British fund manager Neil Woodford on July 18 2019. Picture: REUTERS HANDOUT/JONATHAN ATKINS
British fund manager Neil Woodford on July 18 2019. Picture: REUTERS HANDOUT/JONATHAN ATKINS

London — Short-seller Muddy Waters targeted Burford Capital, 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 on Wednesday. Shares of Burford — which counts Woodford Investment Management among its top holders — had slumped by 19% on 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 CEO 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 up to Tuesday’s close. Among analysts tracked by Bloomberg, eight out of nine rate the stock a buy or equivalent.

The company said in a statement earlier that 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”. The Muddy Waters report comes less than two weeks after London-based ShadowFall Capital & Research disclosed a short position in Burford in a tweet on 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 realised 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.

Family ties

The company was founded in 2009 by Christopher Bogart, a former general counsel of Time Warner; and Jonathan Molot of Georgetown University Law Centre. Its CFO, Elizabeth O’Connell, is married to co-founder and CEO 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 contains 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 Burford 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 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, with a 7.45% stake as of August 2, according to Bloomberg data.

GAM Holding is the biggest holder of Burford’s approximately $620m of bonds it has issued since 2014, according to fund filings compiled by Bloomberg. Burford’s £175m of 5% notes fell 29p on the pound to a record-low 61p 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 the 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 US-listed Chinese companies that he alleged were frauds. Short-sellers seek to benefit from a decline in a company’s share price.