On 5 August, Muddy Waters shorted 0.71 per cent of Burford Capital (BUR) shares. Within two days, the hedge fund had published a devastating short dossier and largely closed out its position in the litigation funder. At that point, the short-seller would have been well within its rights to exit the debate over its target’s accounting and corporate governance practices. It has not. This week, Muddy Waters published its counter-response to Burford’s own defence, dismissing the Aim-listed group’s rebuttal and a series of accusations as “nothing more than distraction and thin excuses”.
That the short-seller has stuck around for what promises to be a protracted battle with the litigation finance group casts a new light over Burford’s initial response to the episode. On 6 August, before it had seen the initial Muddy Waters report, but after its shares had fallen on investor fears that it was indeed the unidentified subject of a tweet from the hedge fund, Burford said it was facing a “short attack”.
This week, the group doubled down on that line of attack. After conducting a forensic examination into stock market data since Muddy Waters’ initial tweet, the litigation funder said it had uncovered evidence of “trading activity consistent with material illegal activity”. Burford presented what it claims to be evidence of spoofing (placing fake orders to force a movement in price) and layering (spoofing by placing high volumes deeper in the order book), techniques which it alleges coincided with Muddy Waters’ releases and therefore constitutes evidence of market manipulation.
To prove its willingness for a legal fight, Buford has retained heavyweight law firms Quinn Emanuel Urquhart & Sullivan, Freshfields Bruckhaus Deringer and Morrison & Foerster to assist with its engagement with “regulatory authorities and criminal prosecutors”.
We already know that those regulators include the Financial Conduct Authority (FCA). “The FCA has been aware of these matters since the first tweet and price movements on Tuesday of last week and at that point we began undertaking wide-ranging enquiries,” a spokesperson for the regulator said. “We will continue to make enquiries using the wide range of data and resources at our disposal.”
Muddy Waters hit back at Burford’s manipulation charge, implying it was defamatory. Taking to Twitter, the hedge fund also said it had “no trading capability” to engage in the type of high-frequency trading alluded to in the spoofing accusation, and calling the accusation preposterous. “If Burford wants to bring that to court, we will smack BUR and any supposed expert down hard,” the group said.
The response continued in a second report in which Muddy Waters re-iterated its view that Burford aggressively marks its cases up to generate non-cash profits, manipulates its cash-based financial metrics to justify fair value gains, deliberately confuses investors about the timing of its fair value gains, and possesses a fragile balance sheet and standards of corporate governance.
So far, analysts’ response to the saga has been restrained or muted. In a flash note to clients, Macquarie maintained its £25.49 target price for Burford shares without commenting on the Muddy Waters' report or the company’s report. While acknowledging the increased cost of raising new capital and the potential reputation impact, Jefferies says questions over return calculations have been answered, liquidity is not a problem and “expects progress on governance issues”. Its price target for the shares is unchanged at £24.
Numis also remains bullish, and this week argued that Burford’s stake in the Petersen case against Argentina is “a very good example” of why fair value accounting gives investors a better impression of carrying value than cash accounting. “Muddy Waters would suggest the case value should be cash accounted and therefore held at the initial $17m case value, despite the very recent sale price of $1bn,” argues the brokerage. “We believe Burford holds Petersen at a substantial discount and marks up as the market price changes.”
