Burford Capital Says Evidence Points to Market Manipulation (1)

Aug. 12, 2019, 10:42 AMUpdated: Aug. 12, 2019, 12:48 PM

Burford Capital Ltd., the latest target of short seller Muddy Waters, said it found evidence of illegal market manipulation after a preliminary analysis of trading that led to last week’s record stock slump.

A forensic examination of detailed data by Burford and its expert, Professor Joshua Mitts of Columbia University, “discloses trading activity consistent with material illegal activity,” the litigation-finance firm said in a statement Aug. 12. The company said it has made regulatory authorities and criminal prosecutors aware of its findings and is considering its own options.

Burford’s traumatic week began when the stock sank 19% Aug. 6, the same day that Muddy Waters tweeted it would release a report the following day on a company it didn’t name. The shares then plunged 46% on Aug. 7 after Muddy Waters, the research firm founded by Carson Block, published a 25-page report saying that Burford overstated the returns it earns on its investments and has questionable financial reporting and governance. Burford labeled the short seller’s claims “false and misleading.”

In its statement Aug. 12, Burford said that in the hours after Muddy Waters’ initial tweet, almost 90 million pounds ($109 million) of sell orders in its shares were placed and canceled without being filled, for a stock whose average daily volume is less than a fifth of that amount. It also released a breakdown of trading activity indicating that only a small proportion of sell orders that were created were actually executed, with most being canceled.

“It strains credulity to believe that a decline on the order of hundreds of millions of pounds in market capitalization was driven solely by actual trading amounting to a few hundred thousand pounds absent market manipulation,” Burford said.

Falling Value

Burford’s market value has fallen to less than 1.8 billion pounds from more than 3 billion pounds only a week ago.

Responding to the statement, Muddy Waters said: “The only manipulation is that of Burford’s return metrics, accounts, and disclosures.”

A spokesman for the U.K. Financial Conduct Authority said the regulator “is aware of these matters” and has been undertaking “wide-ranging enquiries,” which will continue.

Burford shares fell 3.4% at 11:55 a.m., Aug. 12, in London, after initially extending their rally to a third straight session. The stock rose 41% in the two days after the company rebutted Muddy Waters’s report and executives purchased shares. Chief Investment Officer Jonathan Molot bought an additional 339,963 shares on Aug. 9, taking his stake to 4.23%, according to a separate statement Aug. 12.

Muddy Waters isn’t the only short seller to scrutinize Burford. Gotham City Research LLC, which shorted the stock last year but doesn’t currently have a short position, said on Sunday that the company isn’t being financed appropriately because of the risks associated with litigation assets. In response, Burford said it has a conservative asset-liability profile, with average concluded investment duration of less than two years and average debt maturity of almost six years, at a weighted average interest rate of 5.8%.

©2019 Bloomberg L.P. All rights reserved. Used with permission

(Adds Muddy Waters comment in seventh paragraph.)

With assistance from Franz Wild

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net Paul Jarvis, John Viljoen

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