Federal investigators are reviewing Ebix Inc.’s cross-border financial transactions to see whether the Atlanta-based software company engaged in money laundering, according to three people with knowledge of the matter.
Ebix fell $2.50 to $9.29 or 21 percent, at 1:43 p.m. in Nasdaq Stock Market trading.
The focus on the company’s wire transfers around the globe follows the June disclosure by Ebix that the U.S. Attorney’s Office in Atlanta had begun an investigation into “allegations of intentional misconduct.”
The U.S. Attorney’s investigation upended a plan by Ebix Chief Executive Officer Robin Raina to take the company private. Ebix, which sells management software to insurance companies, had proposed a $820-million deal financed by Goldman Sachs Group Inc. In May, Ebix had disclosed that the U.S. Securities and Exchange Commission was investigating its accounting practices.
Tim Lynch, a spokesman for Ebix who works for Joele Frank, said the company had no immediate comment.
[Later in the day, Reuters reported that Ebix issued a statement claiming the allegations of money laundering are “false, inaccurate and likely to cause significant financial harm to Ebix shareholders.”]
Robert Page, a spokesman for the U.S. Attorney’s office in Atlanta, declined to comment, as did Judith Burns, an SEC spokeswoman.
One of the people familiar with the probe is a former Ebix executive who was contacted by FBI agents. Federal Bureau of Investigation agents asked him about the company’s wiring of funds to operations in locations such as India, Sweden and Singapore, the person said.
In one of the interviews, the former executive said he was asked by the FBI whether he thought the transfer of funds constituted money-laundering. The former executive requested anonymity because the investigation is confidential.
Joint Effort
The former executive as well as the two other people with knowledge of the probe said the SEC investigation, which began last year, had been joined with the Justice Department’s examination of Ebix.
One area of interest to the FBI agents and SEC attorneys is Ebix’s largest investor, the Rennes Foundation, according to one of the people briefed on the probe, who declined to be identified because the SEC investigation is confidential.
The lead director of the Rennes Foundation, which is based in Liechtenstein, is Rolf Herter, a Zurich attorney who is also a member of Ebix’s board of directors. The foundation owns 9.6 percent of Ebix’s stock, according to public records, which don’t identify the foundation’s owners.
No Access
Goldman Sachs was not able to determine the identity of the Rennes Foundation’s beneficiaries, even though the foundation was slated to receive a cash windfall of $11.4 million from the Wall Street bank’s proposed buyout of Ebix, as well as a 15 percent stake in the newly private company, according to an SEC filing from May 10.
In that filing, Goldman Sachs partner Sumit Rajpal wrote that the Wall Street bank had not been given access to any documentation or information about the people or organizations behind the Rennes Foundation.
Referring to the lack of data about Rennes, Rajpal wrote: “For the sake of clarity, it is agreed” by Goldman Sachs, “that all documentation and information related to the potential beneficiaries of the Rollover Investor is deemed to be documentation and information that is not available.”
Andrea Raphael, a spokeswoman for Goldman Sachs, said the language used in the filing was not unusual, given that the proposed deal was months away from consummation.
SEC Failed
The SEC tried to identify the sources of the Rennes Foundation’s funds in 2005, in a letter to Futuremedia Plc, a U.K. company in which Rennes held a substantial stake. Futuremedia responded that it had no information about the sources of Rennes’s funds. Following several years of losses, Futuremedia became a penny stock in 2007 and was delisted from the Nasdaq Stock Exchange in early 2008.
Investigators from the SEC haven’t found any violations regarding the Rennes Foundation. What attracted their attention initially was the lack of information about the fund’s owners and its base in Liechtenstein, a country that advertises its privacy laws to attract investors, said one of the three people, who had been briefed on the SEC’s investigation.
Also of interest to the SEC is that each of the three directors of the Rennes Foundation identified in an SEC filing from May 14, including Herter, serve as directors of companies registered in Panama, which also advertises its privacy laws to attract investors.
Herter, who serves on Ebix’s corporate governance and nominating committee, is a director of two Panamanian entities, Nesbit United SA and Melberry Financial SA
Can’t Say
In an e-mail, Herter said confidentiality laws prevented him from identifying the clients he represented in the Panamanian companies.
“I can confirm that neither of the companies are related to Ebix in any way whatsoever and neither of the companies are involved in any laundering activities whatsoever,” he said in an e-mail. Herter did not respond to a question of whether there was any relationship between Rennes and the Panama entities.
On the foundation itself, Herter did say: “Rennes Fondation is a discretionary family foundation. The foundation’s beneficiaries are not public. Not even the beneficiaries themselves have knowledge of their entitlement. Also, the beneficiaries do not have any enforceable claim of distribution against the foundation. Therefore, the beneficiaries will not be disclosed.”
Panama, Liechtenstein
Two other directors of the Rennes Foundation, Anton Daniel Wyss and Renzo Zanolari, are listed as partners of Audax Consulting Trust in Vaduz, Liechtenstein. Both men also serve as directors of companies in Panama. The address of their firm, Audax, is the mailing address of the Rennes Foundation, according to SEC filings.
Another thing about the Rennes Foundation that intrigued, according to the person in touch with the SEC investigation, is its weak track record as an investor in companies listed on U.S. exchanges.
Since 1999, Rennes has accumulated stakes of 5 percent or more in seven different companies, including Ebix, according to SEC filings. In addition to Futuremedia, Rennes’ other significant investments were in Semiconductor Laser International Corp., @Comm Corp., Cardiome Pharma Corp., Inovio Pharmaceuticals Inc. and Orthovita, Inc., which was acquired by Stryker Corp. Like Futuremedia, Semiconductor Laser was delisted, while @Comm filed for bankruptcy protection.
Question Raised
The foundation’s investment performance raises the question whether Rennes’ backers are interested in getting a return on their investments, said Joseph Carcello, co-founder of the Corporate Governance Center at the University of Tennessee.
“Where is their money coming from, and how does it continue to flow?” Carcello asked. “This doesn’t make economic sense.”
“Rennes Foundation’s investment activities are of course directed to generate a positive return,” Herter said in an e- mail. “Although Rennes shall not publicly discuss its investment activities and/or its financial results I may let you know that Rennes’ board of directors is satisfied with the performance. Please be aware that Rennes’ investments are not limited to US stock exchanges.”
The Justice Department review of Ebix’s transactions comes while the company is being investigated by the SEC over its accounting practices, and while the Internal Revenue Service is examining Ebix’s strategy of booking U.S. revenues to foreign subsidiaries in low-tax nations such as Singapore and India.
Short Sellers
For more than two years, Ebix has been the target of short- sellers who have claimed the company’s earnings have been manipulated. On May 1, CEO Raina appeared to have secured a victory over the shorts, when he announced plans to take Ebix private in the $820-million leveraged buyout.
The transaction would have inflicted pain on short-sellers who were betting Ebix’s shares would trade at less than half the $20-per-share offer price. A completed deal would also have demonstrated that the quality of Ebix’s earnings had been ratified by the due diligence team at Goldman Sachs.
Following disclosure of the U.S. attorney’s investigation and the termination of the Goldman Sachs deal in June, shares in Ebix dropped by almost half, from $19.72 to $11. In response, the company announced that it would spend $100 million over the next two years on a share buyback.
The person briefed on the SEC probe said investigators were “puzzled” not only by the share buyback, but by the absence of any indication that the Ebix board has hired an outside law firm to conduct an independent review of the allegations which have led to the regulatory probes. Lynch declined to say if such a firm had been hired but not previously disclosed.
Lynn Turner, former chief accountant of the SEC, says Ebix’s board probably should be focused on matters other than the share price.
“As a director, I would want to get an independent perspective of what, if any, allegations are truthful,” Turner said in an e-mail. “As chair of an audit committee I would do an investigation to quickly get to the bottom of things. I would retain independent legal counsel and independent accountants. This should have all been done before things blew up, but as they say, better late than never.”