Burford Capital (BUR) has hit back at a short-seller report which this week helped to erase more than half of the group’s stock market valuation in 24 hours, in a bid to halt further selling pressure and reassure panicked investors in the litigation funder.
In a statement on Thursday, the group defended its governance standards, labelled questions over its solvency as “baseless”, and called the Muddy Waters report “false and misleading”.
A day before, the hedge fund accused Burford of “egregiously misrepresenting” its financial metrics, outlining numerous ways in which Muddy Waters claimed Burford manipulates its return on invested capital and its internal rate of return.
In turn, Burford chief executive Christopher Bogart explicitly alleged that Muddy Waters had “engaged in market manipulation”, and hinted at further action.
“In virtually every instance, Burford has already addressed publicly the points raised by the report…or has shown them here to be simply erroneous,” the group said in a statement to the market. “It is also remarkable that the core of the attack is based on Burford’s expanded investment disclosures, disclosures Burford began voluntarily publishing in March 2019.”
The report centres on seven claims put forward in the Muddy Waters report. The first – which Burford describes as “the most prominent”- is that it acted in concert with shareholder Invesco to pump money into client Napo Pharmaceuticals in order to pay money owed to Burford. Burford called the claim “simply false” and made “no sense commercially”.
The group also dismissed the claim that its cash flows are impacted by delayed or non-cash recoveries, adding that less than $1m of its cash recoveries are awaiting monetisation and that just 4 per cent of investment recoveries are currently “represented by investments that are yet to pay in full”.
Burford also defended its accounting and cash-based reporting, the latter of which it describes as “the principal analytical tool in the business”. Muddy Waters disputes Burford’s use of fair value accounting, arguing that it conflates realised gains and net realised gains, the latter of which it says includes previously-recognised fair value gains. Burford denies that the practice is misleading, and that it reverses prior unrealised gains whenever it recognises a realised gain.
The response caused Burford’s shares to re-bound from an intra-day low of 553p to as high as 858p, in another extremely volatile trading session during which it was disclosed that Muddy Waters had taken 0.71 per cent of Burford’s stock out on loan as of 5 August.
Mr Bogart and chief investment officer Jonathan Molot confirmed on an investor call that they had together bought $4m-worth of Burford shares on Thursday. The group said two non-executive directors and “numerous Burford employees” have also signalled their intention to acquire shares, and said the board would explore the possibility to buy back up to 10 per cent of shares.
The riposte followed a statement from Burford peer IMF Bentham (ASX:IMF) which attempted to distance itself from this week’s reputational hit to the litigation financing sector. IMF pointed to the “material” difference in its accounting treatments to those of Burford, including its classification of litigation funding assets as intangible assets subject to impairment testing, and its recognition of gain on assets only at the time of an asset’s completion.
The Australian-listed firm only uses concluded investments when calculating its return on invested capital and internal rate of return metrics, and implied that re-valuations through unrealised gains are “potentially-artificial estimations”.
