Litigation funding giant Burford Capital was reeling yesterday after a short-selling attack on its shares saw them lose nearly half their value in a day.
Just two weeks after unveiling record results, the company put out three stock market statements in the space of a few hours, with the co-founders announcing their intention to buy more shares personally as a way of indicating their confidence in the business.
Burford’s shares have risen spectacularly in recent years from 120p five years ago to over 2000p this time last year. However, they lost 260p on Tuesday as rumours of the attack circulated and a further 516p yesterday after it was unveiled, to leave the share price at 605p.
The 25-page report was published by US-based Muddy Waters Research, which was set up by a lawyer and claims that it “peels back the layers, often built up by seemingly respected but sycophantic law firms, auditors, and venal managements”.
The report said more detailed investment data published this year by Burford “proves” that it has been “egregiously misrepresenting” its return on invested capital (ROIC) and internal rates of return, as well as the state of its overall business.
It argued that Burford’s net realised returns have actually relied on a very small number of cases. “Just four cases have produced approximately 66% of Buford’s net realised gains during 2012 through H1 2019. We calculate that the other concluded cases during this time generated a combined ROIC of only approximately 19%.”
Muddy Waters insisted that Burford’s liquidity was “risky, and it is arguably insolvent”, noting the turnover of chief financial officers in recent years and that the current incumbent was chief executive Chris Bogart’s wife.
Burford said the criticisms were “without merit” and that it would issue a detailed response “as soon as practicable” and then convene an investor conference call.
“Christopher Bogart and Jonathan Molot, Burford’s chief executive officer and chief investment officer, respectively [and also its co-founders in 2009], have informed the board that once Burford’s detailed response to the Muddy Waters’ report allegations has been published, they each intend to purchase Burford shares for their personal accounts.”
It told the market that its cash position and access to liquidity was “strong”.
The statement added: “To be sure, Burford will need to take on additional external capital to continue its growth as it has done successfully throughout its history, but this is a cause for celebration, not for alarm, because it means the business is growing rapidly.
“We have discussed our capital structure at length in the past. Burford has a wide variety of capital sources available to it and significant ability to manage its cash outflows, and has over $400m of cash and cash equivalents on hand as of 5 August 2019.”
Burford said its returns were “robust”, and that it used the same IFRS accounting that was used widely across the financial services industry.
It added: “There is a clear line between appropriate commentary and market manipulation… Short sellers of this ilk are not long-term investors. Rather, their goal is to panic investors into selling their holdings and thereby to drive down the share price.
“If investors oblige them, then the attack succeeds, long-term investors are harmed and the short sellers pocket a quick payday.
“Companies are largely powerless to intervene in this dynamic other than by continuing to perform, just as Burford has been; the way to thwart the attacks is for investors to recognize manipulation for what it is and not behave as the short sellers hope.”
There are two other listed litigation funders in London – insolvency specialist Manolete Partners, whose shares dived 16% yesterday, and LCM, which dropped just under 5%.
Listed Australian funder IMF Bentham issued a statement in response to what was happening to Burford, saying “the accounting treatments adopted by IMF and some of its competitors vary materially”.