What: Shares of Indian language film distributor Eros International (NYSE:EROS) slumped on Friday, erasing gains from the previous day. The stock has been volatile since a writer on Seeking Alpha accused the company of vastly overstating its revenue and earnings in a series of articles. While the company's defense of its business sent shares higher on Thursday, at 1:15 PM Friday the stock was down about 22%.
So what: Two law firms are now investigating Eros as a direct result of the negative articles, and class action lawsuits are a possibility if wrongdoing is found. While shares of Eros had been tumbling well before the first negative article was published on October 30, these allegations essentially accuse the company of being fraudulent.
The author of the negative articles tweeted that a third article would be published on Friday morning, and it became available in the early afternoon. The new article goes through individual films in an attempt to show that the number of films Eros has distributed has been inflated, thus also inflating revenue.
Now what: For Eros investors, this is certainly a scary time. A deep knowledge of the company would be required to evaluate the veracity of the accusations, but if there turns out to be any truth in these articles, the stock could go much lower.
The author of these articles has criticized other companies in the past, including Uni-Pixel and ParkerVision in late 2013,and SFX Entertainment in late 2014. In all three of these cases, the stocks eventually collapsed in dramatic fashion, wiping out shareholders in the process. So far, the market is severely punishing Eros, and only time will tell whether the stock meets a similar fate as the three listed above.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.