Litigation funder Burford Capital has launched proceedings against the London Stock Exchange (LSE) to force it to reveal the identities of market “manipulators” who wiped almost £1.7bn off the value of its shares in only two days last month.
Burford has also released a report from Professor Joshua Mitts, a New York academic specialising in securities law, arguing that “market manipulation” in the form of “spoofing and layering” caused an “artificial decline” in Burford’s share price.
The value of Burford’s shares fell by over 50% last month after an attack by US short sellers Muddy Waters, falling by almost 19% on 6 August and 46% on 7 August.
The litigation funder released the text of a witness statement in support of its application to the High Court from Richard East, senior partner at US firm Quinn Emanuel Urquhart & Sullivan’s London office.
In it, Mr East said Burford wanted details of individuals and organisations who were placing orders for its shares “for the purpose of contacting the manipulators to commence and pursue legal proceedings”.
Mr East said Burford was seeking a Norwich Pharmacal order – an order under which third parties are required to disclose information or documents.
He said the litigation funder was doing this on the basis that there was a “good, arguable case” that a wrong had been carried out by an ‘ultimate wrongdoer’ who facilitated the wrongdoing and was able to provide information.
The final part of the test was that the court order was a “necessary and proportionate response’ in all the circumstances.
He said: “While the information sought will involve the defendants disclosing details of share orders and traders who, upon analysis, may prove to have had no involvement in market manipulation, such disclosure is necessary precisely in order that Burford can identity such traders and share orders as innocent and avoid taking any action against them.
“In circumstances where Burford wishes to obtain redress against wrongdoers who, in the course of two days, wiped almost £1.7bn off Burford’s shares and by their actions have caused continuing damage to Burford’s standing among investors, it is my respectful submission that an order requiring the defendant to provide the information sought is necessary and appropriate.”
Mr East said he had written to the LSE last month, which said it wanted more time to respond, but “given the seriousness of the matters” and the “obvious likelihood that the LSE would require a court order”, Burford decided to “move immediately” to issue of proceedings.
Much of Mr East’s witness statement was based on a report by US academic Professor Mitts, based at Columbia Law School, which defined “spoofing and layering” as the “creation and cancellation” of a large volume of orders which distorts supply and demand for a security.
He concluded that the collapse in the price of Burford’s shares on 6 and 7 August was driven by “large waves of sell-side order cancellations”.
Professor Mitts said: “During five one-minute periods on 6 August, Burford’s stock fell 6.5%, or over £170m.
“Similarly, during ten one-minute periods on 7 August, Burford’s stock fell 48.6%, or over £868m.
“The extremely large net sell-side cancellation volume during the minutes when Burford’s share price decreased is strong evidence that the price decline on 6 and 7 August 2019 was not induced by ordinary trading in Burford’s stock.”
Professor Mitts said spoofing and layering were prohibited by English and EU law.
Muddy Waters Research boss Carson Block has rejected any suggestion that his firm was responsible for manipulating trading in Burford stock, and said it had “zero capability” to take part in spoofing and layering.
A spokesman for the London Stock Exchange said: “The Financial Conduct Authority (FCA) is the competent public authority responsible for investigating allegations of market abuse, where there are reasonable grounds for doing so and taking action, including potential criminal proceedings, where the evidence supports it.
“London Stock Exchange provides any information the FCA requires from it for the purposes of their investigations.”