Following a report from influential stock watcher Citron Research, Shopify shares took a nosedive and American law firm Girard Gibbs LLP. began a class action lawsuit investigation on behalf of shareholders
VANCOUVER—Shopify Inc. shares plunged more than 11 per cent Oct 4 after a short-seller report alleged the e-commerce platform is overvalued and operates outside the law.
“This is not an $11-billion company,” said Andrew Left, managing editor at stock commentary website Citron Research, in a video where he claims Shopify’s business model does not comply with guidelines set by the Federal Trade Commission.
The company “has mastered the good ol’ get-rich-quick scheme,” he said, comparing its practices to those of Herbalife, which recently settled with the FTC for $200 million and made structural changes after claiming members could “quit their job” upon joining the company.
Left, an activist short-seller whose previous Citron Research reports moved the direction of shares for the likes of Valeant and BlackBerry, said the stock should be closer to US$60, prior to any potential involvement by the FTC.
He questions how many of the 500,000 businesses Shopify says it powers are legitimate.
He alleges Shopify’s partners recruit merchants by wooing them with promises of self-employment and million-dollar incomes. Left points to content on Shopify’s website and social media, like a statement that 2,700 people become millionaires daily and a sample resignation letter.
Shopify spokeswoman Sheryl So said in an email that the company “does not have a comment on Citron Research.”
FTC’s acting director of public affairs Peter Kaplan said in an email that the commission’s policy is not to comment on specific companies and/or allegations.
The company’s stock fell $16.75 or 11.5 per cent to $128.95 on the Toronto Stock Exchange, and US$13.51 or 11.57 per cent to US$103.30 on the New York Stock Exchange.
American law firm Girard Gibbs LLP. said Wednesday after markets closed that it was conducting a class action lawsuit investigation into claims of “possible violations of federal securities laws or other unlawful business practices” on behalf of shareholders.
Some investors have questioned the company’s high valuation.
It first went public on both Bay and Wall Streets in a dual initial public offering in May 2015, when it raised a larger-than-expected US$131 million.
Short sellers, who believe a company’s share price is over-valued and profit if it falls, have targeted the stock since.
On the TSX, some 367,000 shares or less than one per cent of the company’s float have been sold short. In New York, about 5.25 per cent of Shopify’s shares or 4.1 million have been sold short.
“The stock is going lower, cautious investing to all,” Left said.