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(Alliance News) - The boss and investment head of Burford Capital Ltd bought shares in the firm Thursday, shortly after the company described the "short attack" issued by US research firm Muddy Waters Capital LLC as "false and misleading".
Shares in Burford closed 26% higher in London on Thursday at 760.00 pence each. The day's gains claw back some of the 54% loss from Wednesday.
In reaction to the sharp losses, the company said Chief Executive Officer Christopher Bogart and Chief Investment Officer Jonathan Molot intend to buy a "significant" number of Burford shares.
Later on Thursday, the firm reported Bogart bought 123,747 shares at 663.77 pence each and Molot acquired 350,643 shares at the same price. These transactions are equivalent to GBP821,395 and GBP2.3 million, respectively.
Following the transactions, Bogart and Malot both held 8.9 million or 4.1% stakes in Burford each.
Earlier on Thursday, Burford reported that two further non-executive directors had also sought clearance to make market purchases.
"In addition, the board is also considering the company buying back its own shares, given the potential investment return the shares represent at their current price. Appropriate disclosure will be issued upon the completion of any purchases," the company added.
The litigation finance firm said the Muddy Waters report contains "many factual inaccuracies, simple analytical errors and selective use of information". As a result, Burford felt the need to "expose its fallacious insinuations".
In the report, Muddy Waters said it had shorted Burford, on the grounds that "it is a poor business masquerading as a great one" by using "heavily manipulated" figures.
"We are short Burford. For years, it was the ultimate 'trust me' stock. Thanks to a light disclosure regime, the esoteric nature of its business, and unethical behavior by its largest shareholder, Invesco, it turned Enron-esque mark-to-model accounting into the biggest stock promotion on the AIM," Muddy Waters alleged.
The research firm continued: "Burford woos investors with non-IFRS metrics, particularly internal rate of return and return on invested capital. However, these metrics are meaningless. They are heavily manipulated and greatly mislead investors about Burford's actual returns."
Burford responded by saying the Muddy Waters reports contains seven main issues, all which are "simply false" and "do not stand up to scrutiny".
The company continued: "Burford is a rapidly growing business that invests in medium-duration assets. By definition, if its growth rate in a year exceeds the recoveries from prior years' investments, it will need incremental capital. That has been consistently communicated to the market, is common to all growth companies and should not be a concern."
Burford said this is "entirely within its control".
The company said it could combat this potential problem by slowing its growth but stressed this would not maximise shareholder value in the long term.
"The suggestion that Burford is 'arguably insolvent' is baseless. Presumably, the reason 'arguably' is inserted is because Muddy Waters knows they would lose a lawsuit if they accused Burford of insolvency, and they know they can't support such a claim," the company added.
The Muddy Waters report claimed: "Through manipulating ROICs and IRRs, Burford portrays itself as a business that derives profits from a broad range of cases in its book. The reality is that Burford's profits are much more concentrated, and have really been dependent on just four cases that have generated approximately two-thirds of its net realized gains since 2012."
The research firm alleged that Burford used several techniques to manipulate its performance metrics, including categorizing a loss as an investment with a significant return, choosing its own cost denominator in a case with a recovery when the total cost is much greater and keeping losses out of the "Concluded Investment" category.
Burford said it currently has USD400 million in cash and cash equivalents on hand. The company continued: "Burford actively manages its cash and is confident about its ability to continue to meet its deployment needs and grow the business."
"Burford is a perfect storm for an accounting fiasco. Burford's governance strictures are laughter-inducing. The CFO is the wife of the founder & CEO. Under the best of circumstances, this should alarm investors; however, with a company that consistently books non-cash accounting profits, it is unforgivable. Burford has cycled through four prior CFOs or senior finance managers - none of whom stayed for long. These facts beg the question 'is current CFO Elizabeth O'Connell the only CFO who can be relied upon to approve the accounts?"
Responding to the claim about manipulating its financial statement, Burford said it has had "clean" audit opinions from Ernst & Young since 2010.
"Burford sets out the details of its investment returns and provides investors with the data necessary to analyse the business in whatever way they see fit," the company added.
Burford also responded to Muddy Waters anger that its CEO and CFO are married, saying the relationship is "longstanding, disclosed and well-known". The pair have been married since 1992.
Muddy Waters claimed Burford is a "perfect storm for an accounting fiasco".
"It is a fund that invests in an illiquid and esoteric asset class, which few investors can understand well. By remaining listed on AIM despite being a midcap company, the company's disclosure requirements are lighter than they would be for the main board," Muddy Waters alleged.
Burford responded by saying it is "simply wrong" to say that its investment disclosure requirements would be greater if the company was listed on London's Main Market.
"Burford's disclosures would be identical to what they are now. However, Burford has already indicated that it is actively considering a second listing, most likely on either NASDAQ or the New York Stock Exchange. Burford has a highly experienced board composed of non-executive directors with significant litigation and financial experience, but Burford does expect to refresh its board in the relatively near term," Burford added.
