THE BLOG
01/22/2016 03:52 pm ET Updated Jan 22, 2017

Is the Eros Whistleblower the Harry Markopolos of Bollywood or Just Another Short Selling Fraudster?

By Tim McCormack and Molly Knobler

Eros International, the so-called Netflix of Bollywood, is deep in the throes of either an Enron-type accounting scandal or a vicious smear campaign by an anonymous source intent on driving its stock price down (perhaps to profit from manipulating the share price). The anonymous source, a blogger known as Alpha Exposure, has published a series of reports (see here, here, here and here) alleging that Eros International PLC has misled investors about its cash flow and the number of movies it has released, and engaged in improper insider transactions and various other improprieties.

Eros' stock price has dropped over 70% since October 12. Although this stock drop did not start with the Alpha Exposure revelations, the anonymous blog reports certainly accelerated and amplified the drop.

So the question arises, who is Alpha Exposure? He or she does not claim to be an Eros insider, but instead purports to be merely analyzing publicly available information to identify fraudulent trends in the Eros financial and operational reports. Is he or she the Harry Markopolos of Bollywood? Mr. Markopolos is, of course, the famous former securities industry executive and independent fraud examiner who uncovered the Bernard Madoff Ponzi scheme. He was not a company insider, but used his extensive industry expertise to analyze Madoff's claimed financial returns and identify strong indicators of fraud. Unfortunately, he was rebuffed by the Securities and Exchange Commission ("SEC") for years when he tried to report Madoff. His work provided an impetus for the SEC whistleblower reward program, created by the Dodd-Frank financial reform legislation.

Or is Alpha Exposure just a fraudster? Alpha Exposure has more than a few critics among the commenters responding to its Eros reports. They charge that the analysis is sloppy, incomplete and even malicious. They further speculate that Alpha Exposure may actually be a short seller trying to manipulate the stock price through unfounded internet rumors. One of the anonymous commenters even cites a recent SEC fraud alert on the risks of market manipulation through social media and internet rumors, insinuating that Alpha Exposure's reports are motivated by the opportunity for personal gain. Alpha Exposure claims to have put its own money on the line, betting that the stock price will drop, even as low as $0.

Some of these commenters reveal personal information and have a relatively long history on the site, suggesting they are legitimate critical observers. But others have limited and suspiciously biased posting histories, suggesting they may well be sockpuppets created or hired by the company to attack Alpha Exposure. There is a lot of ad hominem in many of these comments, but also some substantive criticism of Alpha Exposure's analysis.

While it is clear that these allegations have had a serious impact on Eros' stock price, it is not yet clear where the truth lies as to Eros' financial position. This scandal does demonstrate, however, the significance and risk of the dissemination of information through social media as well as the importance of an independent market arbiter. If either Alpha Exposure or the various irate commenters had reported their concerns to the SEC through its whistleblower program, they would have had an opportunity to not only bring the alleged fraudsters to justice, but also to earn a significant reward (15 to 30% of any recovery by the SEC) in the process. Instead, they are left hoping for justice at the business end of a flame war in the trenches of the anonymous Internet. Good luck with that.