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:
Similar filings for the Cyprus and Australia subsidiaries are also available, but they are generally not material to the Group. For reference:
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:
- 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.
- 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.
- 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.
- 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.
- 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).
- 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.
- 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.
- 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.
- The 2013 report misstates the legal name of the Parent at note 18 as “PLUS500 plc.” It is “Plus500 Ltd.”
- 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.
- 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.
- 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.
- 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.
- 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).
- 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.
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):
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.