Shares of Tile Shop Holdings Inc plunged 39 percent Thursday after short seller Gotham City Research alleged that the stone tile retailer's gross margins were inflated.

Gotham City Research said in a report on Thursday that Tile Shop used captive suppliers such as Beijing Pingxiu to overstate inventories, understate cost of sales and overstate gross profits.

The short seller claimed that Beijing Pingxiu was run by Fumitake Nishi, who it said was the brother-in-law of Tile Shop Chief Executive Robert Rucker.

Tile Shop later in the day suspended its relationship with Beijing Pingxiu, saying it was not aware of ownership changes at the supplier. The company denied misreporting financial statements.

The Gotham City report said that Beijing Pingxiu, Tile Shop's largest supplier, sold to the retailer at zero cost, allowing the company to achieve higher gross margins.

Tile Shop shares sank $8.27 to end at $12.95 in New York. In aftermarket trading, the shares regained some of the loss, rising about 10 percent to $14.20.

About $400 million of the company's market value was wiped out during regular trading. The shares had risen 55 percent over the last year.

Gotham City said it did not value the company's shares at more than $1.54-$3.34 per share.