Burford claims ‘illegal market manipulation’ in Muddy Waters attack

Forensic examination of trading data reveals instances of ‘spoofing’ and ‘layering’

Burford Capital, which last week found itself at the centre of an explosive short attack that sent shares toppling, is claiming to be the victim of “illegal market manipulation”.

The Aim-listed stock fell more than 65% on Wednesday when Muddy Waters Research released a scathing report accusing the firm of duping shareholders by manipulating metrics to appear more financially stable than it was. 

Burford retaliated the following day, accusing Muddy Waters of implicating Neil Woodford in its criticisms of the litigation firm to generate headlines.

The update comes as a second activist Gotham Research has reportedly taken out a meaningful short on Burford. Gotham has not yet revealed the size of its holdings and as of Monday it has not been recorded in the Financial Conduct Authority’s (FCA) database.

Burford said in the RNS update it has retained a trio of City law firms including Freshfields Bruckhaus Deringer to investigate the matter and has alerted regulatory authorities and criminal prosecutors of its preliminary findings.

Burford said a “forensic examination” of trading data on 6 August, the day on which Muddy Waters tweeted about an imminent short attack involving an anonymous target, and 7 August, the day of the “short attack” in which its shares plummeted 50%, showed “activity consistent with material illegal activity”.

The litigation finance firm claims that several trades appear to be instances of ‘spoofing’ and ‘layering’, placing a bid or offer on a stock with the intention of cancelling before completing in order to lure other high frequency traders.

Suspect trades

In the  hours following Muddy Water’s 6 August tweet, £90m worth of sell orders were placed and cancelled without being filed, which Burford noted is an unusually high amount of activity. Its average trading volume is less than one fifth that amount.

Its shares fell 6% or £170m in value during five one-minute increments last Tuesday even though executed sell orders totalled “a mere £186,000”.

There was more suspicious activity the following day as Burford’s share price declined by 60% over 10 one-minute periods despite the fact only 740,000 shares or 0.3% of its share capital had been traded. It said that 28 million shares traded that day.

“These 10 minutes collectively reflect a 60% decline in the price of Burford’s shares. Yet it is striking how few shares were actually sold over these windows,” the firm said in an RNS statement.

“For example, at 08:53, the minute which saw a 7.6% price decline, there were only 27,885 shares actually sold – less than 10% of the number of shares underlying the orders created, 291,364. It strains credulity to believe that a decline on the order of hundreds of millions of pounds in market capitalisation was driven solely by actual trading amounting to a few hundred thousand pounds absent market manipulation.”

In addition, “a large wave of sell order cancellations” for Burford began arriving before Muddy Waters identified the target of its attack on 7 August. Sell orders totalling 578,000 shares were cancelled three minutes before the activist’s tweet went out at 8.53am BST. Muddy Waters had stated the day before its report would go live at “8am London time”.

“Given that Muddy Waters made no public announcement about the actual timing of the release of the report, we do not see why a legitimate market participant without knowledge of the actual tweet’s expected release time and content would be placing and cancelling a large number of sell orders in the three minutes before the release of the tweet,” Burford said.

Muddy Waters bought back Burford as shares wobbled

Data from the FCA shows that Muddy Waters bought back shares in the litigation finance group days after shorting the stock.

The California-based activist took a short position, equivalent to 0.71% of Burford’s shares, on 5 August but had reduced this to 0.57% the day of the teaser tweet and even further to 0.12% the day the report went live.

In other words, while Muddy Waters was suggesting that Burford was insolvent, it was at the same time buying Burford shares,” the company said.

Muddy Waters accused Burford Capital of being “a perfect storm for an accounting fiasco” with “laughter inducing governance structures” in a scathing report in which it accused the firm of “egregiously misrepresenting” the state of the business. 

The report also implicated Neil Woodford protégé Mark Barnett for his help in bailing out Burford in a case that would have otherwise been “a total loss” involving two biotech companies. Burford provided $7.4m in litigation finance to Napo Pharmaceuticals in a case versus Salix Pharmaceuticals, in which the jury ultimately sided with the latter in a 2014 decision.

Invesco has categorically refuted any accusation or improper or unethical behaviour on behalf of the firm and Barnett.

It remains the largest investor in Burford, owning a 13.9% stake, followed by Neil Woodford who owns 9.48%.

Update: After this story was published Muddy Waters issued a statement denying any role in the alleged “spoofing” and “layering” of Burford shares.

“Spoofing and layering are issues that have arisen in the high frequency and computer-driven trading world and Muddy Waters has neither the capability nor the incentive to engage in these practices. They have nothing to do with us,” a spokesperson for the company said.

“The only manipulation is that of Burford’s return metrics, accounts, and disclosures,” they added.

The short seller also explained that it had taken down its short position in the company on 6 and 7 August because it was taken aback by the decline in share price.

“We were very surprised by the share price fall, so felt we had to de-risk our position given how significant a proportion of our fund it was until we fully understood what was happening. This is entirely normal and there is no market manipulation.” 

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