Kyndryl (KD) Shares Plunge 6.99% as Short-Seller Report, Audit Expose Financial Schemes, Weak Controls

Kyndryl Holdings (KD) shares plunged 6.99% on Friday, marking a two-day decline of 8.07% and falling to their lowest level since April 2025. The stock’s intraday drop of 7.02% underscored mounting investor concerns amid a cascade of financial, legal, and operational challenges.

The selloff follows a damning report by short-seller Gotham City Research, which accused Kyndryl of systematically inflating key financial metrics like adjusted EBITDA and free cash flow through aggressive accounting practices. The firm alleged that routine operational costs were capitalized instead of expensed, creating a false narrative of profitability. These claims were amplified by a critical audit finding in Kyndryl’s 2024 10-K report, which highlighted a material weakness in internal financial controls. The report also questioned the company’s unusually low days sales outstanding, suggesting potential manipulation of cash flow disclosures.

Legal pressures have further compounded the turmoil. A securities class-action lawsuit was filed, alleging Kyndryl misled investors by concealing risks tied to its IBM dependency. The suit focuses on the expiration of favorable pricing terms with IBM in 2025 and 2026, which could trigger a sharp rise in service costs. While Kyndryl has denied wrongdoing, the legal battle has intensified uncertainty, with whistleblowers encouraged to come forward. The SEC’s potential involvement adds another layer of regulatory risk.

Kyndryl’s reliance on IBM remains a focal point. The company’s related-party service costs, which totaled $1.38 billion annually over multiple periods, have drawn scrutiny. Gotham City Research warned that the expiration of cost-saving agreements could push annual expenses beyond $2 billion, severely squeezing margins. The abrupt cessation of IBM cost disclosures after 2023 has fueled speculation about hidden financial vulnerabilities.

Investor sentiment has deteriorated rapidly. Despite a 40% gain in the year leading up to April 2025, the stock has lost 19% since March 27 amid the scandal. A recent partnership with Google Cloud failed to reassure markets, as investors remain fixated on financial and legal risks. The lack of transparency in management communications and increased insider selling have further eroded confidence, leaving Kyndryl’s future trajectory in limbo.