Muddy Waters Short Wipes $2 Billion Off Burford Market Value

By Lisa Pham

Short-seller Muddy Waters targeted Burford Capital Ltd., driving the litigation-finance company’s stock down as much as 66% and piling pressure on fund manager Neil Woodford, a big Burford shareholder.

London-listed Burford overstates the returns it earns on its investments and has questionable financial reporting and governance, Muddy Waters, the research firm founded by Carson Block, said in a report on its website Wednesday. Shares of Burford — which counts Woodford Investment Management among its top holders — had slumped by 19% Tuesday amid market speculation about Muddy Waters’ next target.

The “criticisms are without merit,” the New York-based company said in a statement. “Burford will issue a detailed response to the report as soon as practicable.” The company’s chief executive officer and chief investment officer plan to buy shares in Burford after the company’s full response has been issued.

Burford has previously been an investor darling, rising 1,021% since listing in October 2009 through Tuesday’s close. Among analysts tracked by Bloomberg, 8 out of 9 rate the stock a buy or equivalent.

The company said in a statement earlier its cash position and access to liquidity is strong and that it is investigating recent market activities and “will take appropriate legal action should we discover actionable misconduct.” Muddy Waters’ report comes less than two weeks after London-based ShadowFall Capital & Research disclosed a short position in Burford in a tweet July 25.

Burford provides cash to law firms or plaintiffs to finance a lawsuit, in exchange for a cut of any resulting monetary awards. According to Muddy Waters, the company has manipulated return metrics and misled investors about how its accounting for realized gains works. The 25-page report details seven techniques that Muddy Waters alleges Burford has used to give a misleading picture of its returns, with details on specific Burford investments. The report says that Burford has, counter to investor opinion, relied on a small number of cases for the bulk of its returns.

The company was founded in 2009 by Christopher Bogart, a former general counsel of Time Warner, and Jonathan Molot of Georgetown University Law Center. Its chief financial officer, Elizabeth O’Connell, is married to co-founder and chief executive officer Bogart, a fact highlighted in Muddy Waters’ report — along with the length of tenure of its board directors — as a governance concern.

Jefferies analyst Julian Roberts said that the report contained nothing new about Burford’s liquidity or governance. In terms of the calculation of returns, “where we would question the short argument at first sight though is on the idea that BUR marks investment values aggressively: we think the evidence of individual disclosed investments points the other way.” The analyst reiterated a buy rating.

The attention from short sellers comes after Neil Woodford’s flagship fund halted withdrawals from the LF Woodford Equity Income Fund in early June. Woodford is the second largest holder of Burford shares after Invesco Ltd., with a 7.45% stake as of Aug. 2, according to Bloomberg data.

GAM Holding AG is the biggest holder of Burford’s approximately $620 million of bonds it has issued since 2014, according to fund filings compiled by Bloomberg. Burford’s 175 million pounds of 5% notes fell 29 pence on the pound to a record-low 61 pence on Wednesday, according to data compiled by Bloomberg. They were quoted above par on Monday.

“Litigation assets are — to put it as an understatement — esoteric,” Block said by phone. “Investors have a very hard time understanding this and because of the nature of that asset, the business, and especially the accounting, there’s a lot of opacity around the company.” Muddy Waters did not disclose the size of its short position in the report.

Block earned his reputation as a short seller almost a decade ago by targeting U.S.-listed Chinese companies that he alleged were frauds. Short sellers seek to benefit from a decline in a company’s share price.