Muddy Waters bites back at Burford Capital鈥檚 report defence
30 August 2019 New York
Image: Shutterstock
Muddy Waters Research has accused Burford Capital, provider of specialised finance to the legal market, of 鈥渟ignificant deception鈥� in its
to the investigative short-seller鈥檚 report on Burford鈥檚 alleged financial mismanagement and misleading investors.
Earlier this week, in the latest episode of the draw out and public spat between two firms, Muddy Waters dismissed speculation that its claims about major errors in Burford鈥檚 2013 annual report were wrong by simply responding: 鈥淣o. Don鈥檛 be silly.鈥�
In an expanded response, Muddy Waters explained: 鈥淲e stated that beginning with Burford鈥檚 2013 Annual Report, Burford egregiously manipulated its return on invested capital (ROIC) and internal rate of return (IRR) on a $7.4 million investment by categorising Napo Pharmaceuticals as a win with a significant return when it should have been a loss.鈥�
Muddy Waters initially revealed it was shorting Burford Capital on 7 August as the firm鈥檚 researchers believed they had uncovered errors in Burford鈥檚 2013 Annual Report that meant it was in a much weaker financial state than it was leading its investors to believe.
Burford returned fire by accusing Muddy Waters of a 鈥榮hort attack鈥� based on evidence that was 鈥渇alse and misleading鈥�.
In a cutting response, Muddy Waters said: 鈥淟eave it to former trial lawyers to talk so much, and yet say so little. Burford鈥檚 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-International Financial Reporting Standards) 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).鈥�
Just a few days later on 15 August, the Muddy Waters further claimed that analysis of Burford鈥檚 defence by Qverity, a behavioral analysis and screening services provider, strongly indicates that Burford鈥檚 management was deceptive in their written and verbal responses to the Muddy Waters鈥� report.
In its report, Qverity, which is staffed by former US deception spy experts from the Central Intelligence Agency, said that the most inadvertently revealing statement in the response was John Lazar鈥檚 [Burford鈥檚 director] comment that he read the report 鈥渒nowing there was no smoking gun鈥�.
The Qverity report reads: 鈥淗e [John Lazar] appears to be attempting to communicate that he read the report, knowing that none of it is accurate and they didn鈥檛 do anything wrong. What he instead conveys with this unintended message is that he was told in advance there wasn鈥檛 a 鈥榮moking gun鈥� or in other words, concrete evidence of what they鈥檙e doing.鈥�
Elsewhere in the report, Qverity suggests that deceptive behaviour detailed in this report were identified in Burford鈥檚 responses and fell primarily into three categories of deceptive behaviour: 鈥渆vasion, aggression, and persuasion鈥�.
Meanwhile, Muddy Waters has said it welcomes scrutiny by the Financial Conduct Authority (FCA).
In a further statement, Muddy Waters said: 鈥淲e believe that [Burford] management鈥檚 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.鈥�
Burford鈥檚 share price dropped significantly following the release of the initial report before rallying somewhat later in the month. At the time of writing, it is up 12 percent.
Ihor Dusaniwsky, managing director predictive analytics for S3 Partners, commented: 鈥淏UR LN short interest is $163 million; 19.48 million shares shorted; 9.75 percent of its float; stock borrow fee in 0.50 percent fee.鈥�
S3 data shows that the amount Burford shares being shorted has increased by 522 percent of the past month, representing 16.35 million shares, as its share price fell 53.4 percent over the same period.
鈥淪hort selling has abated recently as some short sellers have trimmed their positions to take profits. We saw 1.85 million shares of short covering over the last week, down 8.7 percent, even as BUR LN鈥檚 stock price fell an additional 22.8,鈥� Dusaniwsky said.
Shorting of Burford is up $58.8 million in year-to date mark-to-market profits, with the vast majority of profits ($54.2 million) being generated in August alone, Dusaniwsky explained.
to the investigative short-seller鈥檚 report on Burford鈥檚 alleged financial mismanagement and misleading investors.
Earlier this week, in the latest episode of the draw out and public spat between two firms, Muddy Waters dismissed speculation that its claims about major errors in Burford鈥檚 2013 annual report were wrong by simply responding: 鈥淣o. Don鈥檛 be silly.鈥�
In an expanded response, Muddy Waters explained: 鈥淲e stated that beginning with Burford鈥檚 2013 Annual Report, Burford egregiously manipulated its return on invested capital (ROIC) and internal rate of return (IRR) on a $7.4 million investment by categorising Napo Pharmaceuticals as a win with a significant return when it should have been a loss.鈥�
Muddy Waters initially revealed it was shorting Burford Capital on 7 August as the firm鈥檚 researchers believed they had uncovered errors in Burford鈥檚 2013 Annual Report that meant it was in a much weaker financial state than it was leading its investors to believe.
Burford returned fire by accusing Muddy Waters of a 鈥榮hort attack鈥� based on evidence that was 鈥渇alse and misleading鈥�.
In a cutting response, Muddy Waters said: 鈥淟eave it to former trial lawyers to talk so much, and yet say so little. Burford鈥檚 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-International Financial Reporting Standards) 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).鈥�
Just a few days later on 15 August, the Muddy Waters further claimed that analysis of Burford鈥檚 defence by Qverity, a behavioral analysis and screening services provider, strongly indicates that Burford鈥檚 management was deceptive in their written and verbal responses to the Muddy Waters鈥� report.
In its report, Qverity, which is staffed by former US deception spy experts from the Central Intelligence Agency, said that the most inadvertently revealing statement in the response was John Lazar鈥檚 [Burford鈥檚 director] comment that he read the report 鈥渒nowing there was no smoking gun鈥�.
The Qverity report reads: 鈥淗e [John Lazar] appears to be attempting to communicate that he read the report, knowing that none of it is accurate and they didn鈥檛 do anything wrong. What he instead conveys with this unintended message is that he was told in advance there wasn鈥檛 a 鈥榮moking gun鈥� or in other words, concrete evidence of what they鈥檙e doing.鈥�
Elsewhere in the report, Qverity suggests that deceptive behaviour detailed in this report were identified in Burford鈥檚 responses and fell primarily into three categories of deceptive behaviour: 鈥渆vasion, aggression, and persuasion鈥�.
Meanwhile, Muddy Waters has said it welcomes scrutiny by the Financial Conduct Authority (FCA).
In a further statement, Muddy Waters said: 鈥淲e believe that [Burford] management鈥檚 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.鈥�
Burford鈥檚 share price dropped significantly following the release of the initial report before rallying somewhat later in the month. At the time of writing, it is up 12 percent.
Ihor Dusaniwsky, managing director predictive analytics for S3 Partners, commented: 鈥淏UR LN short interest is $163 million; 19.48 million shares shorted; 9.75 percent of its float; stock borrow fee in 0.50 percent fee.鈥�
S3 data shows that the amount Burford shares being shorted has increased by 522 percent of the past month, representing 16.35 million shares, as its share price fell 53.4 percent over the same period.
鈥淪hort selling has abated recently as some short sellers have trimmed their positions to take profits. We saw 1.85 million shares of short covering over the last week, down 8.7 percent, even as BUR LN鈥檚 stock price fell an additional 22.8,鈥� Dusaniwsky said.
Shorting of Burford is up $58.8 million in year-to date mark-to-market profits, with the vast majority of profits ($54.2 million) being generated in August alone, Dusaniwsky explained.
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