VRSN
Registrar WHOIS Server: whois.godaddy.com
Registrar URL: http://www.godaddy.com
Update Date: 2013-03-29 14:17:07
Creation Date: 2008-08-22 05:51:28
Registrar Registration Expiration Date: 2014-08-22 05:51:28
Registrar: GoDaddy.com, LLC
Registrar IANA ID: 146
Registrar Abuse Contact Email: abuse@godaddy.com
Registrar Abuse Contact Phone: +1.480-624-2505
Domain Status: clientTransferProhibited
Domain Status: clientUpdateProhibited
Domain Status: clientRenewProhibited
Domain Status: clientDeleteProhibited
Registry Registrant ID:
Registrant Name: yossi sh
Registrant Organization:
Registrant Street: Dubnov 7
Registrant City: Tel Aviv
Registrant State/Province: Not Applicable
Registrant Postal Code: 61400
Registrant Country: Israel
Registrant Phone: 972545885555
Registrant Phone Ext:
Registrant Fax:
Registrant Fax Ext:
Registrant Email: rotem@investhead.com
Registry Admin ID:
Admin Name: yossi sh
Admin Organization:
Admin Street: ben yehuda
Admin City: tel aviv
Admin State/Province: Not Applicable
Admin Postal Code: 55555
Admin Country: Israel
Admin Phone: 972545885555
Admin Phone Ext:
Admin Fax:
Admin Fax Ext:
Admin Email: yossi@crazymarketing.com
Registry Tech ID:
Tech Name: yossi sh
Tech Organization:
Tech Street: ben yehuda
Tech City: tel aviv
Tech State/Province: Not Applicable
Tech Postal Code: 55555
Tech Country: Israel
Tech Phone: 972545885555
Tech Phone Ext:
Tech Fax:
Tech Fax Ext:
Tech Email: yossi@crazymarketing.com
Name Server: NS1.INVESTHEAD.COM
Name Server: NS2.INVESTHEAD.COM
DNSSEC: unsigned
URL of the ICANN WHOIS Data Problem Reporting System: http://wdprs.internic.net/

 

On to Part 10: A concluding thought about the competition –>


Your Capital at Risk Part 8: Scalping 2

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Successful traders at Plus500 often complain of difficulties withdrawing funds. Plus500 has in some cases tried to void profitable transactions, even in jurisdictions where it is operating outside the law.

There are numerous examples of users discussing their experiences with Plus500 online. One trader complained that his account was frozen for ‘scalping’ after he generated profitable trading activity in February 2015. Scalping is referenced in section 24.1.3 of the user agreement, but it is not clearly defined. Even though most Plus500 trades have a duration measured in minutes, according to the company’s own data, the user agreement contains the clause “a significant number of transactions with short duration may be deemed as Market Abuse” giving the company wide latitude to reject any profitable trading activity.

I have no way to assess the merits of individual claims, but making it more difficult to withdraw funds when customers are profitable would be broadly consistent with a business model designed to ultimately separate customers from their deposits.


As a concrete example of Plus500 operating outside of legal bounds, consider one such complaint by a customer in Singapore. I contacted the individual in question and learned only that he eventually received “his money back” after a delay of several months. I will update this post if I learn more about his experience. However, what is more remarkable is that Plus500 was operating in Singapore in the first place. The domain www.plus500.sg redirects to Plus500.com. Yet Singapore has very clear prohibitions against bucket shops.under the Commodity Trading Act (see note 14). It should be uncontroversial that operating a bucket shop in Singapore is illegal.

Separately, it may be worth examining the transaction record posted by the customer. I’ve uploaded a version so there’s no need to register on the Forex Peace Army website. To my eyes, the BTC trades look like very fortunate trading during a period of extremely high volatility in the underlying instrument. Perhaps Plus500′s software was slow to catch up to market developments. The nice thing about Bitcoin is that there is a blockchain transaction record that covers every transaction on every major BTC exchange. It should be possible to compare the customer’s transactions to the historical record and draw your own conclusions, if desired.

 

On to Part 9: Worldwide web –>


Your Capital at Risk Part 7: Whois Plus500? 1

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Plus500 appears to have an undisclosed Belize subsidiary called Geostrading Ltd. Plus500 previously ran an unlicensed operation under the brand 10pips.com.

Plus500 admits to unlicensed activity in its Admission Document. It is interesting to review what that actually entailed.

Two very useful websites, the historical whois records lookup on Domaintools.com and the Wayback Machine, reveal elements of Plus500′s past that it has not chosen to share with investors. In the Admission Document, Plus500 discloses only the existence of a dormant Cyprus subsidiary called MeVideoCY, without any discussion of what this subsidiary was or what it did. Unmentioned entirely is another entity that may or may not actually exist: Geostrading Ltd, a Belize-based entity also referred to as Plus500 Ltd, Belize.

I have been unable to locate any records of this entity other than its repeated mention on Plus500 and 10pips.com marketing materials still scattered around the Internet. Google “Geostrading Ltd” and every result is related to Plus500 in some way. There is an excerpt from an old English-Malay translation request. There is a Spanish-language affiliate’s website dated 27 December 2012 that still refers to Plus500 as being operated by Geostrading Ltd. There is even an amusing discussion thread in which a Plus500 representative tries to convince skeptical moderators of a website validation service, Web of Trust, that its business is legitimate. And of course there is 10pips.com, which I will discuss in a moment.

First, consider the text on the bottom of the Plus500 About Us page over time:

  • 2 January 2009: “Plus500 is operated by: MeVideoCY Ltd, Larnaca, Cyprus.”
  • 31 October 2009: “Plus500 is operated by: Plus500 Ltd, Belize.”
  • 2 May 2010:  ”Plus500 is operated by: Geostrading Ltd.”

Beginning in July 2010, after Plus500UK received its FSA license, the phrase disappears entirely.


Whois records also reflect these changes. Note the UK (+44) country code for the phone and fax numbers for the Belize entities. There also seems to be a private joke of some sort listing the administrative contact as “Hedge” Haber, perhaps a play on Gal Haber’s name.

Domain: plus500.com
Record Date: 2009-11-26
Registrar: GODADDY.COM, INC.
Server: whois.godaddy.com
Created: 2008-05-08
Updated: 2009-03-09
Expires: 2011-05-08

Record:
Registrant:
MeVideoCY LTD
Prodromou Court, 54 Sittika Hanoum Str.
Larnaca, 6051
Cyprus

Registered through: GoDaddy.com, Inc. (http://www.godaddy.com)
Domain Name: PLUS500.COM
Created on: 07-May-08
Expires on: 07-May-11
Last Updated on: 09-Mar-09

Administrative Contact:
Haber, Hedge hostmaster@plus500.com
MeVideoCY LTD
Prodromou Court, 54 Sittika Hanoum Str.
Larnaca, 6051
Cyprus
+44.2081444391 Fax — +44.2030027290

Technical Contact:
Haber, Hedge hostmaster@plus500.com
MeVideoCY LTD
Prodromou Court, 54 Sittika Hanoum Str.
Larnaca, 6051
Cyprus
+44.2081444391 Fax — +44.2030027290

Domain servers in listed order:
NS13.DOMAINCONTROL.COM
NS14.DOMAINCONTROL.COM

Domain: plus500.com
Record Date: 2010-03-13
Registrar: GODADDY.COM, INC.
Server: whois.godaddy.com
Created: 2008-05-08
Updated: 2009-03-09
Expires: 2011-05-08

Record:
Registrant:
Plus500 Ltd
99 Albert Street
Belize City, 8024
Belize

Registered through: GoDaddy.com, Inc. (http://www.godaddy.com)
Domain Name: PLUS500.COM
Created on: 07-May-08
Expires on: 07-May-11
Last Updated on: 09-Mar-09

Administrative Contact:
Haber, Hedge hostmaster@plus500.com
Plus500 Ltd
99 Albert Street
Belize City, 8024
Belize
+44.2081444391 Fax — +44.2030027290

Technical Contact:
Haber, Hedge hostmaster@plus500.com
Plus500 Ltd
99 Albert Street
Belize City, 8024
Belize
+44.2081444391 Fax — +44.2030027290

Domain servers in listed order:
NS13.DOMAINCONTROL.COM
NS14.DOMAINCONTROL.COM

Domain: plus500.com
Record Date: 2011-12-16
Registrar: GODADDY.COM, INC.
Server: whois.godaddy.com
Created: 2008-05-08
Updated: 2011-02-08
Expires: 2014-05-08

Record:
Registrant:
Plus500UK Ltd.
33 Throgmorton Street
London EC2N 2BR
United Kingdom

Registered through: GoDaddy.com, Inc. (http://www.godaddy.com)
Domain Name: PLUS500.COM
Created on: 07-May-08
Expires on: 07-May-14
Last Updated on: 08-Feb-11

Administrative Contact:
Sordo, Dror hostmaster@plus500.com
Plus500UK Ltd.
33 Throgmorton Street
London EC2N 2BR
United Kingdom
+442071565038 Fax — +442033707960

Technical Contact:
Sordo, Dror hostmaster@plus500.com
Plus500UK Ltd.
33 Throgmorton Street
London EC2N 2BR
United Kingdom
+442071565038 Fax — +442033707960

Domain servers in listed order:
NS.RACKSPACE.COM
NS2.RACKSPACE.COM


“10 pips a day – that’s all you need to become a millionaire…”

Wayback Machine archives of 10pips.com reveal a strange evolution from an online backgammon affiliate site to a fully-fledged trading platform operated by MeVideoCY very similar to Plus500.

  • 2007: 10pips.com is a placeholder.
  • 8 October 2008: 10pips.com links to Gammoned.com, an online backgammon website
  • 11 February 2009: 10pips.com is now a mock-up of a CFD provider, but has yet to describe itself
  • 15 March 2009: “10Pips platform is operated by: MeVideoCY Ltd, Larnaca, Cyprus.”
  • 12 June 2010: The last capture before 10pips.com was closed on 14 July 2010.
  • 8 August 2010: By August, 10pips.com was replaced with a redirect to Plus500.

10pips.com also includes a link to the “Costumer agreement” from March 2009 that makes explicit its operation by MeVideoCY. (They caught the typo by July). The user agreement page remained active until November 2013, although Plus500 states in the Admission Document from July 2013 that MeVideoCY was already dormant.

References to Geostrading Ltd instead of MeVideoCY as the operator of 10pips.com  appear on some affiliate websites:

10PIPS platform is operated since 2008 by: Geostrading Ltd. Albert Street Belize City, 8024. Belize. Fax Number: +44 203 002 7290, Email: support@10pips.com

Apparently, 10pips.com ran an active affiliate marketing scheme and international unlicensed CFD business right up until Plus500UK received its FSA authorization. The website was pulled without warning less than 3 weeks before the license was granted, angering some affiliates. More on affiliate marketing and 10pips.com in Part 9.


In addition to the warnings from regulators in Hong Kong, Quebec, and Brazil already cataloged by Dan McCrum, the activities of Plus500 generated additional warnings from Slovenia and Greece. Cyprus warned both Plus500 and MeVideoCY in 2009, although apparently all is forgotten now that Plus500 has received a license from Cyprus. Most recently, the Croatian regulator issued a warning to Plus500UK in 2012 before being forced to backtrack in 2013 due to the passporting mechanism of Plus500′s UK license in the rest of Europe. The Croatian regulator nevertheless stands by its warning to customers. Perhaps investors should heed it as well.

 

On to Part 8: Scalping –>


Your Capital at Risk Part 6: Unlicensed Activity

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Plus500′s purported 2010-11 revenue was either generated illegally or not at all. Inconsistency #8 in Part 4 is significant enough that it deserves its own post.

Comparison of Group and Plus500UK turnover 2010 2011 2012 2013 2013 as restated 2014
A. Group reported revenue 24,211  50,028  56,127 115,088 115,088 228,865
B. Plus500UK reported revenue, translated into USD 1,553 28,993 44,692 99,864 20,043 40,025
C = A – B. Revenue generated elsewhere 22,658  21,035  11,435 15,224 95,045 188,840
Plus500UK as % of Group reported revenue 6.4%  58.0% 79.6%  86.8%  17.4%  17.5% 
D. Stated revenue from EEA/Gibraltar customers 18,667 42,874 49,785
E = D – B. Missing revenue from regulated customers 17,114  13,881  5,093

Revenues are translated at period average exchange rates. EEA/Gibraltar revenue for 2010-2012 is based on percentage of Group revenue disclosed in the Admission Document.


There are two important takeaways from the $24.2 and $50.0 million in reported 2010 and 2011 revenues in the Admission Document. The first is that these amounts exceed the revenue reported in the Plus500UK subsidiary by over $20 million both years (line C). We already know that the Plus500UK revenue was reported on a gross basis prior to the 2014 report, so any difference must arise from the Parent or another subsidiary. We know from the Admission Document that Israel represented a very small proportion of revenue (2%). The Australia and Cyprus regulated subsidiaries were not yet up and running. Therefore, the remaining revenue must have been generated in other jurisdictions, where Plus500 was unlicensed.

This may not seem controversial. The Admission Document (p.36) discloses that Plus500 operated illegally for a period of time:

The Group has grown rapidly and as part of this growth has, in the past, commenced trading in a limited number of jurisdictions where operations have been found to constitute, or are likely to constitute, an offence and the penalties (whether civil, criminal, regulatory or other) against the Group or its directors are unknown.

It seems probable that Plus500′s dormant subsidiary MeVideoCY Ltd. (p.84) was responsible for these activities. More on this in Part 7.

However, it is not possible to reconcile this $43.7 million of unlicensed, unregulated activity with the customer domicile disclosures in the Admission Document.

The second important takeaway is in line E of the table. In 2010 and 2011, respectively, the Admission Document claims that 77.1% and 85.7% of turnover was generated within the EEA and Gibraltar—under the aegis of the FSA. If the Admission Document is accurate, Plus500 generated $17.1, $13.9, and $5.1 million in 2010, 2011, and 2012 from UK/European customers without those revenues flowing through Plus500UK. Did Plus500 conduct unlicensed activity in the EEA even after its license was obtained in 2010? Alternatively, did the Admission Document misrepresent the geographic origin of Plus500′s customers? Did it present 2010-11 revenues that were higher than the company actually earned?

 

On to Part 7: Or was Plus500 operating an undisclosed subsidiary? –> 


Your Capital at Risk Part 5: Audit Opinions 4

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

The auditors of Plus500′s UK accounts do not inspire confidence.

In some of the discrepancies identified in Part 4, it is the Admission Document or the 2013 and 2014 Group accounts that appear to be overstated when compared the Plus500UK subsidiary filings. In others, statements in the Plus500UK subsidiary filings appear to be exaggerations relative to the company’s statements elsewhere. It is difficult to determine which filings, if any, are more reliable. While it is not generally the responsibility of auditors to proofread basic statements about the business by the company in a director’s report, one wonders if similar errors might be present elsewhere.

For the year ended 2013, the audits of Plus500UK, Plus500AU, and Plus500 Ltd were performed by three separate, unaffiliated audit firms. For 2014, Plus500 has begun to take steps to clean up the audit structure by having PricewaterhouseCoopers affiliates in the UK and Cyprus perform the local audits. However, in 2013, Kesselman & Kesselman (PwC) in Israel would have had to rely on the work of Baker Tilly (formerly RSM Tenon) in the UK and Gauld Tulloch Bove in Australia.

The 2010-2013 auditor of Plus500UK is a cause for concern. RSM Tenon nearly collapsed in 2012 after being discovered as having misrepresented its own accounts. After Baker Tilly bought the firm out of administration in 2013, the same RSM Tenon audit partner responsible for the 2012 report, Malcolm Pirouet, signed the 2013 report on behalf of Baker Tilly.

Nor does the replacement of RSM Tenon/Baker Tilly with PwC necessarily improve the situation in the UK. After all, PwC was RSM Tenon’s auditor. Perhaps more importantly, just after completing the 2014 audit, Plus500UK hired Gareth Derbyshire from PwC to serve as head of compliance. Though not required, it is common for a company to change auditors after making a senior hire from its auditor. The new appointment creates the appearance of a potential auditor independence issue.

Whatever the potential risks of the audit structure, the audit of the 2013 Group accounts was completed on 10 March 2014, which was at least after the Australia report on 7 March and the UK report on 3 March.

In 2015, by contrast, Kesselman & Kesselman’s report on the 2014 Group accounts was dated 16 March 2015. However, Plus500CY’s audit report was not signed until 29 April 2015 and Plus500UK’s is dated 10 April 2015. What exactly was Kesselman & Kesselman auditing in March of this year? Were they relying on unaudited subsidiary results? In the context of a significant restatement of the UK subsidiary’s accounts, how could Kesselman & Kesselman complete its Group audit ahead of time?

The 2014 Plus500UK accounts include significant inter-company payables (“Other amounts owed to group undertakings” at note 17) that would be eliminated upon consolidation in the Group accounts. The revised revenue recognition policy at Plus500UK implies that amounts owed under the inter-company agreement are paid to the Parent immediately and therefore not even recognized in revenue at the subsidiary level. How, then, did the amount of inter-company payables balloon from GBP 1.6 million in 2012 to 8.8 million in 2013 and 12.4 million in 2014? Are the audited inter-company amounts reported by Plus500UK the same amounts the company reported to Kesselman & Kesselman for the Group audit?

 

On to Part 6: Analyzing Plus500′s unlicensed activities –>


Your Capital at Risk Part 4: Companies House Inconsistencies

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Plus500 makes inconsistent claims about the basic details of its business. It will be a bit tedious to run through them all, but it should give investors pause that even simple facts like the number of CFDs offered on the platform are not consistently represented.

Public and private companies in the United Kingdom are required to file annual accounts, which are publicly accessible from a government website called Companies House. Plus500′s UK subsidiary, Plus500UK Ltd, company number 07024970, has filings available since its 2009 inception. Unlike EDGAR, downloading each document costs 1 GBP, so to save you a few quid I’ve uploaded the key documents:

2010 Plus500UK Full Accounts
2011 Plus500UK Full Accounts
2012 Plus500UK Full Accounts
2013 Plus500UK Full Accounts
2014 Plus500UK Full Accounts

Similar filings for the Cyprus and Australia subsidiaries are also available, but they are generally not material to the Group. For reference:

2013 Plus500AU Full Accounts
2014 Plus500CY Full Accounts

For comparison purposes, I reference Plus500′s published annual and interim reports, the company’s website, and the 17 July 2013 Admission Document (akin to an S-1).


Starting with the basics, the UK subsidiary filings contain a number of simple statements about the business that do not match Plus500′s marketing materials or contemporaneous filings. Again, I don’t want to levy accusations—these are publicly verifiable discrepancies, but I have no idea whether they reflect mere sloppy drafting, poor internal controls, or deliberate fabrications. The following list of misstatements in one place or another is in chronological order, not order of significance. Some differences are a lot more bothersome than others, and I’m sure I’ve missed a few:

  1. From its first version in September 2008 through today, the About Us page on Plus500′s website refers to ”strong execution relationships with many of the world’s largest international banks” and states that “Plus500 receives and is able to pass on the benefits of size, better prices, and better execution to our clients” even though Plus500 operates a bucket shop that does not transact for clients on an agency basis.
  2. In the 2010 director’s report dated 11 March 2011, Plus500UK referenced “almost 20,000 active customers since commencing business,” covering the period from 21 September 2009 to 31 December 2010. The Admission Document (p.17) put the number of active accounts in 2010 alone higher at 26,570.
  3. From March through September 2012, the About Us page inaccurately stated that Plus500 is owned by its UK subsdiary, Plus500UK Ltd, and implied that the company’s small office at 359 Goswell Road was located in the financial district (“the city of London“). More about the Plus500 ownership on the About Us page is in Part 7.
  4. The March 2012 About Us update also introduced the claims, still on the timeline today, that Plus500 has “over a million clients” and reached “more than 1,000,000 traders” in 2011. As shown in Part 3, the cumulative number of new accounts funded at Plus500 is only 252,748 to date.
  5. The timeline also includes the claim that Plus500 had more than 2,000,000 monthly transactions in 2011. In its 2012 action against Plus500 for failing to properly report transactions, the FSA counted only 1,332,000 total transactions over the period from 29 June 2010 to 5 November 2011. The monthly amount claimed, if annualized, is also more than double the 10 million trades for the following year claimed in the Admission Document (p.20).
  6. In the director’s report for 2011, Plus500 had “54 different countries in 34 languages.” In 2012, the figure was “55 different countries and 36 languages.” The Admission Document published 4 months later states on p.15 that “The Trading Platform has been localised into 30 languages.” Most subsequent documents reference 31 languages and “more than 50″ countries. The website currently shows a drop-down list with 32 languages to choose from.
  7. The 2012 director’s report dated 8 March 2013 states, “We currently have over 86,000 active customers globally.” The number of active customers in the full year 2012 was 58,343 as reported in the Admission Document (p.17). Curiously, 86,000 (85,795 to be exact) is the number of active customers the Company reported for 2013 in its Group filings one year later.
  8. The Admission Document states that 88.7% of 2012 revenues, or $49.8 million, were generated by customers domiciled in the EEA/Gibraltar. By law, these revenues should have been earned at the regulated UK subsidiary. However, the UK subsidiary reported revenue of only GBP 27.2 million (about $44.7 million) in its 2012 accounts. That leaves $5.1 million of revenue purportedly generated by customers in regulated jurisdictions that did not flow through the regulated subsidiary. The discrepancies in 2010 and 2011 are even larger, as discussed in more detail in Part 6.
  9. The 2013 report misstates the legal name of the Parent at note 18 as “PLUS500 plc.” It is “Plus500 Ltd.”
  10. The 2013 director’s report dated 3 March 2014 contains several inaccuracies. The filing states, “During 2013 we broadened our offering with an additional 1,000 CFD products…We currently have just over 416,000 users globally accessing over 3,000 CFD products.” As noted above, there have been only 252,748 new accounts reported to date and there were only 173,437 as of Q1 2014. If Plus500 is including unfunded accounts, the 416,000 is still substantially less than the 1 million traders claimed on its website.
  11. The 3,000 CFD products referenced in the 2013 report does not correspond to other filings. The 2012 report one year earlier referenced 1,500 CFD products, for a total of 2,500 if Plus500 in fact added 1,000 during the year. The 2013 Group accounts published one week after the Companies House filing say that Plus500 offers 1,900 CFD products.
  12. The 2014 director’s report, in turn, says the company offers over 2,000 CFD products and added 400 during 2014, which would imply there were about 1,600 CFDs at year-end 2013. The Admission Document said that Plus500 offered 1,700 CFDs as of July 2013.
  13. On a Q3 2014 conference call, the Company stated that it offers 2,100 instruments, an increase of 300 from the end of 2013, with plans to add 200 more before year-end 2014. Neither figure corresponds to the number of CFD products reported in the 2013 and 2014 Group accounts.
  14. As discussed in Part 1, 2013 revenues are 80% lower in the 2014 Companies House filing than in the 2013 Companies House filing prepared by a different auditor. Neither the original filing nor the revised filing are consistent with the terms of the inter-company agreement in section 15.6 of the Admission Document (reproduced below for convenience).
  15. The 2013 and 2014 credit card charges (note 10) disclosed in the 2014 Companies House filing, when translated into US dollars, are $1.9 and $3.3 million. According to the inter-company agreement (below), Plus500UK pays the parent 5% of each credit card transaction, implying that credit cards were used to deposit about $38.5 and $67.0 million in 2013 and 2014. Although credit cards are the most convenient way to fund an account and are encouraged by the company, these amounts are significantly lower than than the $300 million+ the company’s investor relations representative estimated flowed through the company in 2013. The total processing fees paid by the parent (Group 2014 accounts note 11a) were $2.4 and $3.9 million. These figures are more consistent with the UK subsidiary representing 80-90% of the Group’s activities, not 17.5% as restated.

Why is the 2013 restatement such a big deal?

Most obviously, if the restated Plus500UK revenues cannot be accounted for elsewhere in the Group, the $115.1 million of revenues reported in 2013 is overstated by the difference of approximately $79.8 million and the Group financial statements cannot be relied upon. Alternatively, if the revenue discrepancy is due to additional trading activity outside of the regulated UK subsidiary, then Plus500 may have understated the degree of its unregulated activity in unlicensed jurisdictions. This would be problematic because the Cyprus license was not granted until 2014 and the Australian subsidiary reported only AUD 3.3 million of revenue in 2013, meaning as much as 80% of the company’s revenues would have been generated without a license.

If the Plus500UK inter-company agreement remains in effect, the company’s explanation that Plus500UK revenues were simply reclassified from Plus500UK to the Parent is nonsensical. The agreement calls for 78% of dealing spread revenue to be paid to the Parent as compensation for the back-end and referral services they provide. If the missing revenues were in fact generated in the UK, they would have been paid over to the Parent anyway under the agreement. In the unlikely event the agreement were no longer in effect in 2013, the same year it was disclosed in the Admission Document, then the Company is extremely tardy in updating the market. In any case, the magnitude of the restatement (GBP 51.0 million, 80% of the 2013 revenue originally reported) is much more than the amounts that would have been payable under the inter-company agreement. Spreads were about 74% of revenues in 2013 according to a company presentation, so I estimate the inter-company agreement should have required Plus500UK to pay the parent approximately 74% x 63.8 million x 78% or about GBP 36.8 million based on the 63.8 million in revenue originally reported.

Moreover, the 2014 Companies House filing includes costs to the subsidiary of GBP 3.3 and 5.0 million in 2013 and 2014 for “introductory commission” which “relates to platform provision and intermediation services provided by Plus500 Ltd.” (note 10). These amounts are significantly less than would be expected under the inter-company agreement. The restated Plus500UK revenue for 2013 was 12.8 million. Applying the same math as before, the 2013 payment should have been 74% x 12.8 million x 78% or about GBP 7.4 million. Based on the 2014 spread proportion of revenue of 87%, the expected payment for “introductory commission” under the agreement in 2014 should have been about GBP 27.1 million. The discrepancy suggests that spread revenue may be a lower proportion than claimed, as hypothesized in Part 2.

Plus500UK inter-company agreement

A more charitable explanation of the revenue shortfall is that Plus500 was reporting gross instead of net revenues for the UK subsidiary, as summarized in the IFRS transition note below (2014 Companies House filing note 21):

2014 IFRS transition explanation

According to PWC, the originally reported GBP 63.8 million of turnover included 18.7 million of improperly recognized cost of sales and e-money charges. The remaining 45.1 million in net revenue was further reduced by 32.3 million of “introductory commission,” which would appear to be amounts remitted to the Parent under the inter-company agreement. It is unclear why a portion of the “introductory commission” (the 3.3 million discussed above) would be reported as a separate cost item, or why amounts payable under the inter-company agreement would be recorded as a contra item to turnover.

Like the 2014 subsidiary accounts, the Group accounts are also prepared under IFRS and do not include any cost of sales item. In other words, the $115.8 million of Group revenues in 2013 should be a net figure. Even assuming the introductory commissions were earned and paid to the Parent, that still leaves GBP 18.7 million (about $29.2 million) of revenue previously reported at the UK subsidiary unaccounted for at the Group level.


If all this sounds complicated, it’s because it is. I have a few speculative theories to explain what’s going on behind the scenes, but these are questions the company should really clarify in its filings. If Plus500 has not fabricated revenues, I suspect the company may be generating substantially more of its profitability from either or both of 1) trades in unlicensed jurisdictions or 2) customer losses, than it has disclosed to the market.

Additional trading in unlicensed jurisdictions would explain the large gap between net revenues at Plus500UK and net revenues at the Group level in periods where Plus500UK was the primary regulated entity. Note the “hedging services” provision in the inter-company agreement. Booking offsetting trades in the Plus500UK subsidiary would allow profits from customer losses to be disguised as inter-company transactions, while allowing the company to claim that customer positions represent a very small proportion of subsidiary revenues.

 

On to Part 5: Audit opinions –>


Your Capital at Risk Part 3: Customer Lifetime Value 6

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

If Plus500 continues as a going concern, it still deserves a low multiple. But there is a bull case.

As should be clear from the previous post, a brokerage business that ultimately captures most customer deposits as revenue has the potential to be stupendously profitable. Indeed, the reported financials look almost too good to be true. Plus500 should be a value investor’s dream: on minimal upfront capital investment, cash generation appears robust. Revenue has doubled two years in a row. EBITDA margins are over 60%. After this week’s decline, shares trade at little more than 4x last year’s earnings. The company has historically paid a significant dividend. There is just one small wrinkle:

Customers run out of money.

As has been discussed elsewhere, Plus500 has very high churn rates. This should be unsurprising given the dynamics of a bucket shop. Revenue growth is attributable to an aggressive customer acquisition and affiliate marketing scheme that pays affiliates one-time bonuses up to $600 per account or ongoing revenue sharing up to 30%. I believe most customers eventually lose their investment, and that the company’s growth will therefore prove unsustainable. To see this, consider the two key KPIs Plus500 publishes each quarter: the number of ‘new accounts,’ defined as a customer who deposits money for the first time, and the number of ‘active accounts,’ defined as a customer who made at least one trade during the period. A different visualization of the data makes clear that customers eventually roll off:

Cumulative new accounts reported by Plus500

Using the 26,570 customers active in 2010 (Admission Document p.17) as a starting point, the cumulative number of new accounts reported has risen to 252,748 as of last report. However, the proportion of accounts active each quarter has steadily declined as customers depart. A small portion of previously active accounts have returned in times of significant market volatility, but to date the number of inactive customers, previously reported as new, has increased every single quarter.

Indeed, in the Admission Document, Plus500 admits that customers have a finite lifetime. As of July 2013, “The Directors currently estimate that on average a customer remains an Active Customer for a period of 15 months and generates $1,700 in revenue for the Group” (p.23). Note that such a short customer lifetime is more characteristic of an online gambling operation than a reputable brokerage. The $1700 figure is consistent with 2013 reported ARPU of $1325 (15/12 x $1325 = $1656). The company’s investor relations representative now claims an average customer stays for 18 months, although the customer activity data suggest 15 months is closer to the right figure. Based on 2014 ARPU, an 18-month lifespan would imply a potential lifetime value of up to $3240.

Among the 252,748 cumulative accounts to date, including 185,081 inactive in Q1, approximately 99,435 are less than 18 months old, and therefore might yet still have capital available to trade. From this, we can calculate a going concern valuation of the business.

What is Plus500 worth as a going concern?

Instead of capitalizing earnings at an arbitrary multiple, it makes more sense to think about the lifetime value of the current customer base, in order to back into what the market is paying for potential future customers. Taking the company at its word and assuming the remaining 99,435 potentially active customers have a weighted average remaining life of 10 months (computed on the number of new accounts reported in each of the last 5 quarters), they could each be expected to generate just under $1800 in additional revenue based on 2014 ARPU, for a total of $178.4 million. Assuming a 15-month lifespan, future revenue would drop to $124.7 million. This is one-time, non-recurring turnover that should not be capitalized. Future growth depends on attracting new customers to the platform.

Using the company’s 2014 net margin of 44.8% (which fairly accounts for operating expenses and ongoing advertising and revenue sharing—not all user acquisition cost is upfront), this gives a range of $55.8-79.8 million in value that the current customer base can be expected to generate for Plus500. I won’t even bother discounting it. Added to stated cash balances of $88 million, the remaining value of Plus500′s ongoing operations is GBP 1.25-1.46 per share, plus the value extracted from any future customers acquired.

In other words, even after this week’s decline and any reputational damage from the account freeze, the market is ascribing about $300 million in present value to Plus500′s future customer acquisition efforts, roughly an additional 200,000-250,000 new customers using the same approach as before.

In my opinion, if regulators carefully review the reporting inconsistencies highlighted in Part 4, neither the monetization of the current customer base nor the acquisition of new customers should take place.

What’s the bull case?

Supporters of Plus500, in addition to making the obvious peer-group comparisons to CFD brokers with different, more sustainable business models, have very effectively countered a strawman short thesis. Zack Buckley of Buckley Capital Partners distributed a widely circulated long pitch on Plus500 last year that effectively sums up the bull case. In it, he expresses trust in the company’s management, while expressing skepticism that “a fraud” could pay dividends, be audited by PricewaterhouseCoopers (PwC), and have substantial insider ownership. I recommend reading the report and hope for Zack’s sake that he no longer holds a position in the company.

I am not aware of anyone whose short thesis on Plus500 has been based on the assumption that the May 15 dividend was not actually paid, as suggested by the company. There is an important distinction between the type of outright financial statement misrepresentation common among some of the more egregious Chinese reverse merger scams in recent years, and other forms of major business fraud. Whether the financial statements fairly and accurately represent a company’s financial position and whether a business is truly everything it claims to be are very distinct questions. For example, a CFD brokerage designed to capture customer deposits as revenue will generate real and substantial cash flow, while perhaps representing itself as being more reputable and customer-friendly.

Enron and Worldcom both paid regular dividends. The founders of Plus500 have cashed out to the tune of approximately GBP 164 million ($254 million) from dividends and share sales in the IPO and follow-on offering. Alon Gonen is already a very wealthy man.

PwC is a reputable audit firm. In Part 5 I will discuss why there could still be issues with the financial statements.

 

On to Part 4: Inconsistencies in Plus500′s public filings –>