Muddy Waters welcomes FCA scrutiny as it doubles down on Burford attack

Short seller compares litigation company to Enron and Noble Group

Muddy Waters has welcomed an investigation by the Financial Conduct Authority on its latest short-selling target Burford Capital which it has accused of engaging in possibly sanctionable conduct.

In a 13-page response, the California-based activist hit back at Burford’s insinuation that it manipulated its stock calling this “nothing more than distraction and thin excuses”.

The litigation firm announced on Monday it had contacted regulators and prosecutors after a “forensic examination” of trades on the day before a short attack from Muddy Waters turned up “activity consistent with material illegal activity”. The FCA confirmed hours later that it was aware of the matter and had been making enquiries.

The war of words between Burford and Muddy Waters began last week when the latter released an explosive report accusing the former of using misleading metrics to dupe investors into thinking , which sent Burford’s shares crashing 65% in a matter of days. 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.

“Leave it to former trial lawyers to talk so much, and yet say so little,” Muddy Waters quipped in its latest response.

“Burford’s written response and numbing two-hour call did nothing to dispel our view that Burford a) aggressively marks its cases up to generate non-cash profits, b) manipulates its (non-IFRS) ROIC and IRR metrics in order to justify its fair value gains, c) deliberately confuses investors about the extent of its fair value gains in each period, and d) has a fragile balance sheet with too much leverage, particularly given the excessive costs the business runs (of which a significant portion could be management compensation).”

Burford’s conduct possibly sanctionable

Muddy Waters went on to say that it encouraged the City watchdog to look into Burford, arguing that management’s behaviour could be sanctionable.

“We welcome scrutiny by the Financial Conduct Authority on the Burford matter,” the activist said. “We believe that management’s conduct has possibly given rise to sanctions claims by the FCA. Muddy Waters stands ready to assist the FCA in any inquiry, and as has been the case for the past nine years of our short activism, we have nothing to hide regarding our own actions.”

The regulator said on Monday it began undertaking “wide-ranging enquiries” after Muddy Waters put out an initial tweet on Tuesday teasing an anonymous short target to be revealed the following day and the price movements that followed.

“The FCA is responsible under the market abuse regime for undertaking enquiries and ultimately investigations into insider dealing, manipulative behaviour and misleading statements and/or delayed disclosures by issuers and participants in the UK’s securities markets,” a spokesperson told Portfolio Adviser.

“We will continue to make enquiries using the wide range of data and resources at our disposal.” 

Reminiscent of Enron

In its most recent clap back, Muddy Waters doubled down on criticisms of Burford’s mark to model or fair value accounting also favoured by energy company Enron which went bust in 2001.

“We believe Burford is effectively sprinting on a treadmill whereby it is growing its portfolio aggressively not because there are so many great opportunities; but, rather because it has so aggressively taken fair value gains that sap the business of future earnings power, and it therefore needs to add litigation assets to the balance sheet in order to take more fair value gains,” it said.

“In this way, we also see Burford as possessing the same illness that, in our view, brought Enron and Noble Group down: Addiction to mark-to-model gains financed by debt.”

The short seller called Burford’s various responses to its initial report “textbook for companies we have exposed for various problematic – even illegal – practices”.

“Burford management has implied – if not outright stated – that Muddy Waters manipulated its stock. This is a completely false accusation. Our research has led to the de-listings of six companies, the indefinite suspension of one more, another company to settle with the SEC for $56 million, the recent indictment by the U.S. Department of Justice of various parties for evading $1.8 billion of tariffs, and other actions taken by regulators to protect markets and individuals. You, Burford, help drown courts in more litigation, which is frankly not something the world needs more of. We are happy to take a moral – and legal – purity test against you.”

The fresh comeback from Muddy Waters did little to move Burford’s share price on Tuesday morning. Shares in the litigation firm fell 0.70% as markets opened but were back above the previous close of 755p not long after.

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