Dirk Markus, Aurelius chief executive
Dirk Markus, Aurelius chief executive

Gotham City Research, the hedge fund which alleged fraudulent activity at companies including Quindell and Let’s Gowex, has set its sights on private equity turnaround firm Aurelius.

In a 68-page document released on its website, Gotham has levelled a series of accusations at Aurelius relating to its conduct with portfolio companies, accounting practices and proclaimed returns. Overall, it believes the firm’s shares, which were trading on the junior Freiverkehr exchange at €65.10 when the report was published, are worth no more than €8.56 – 88 per cent less.

Aurelius, which is led by chief executive Dirk Markus, has since responded to the claims, describing them as “unfounded and distorting reality” and “a manipulation of the facts known and already published” by the firm. It says the conclusions drawn are “substantially incorrect” and that it is considering both a possible damages claim and a criminal complaint against individuals at Gotham for market manipulation.

Aurelius said it expected to successfully exit two to three sizeable companies over the next few months and that it had made a “good start to fiscal year 2017”, with group revenues and total group Ebitda expected to increase further.

According to Gotham, “15 out of 26 former Aurelius portfolio companies entered insolvency shortly after the firm sold them to suspicious buyers, some of whom seem to have direct ties with Aurelius”. It had previously been reported by analysts that Aurelius had only lost four companies.

Aurelius stated that it has acquired nearly 80 companies over the past 11 years, all of which were in distress, and that “in some cases insolvencies could not be avoided”.

The hedge fund also criticised the firm’s accounting practices, noting that Aurelius’s income from negative goodwill accounts for more than 120 per cent of earnings between 2011 and 2015, and that it has never received an unqualified audit opinion on its audited financial statements.

In response, Aurelius said that “achieving negative goodwill upon the acquisition of companies is an intrinsic component of the business model”, and that its audits have led to no reservations for more than ten years.

Furthermore, Gotham reports that Aurelius executives sold €169m worth of shares in December, accounting for 40 per cent or more of their stake, at €52.50 per share. The prevailing market price that day was €59.

Aurelius has today announced an immediate €50m share buy-back programme and plans to purchase a further €160m worth of stock subject to approval at its AGM in June.

Gotham notes that Aurelius has been ruled guilty in two cases relating to illegal or improper business conduct at portfolio companies Einhorn and EDS, and has open cases with MS Deutschland and Mode & Preis.

The buyout firm said that its number of lawsuits is “in line with a company of our size”, and that total payouts over the last decade have been in the single-digit millions of euros.

In summary, Gotham “believes that asset stripping, not reaping nor patiently growing its subsidiaries’ operating profits, is a key value driver of Aurelius’ business, as it was for Sir Philip Green (i.e. his ownership of BHS)”.

Little is known about Gotham City Research, which publishes documents on public companies it believes to be acting fraudulently and shorts the stock, and is reportedly run by New York-based Daniel Yu. The document on Aurelius was not signed by an analyst and there is no employee information available on Gotham’s website.

In 2014 Gotham accused Spanish wifi business Let’s Gowex of falsifying accounts. The company’s chief executive Jenaro Garcia Martin subsequently admitted that it was bankrupt.

The firm also targeted Quindell, a UK outsourcer which had a diverse range of interests including insurance, healthcare and a golf course. Gotham wiped £1bn off Quindell’s stock price when it published its research. The bulk of the company was subsequently sold to Australian law firm Slater & Gordon, which then announced it intended to sue the vendor after taking a sizeable loss on the deal.

Aurelius intends to issue a more comprehensive rebuttal of the allegations in the coming days.