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Short seller denies Burford Capital claims of market manipulation: 'This is entirely normal'

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
A man walks past The Gherkin and other office buildings in the City of London. Photo: REUTERS/Toby Melville

A row is building in the City over whether a darling of London’s junior stock market has been illegally targeted by a US fund looking to profit from its share price fall.

Litigation finance-specialist Burford Capital (BUR.L), which is listed on London’s AIM stock market, on Monday claimed it had been the victim of “illegal market manipulation” after a short seller targeted the company last week.

California-based Muddy Waters Research published a highly critical 25-page report last Wednesday. Much of its criticism centred around the way Burford books profits by marking up the value of legal cases it has funded but that have not yet concluded.

READ MORE: Burford Capital crashes 60% after attack from US short seller Muddy Waters

Muddy Waters also criticised the fact that the company’s CFO was the wife of its founder and CEO. The US short seller, which profits if Burford’s share price declines, said Burford “actively misleads investors” and was “arguably insolvent.”

Burford strongly denied the claims and issued a detailed rebuttal a day after Muddy Waters’ report. The company has since been analysing trading in its stock around the days before and after the report was published. It claimed on Monday it had found evidence “consistent with material illegal activity.”

‘Market manipulation’

Burford Capital shares fell as much as 60% on the day Muddy Water’s report was published, before recovering in the following days.

The company’s share price also fell by 6% in a “flash crash” the day prior to Muddy Water’s releasing its research. The price decline came in the hours after Muddy Water’s tweeted that it would release a new short position the following day, although it did not name Burford.

Muddy Waters Research's tweet the day before it released the Burford report. Photo: Screenshot/Twitter

Burford said it found evidence of spoofing and layering related to the flash crash. Spoofing and layering are illegal trading methods used to manipulate share prices. They involve placing orders that are then cancelled to deceive other traders about the true level of demand in the market.

Trading in Burford’s shares in the hours after the Muddy Waters Tuesday tweet was “consistent with market manipulation,” Burford said.

The FCA confirmed on Monday that it was “undertaking wide-ranging enquiries” related to the tweet and the subsequent drop in Burford’s share price.

‘Entirely normal’

Muddy Waters, which is run by US investor Carson Block, was forced to deny market manipulation on Monday.

The company said in a statement provided to Yahoo Finance UK: “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.

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

READ MORE: Under-fire Burford Capital rebounds after 'false and misleading' short-seller attack

Muddy Waters described Tuesday’s tweet as “innocuous” and said it was “surprised by the share price fall.”

The short seller said its trading in Burford shares in the wake of the tweet as a result of “de-risk our position.”

“This is entirely normal and there is no market manipulation,” the firm said.

Gotham joins the attack

Short sellers borrow shares in companies from investors and then sell them on the stock market, betting that the stock price will decline by the time they have to return the shares. If the price declines, then short sellers profit from the difference between what they sold the shares for and the amount they pay to re-buy them to repay the loan.

Short selling is legal and proponents argue the practice helps to uncover bad behaviour and poor performance in public markets given the financial incentive.

Burford shares were down another 10% on Monday afternoon and are down by 45% since the start of last week.

Burford Capital's share price decline over the last week. Photo: Yahoo Finance UK

Gotham City Research, another notorious US short seller, on Sunday added to Burford’s woes by publishing a blog post saying the company was “inappropriately financed” and its response to Muddy Waters’ accusations were “concerning.” Gotham, which famously targeted UK insurance tech company Quindell in 2014, said it is not currently shorting Burford but has in the past.

Founded in 2009, Burford Capital provides specialised financing for legal cases. It had become a favourite of retail investors in recent years thanks to a more ethan 1,000% rise in its share price over the last four years. Investment blog recently The Motley Fool dubbed it a “super stock”.

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at@OscarWGrut.

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