CORRECTED-UPDATE 2-UK's Quindell says takes legal action against short-seller

Fri Apr 25, 2014 9:30am EDT

(Inserts dropped word "not" in paragraph 7)

April 25 (Reuters) - British IT outsourcing services provider Quindell Plc said it had started legal action against Gotham City Research related to a "coordinated shorting attack" against the company.

Quindell's shares fell as much as 56 percent on Tuesday after Gotham City Research questioned Quindell's revenue model and profit quality in a report published on its website.

Quindell declined to elaborate on the nature of the legal action on Friday but had said earlier that Gotham City's comments were "highly defamatory" and "deliberately misrepresentative."

The company, which provides services mainly to the insurance and telecom industries, said short positions were taken in its shares prior to the publication of the report.

Investors who sell securities short borrow shares and then sell them, expecting the price to fall so they can buy the shares back, return them to the lender, pay borrowing fees and pocket the difference.

U.S.-based Gotham City Research has not said whether it has taken a short position on Quindell's shares, but says on its website that it may have long or short positions in the companies it covers.

Gotham City Research, which does not list a telephone number on its website, did not respond to a request for comment by Reuters posted on the "contact us" section of its website.

Quindell's shares initially fell as much as 20 percent after it said it had initiated the legal action but recovered later when the company published a detailed response to Gotham City Research's allegations on its website.

The AIM-listed company said its response should reassure investors about its "transparent approach." (link.reuters.com/xut78v)

Almost 1.9 billion Quindell shares had traded by 1240 GMT, when the stock was up 5 percent at 26.25 pence. The stock was the most heavily traded on the London Stock Exchange.

Quindell, which is planning to move its listing to London's main market, said it would continue its U.S. investor roadshow next week as planned.

A number of the Quindell directors will buy shares in the company after receiving regulatory clearance, Quindell Vice-Chairman Tony Bowers said.

At 26.25 pence per share, Quindell has a market value of about 1.62 billion pounds ($2.72 billion). ($1 = 0.5953 British pounds) (Reporting by Noor Zainab Hussain in Bangalore; Editing by Gopakumar Warrier and Ted Kerr)