Litigation funder Burford Capital has described one of the agreements that has come under scrutiny in recent weeks as one where an outright win in the underlying case was not required.
Burford’s handling of the agreement with US pharmaceutical firm Napo in its accounts was one of the main criticisms levelled by short seller Muddy Waters in the report which triggered a collapse in the Burford’s share price last month.
Muddy Waters repeated the allegation last week that Burford manipulated the return on invested capital (ROIC) on its $7.4m investment in the Napo case “by categorizing Napo as a win with a significant return when it should have been a loss”.
As part of its ongoing rebuttal of Muddy Waters’ claims, Burford yesterday published a detailed chronology of what happened in the Napo case, concluding that its had produced a “healthy cash profit of 27% ROIC”, along with shares that “may one day recover some value”.
Burford said it had accounted for its Napo investment “appropriately and conservatively” and made “no efforts” to inflate its value.
“What Napo is more than anything else is a good example of how doggedly and diligently we work investments for the benefit of our investors.”
Burford said “it was introduced to Napo by a litigation partner at a major US law firm with which Burford had a relationship, although that firm was not representing Napo in its litigation”.
Burford denied that Napo was referred to it by Invesco, as Muddy Waters alleged.
“Invesco’s interest in Napo was held in a different fund with a different fund manager than Invesco’s interest in Burford, and at the time Burford did not even know the fund manager who held the Napo interest.
“Napo met the classic profile of some of Burford’s clients – a smaller business with potentially valuable intellectual property or other rights arguably being taken advantage of by a larger company.
“Burford regularly provides capital to such clients to level the playing field and permit the smaller business to retain top-flight counsel and match litigation resources with the larger firm.”
Burford said it entered into a financing agreement with Napo in December 2011 that provided for $1.5m of funding, plus two “further $1.5m options” at Burford’s discretion.
The “core economics” of the deal was that Burford would receive the greater of two potential payment streams upon any ‘litigation resolution’.
The funder went on: “What, then, is a ‘litigation resolution’? Again, the short answer is a settlement or final resolution of some or all of a piece of litigation encompassed by Burford’s agreement.
“To be clear, Napo did not need to win a case for Burford’s entitlement to vest; a number of other outcomes could also cause that vesting. Litigation isn’t always just about winning; it can simply be about improving one’s position.”
Burford exercised its options and provided another $3m in funding in 2012.
The following year a ‘litigation resolution’ occurred when an arbitration tribunal handling one of Napo’s disputes, with Glenmark Pharmaceuticals, issued a final order.
“While Napo lost pieces of the Glenmark arbitration, its success on certain points was sufficient to count as a litigation resolution under Burford’s funding agreements and to trigger Burford’s entitlement.
“Napo agreed. Napo and Glenmark went on to settle the case and agree on its final outcome.”
Burford said that, in October 2014, it agreed to terminate its litigation funding agreements “to crystallize Burford’s entitlement and clean up Napo’s capital structure”.
The funding agreements were replaced by “secured debt instrument with a $30m principal balance and 18% interest”.
When, in 2017, Napo merged with another pharma company, Jaguar, Burford received “$8m in cash – our entire investment back plus a modest profit – and a substantial equity interest in the merged entity”.
Burford said this was the “only instance” it has received public equity as part of a litigation funding agreement.
“What happened next was out of Burford’s hands. The market was not impressed by the Jaguar/Napo merger, and the share price started to fall.
“That set off a vicious cycle affecting Jaguar’s access to capital, which constrained its drug development activities, and the stock has fallen sharply. Burford was able to sell about $625,000 of shares in 2018 and we continue to hold the remainder of our interest.”
Burford added that its funding for Napo amounted to 0.35% of its litigation finance commitments to date, and between 0.8% and 1.9% of its recoveries.