Litigation Funders Seek Damage Control After Burford Drop (2)

Aug. 8, 2019, 8:56 AMUpdated: Aug. 8, 2019, 4:34 PM

After a scathing report from a short seller questioning litigation finance company Burford Capital Ltd.’s accounting practices caused shares of the industry’s largest player to plunge more than 45% on Wednesday, others in the still young industry were seeking to head off any further fallout.

One executive at a private litigation fund was making phone calls to assure investors that their fund does not use the types of methods to value ongoing litigation assets that short seller Muddy Waters said Burford implemented.

Other litigation funding executives attempted to ring-fence Burford and its financial accounting method, which requires the company to adjust the value of ongoing litigation assets, in an attempt to prevent further criticism of the broader industry. And in a conference call on Thursday, Burford executives vigorously defended their accounting practices, calling them “consistent” and “transparent.”

Still, more than a half-dozen industry executives who spoke to Bloomberg Law were wary that litigation finance’s critics, including the U.S. Chamber of Commerce and lawyers who still view financing lawsuits as unethical, would use the Muddy Waters research as ammunition to call for more regulation of the industry.

“I would wager that opponents of litigation finance will conflate this recent news with policy issues affecting civil litigation,” said Charles Agee, managing director of Westfleet Advisors, which acts as a broker for litigation financiers.


The report, which the funder has said it did not receive in advance, accused Burford of engaging in “Enron-esque” accounting that overstates the current value of ongoing cases.

Burford swiped back in a statement Thursday morning calling Muddy Waters’ evaluation “false and misleading,” assuring investors of its strong cash flow and access to expansion capital. The funder said its board is considering having the company buy back its shares given the potential return on investment at their current price.

Burford’s stock price on that statement jumped by as much as 42% in London trading, according to Bloomberg News.

Among the many criticisms in the Muddy Waters report was that Burford had not accurately portrayed the value of a pair of lawsuits it financed on behalf of law firm Hausfeld in Germany. One case Hausfeld brought against Volkswagen is in the midst of an appeal to a ruling favorable to the automaker, the report said. In another, a judge ruled Hausfeld’s client could not split recoveries with a third-party funder, according to the report.

Despite their “potentially recovery-killing implications,” Muddy Waters wrote, neither of those developments were accounted for in Burford’s valuation of its portfolio with Hausfeld.

In its Thursday statement, Burford said that it couldn’t comment on the Volkswagen litigation, as it remains active. However it rejected the “recovery-killing” characterization as it said the automaker has already paid more than $30 billion in settlements tied to the subject matter of the litigation.

On a Thursday conference call with Burford executives, analysts sought more clarity on how the company values ongoing lawsuits. Burford CEO Chris Bogart said the company would consider new types of disclosure, but defended the company’s history of marking its cases to their present fair value.

“We have a larger portfolio of litigation assets that are progressing through the litigation process, so it’s not surprising that the amount of assets in fair value is going up,” Bogart said. “Which is a good thing, because we don’t have a long history of those assets being marked up and then losing money on them.”

Burford has also defended its general accounting method, saying it is widely used across the financial services industry and it has received clean audit opinions from Ernst & Young every year since 2010.

Burford managing director David Perla is a former president of Bloomberg Law.


The only other major corporate litigation finance firm that is publicly traded, Bentham IMF, has not used the same accounting method as Burford, said Allison Chock, the company’s U.S.-based chief investment officer. Instead, Bentham reports lawsuits as gains or losses when they conclude. That has led to “lumpiness” in the stock’s performance, she said.

“It’s something that our investors and shareholders don’t like, but we are managing it with the careful growth of our footprint,” Chock said.

She declined to comment on whether the episode was likely to lead to further calls from organizations such as the Chamber of Commerce to increase the amount of disclosures litigation financiers are required to make.

Muddy Waters’ founder Carson Block “does not appear to be criticizing the industry more broadly,” she said. “Hopefully this will be cabined to [Burford’s] mark-to-market approach, which we have never practiced at IMF.”

Disclosure Fight

The growing litigation finance industry has often come under fire from critics. Plenty of lawyers still view financing lawsuits as untoward, making them reluctant to become customers of the industry. And then there are those, led by the Chamber, who have urged lawmakers to require disclosures in funder-backed cases.

Burford’s Bogart has been among the most vocal opponents of the disclosure rules pushed by the Chamber.

After a bill that would require disclosure in funded class-action cases was reintroduced in February, Bogart wrote a letter to Congress saying the rules were not necessary. In it, he noted he had worked with 90 percent of the nation’s 100 largest law firms as ranked by AmLaw.

“We are a multi-billion dollar publicly traded company with audited financial statements; we aren’t just making this stuff up,” Bogart wrote.

The CEO of another U.S.-based litigation finance firm, who spoke on the condition of anonymity to protect relationships in the industry, said Burford’s financial reporting had a reputation as “opaque” within the industry. But that should not factor into whether funding should be disclosed to courts, the CEO said.

“If they’re called to heel, they’re called to heel,” said the executive. “But that doesn’t say anything about whether [third-party financing] is good for the legal system.”

Reputational Risk

Industry executives told Bloomberg Law the claims in the Muddy Waters report could be used to harden lawyers’ views against litigation finance.

A survey released this week by The American Lawyer and Validity Finance said 15% of lawyers questioned had personally used litigation finance compared to 34% who said they were not interested in using it and 54% who said they would consider it.

“I’m sure this will go on the list of reasons that litigation funding is the worst thing ever. But nobody will know whether this critique is real or not for years,” said a partner at an Am Law 100 firm who has used litigation finance in the past and wished to remain unnamed to preserve industry relationships.

On Thursday’s conference call, Bogart said some law firms named in the Muddy Waters report had reached out to the litigation finance company.

“They were very quick to call up and say, ‘Oh my god this is so inaccurate. It’s completely false and fabricated,’” Bogart said. “But generally the law firms understand [the Muddy Waters report] for what it is. They understand we are an upstanding and transparent company and we have delivered what we promised.”

(Updated to include Burford's analyst call details and details from its Thursday statement throughout.)

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com

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