(Alliance News) - Burford Capital Ltd on Wednesday noted the plunge in its share price, saying it believed the reason for its share movement was due to the rumour of a "short attack".
A short attack was defined by Burford as a tactic where sellers take a short position in a company's stock, then engage in claims about the company with the intent to spook investors, and depress the company's stock and profit from the decline.
Burford shares were down 42% to 648.00 pence in London in morning trade Wednesday.
The litigation finance firm noted the release of a short attack document by US research firm Muddy Waters Capital LLC.
In the document, Muddy Waters said it had shorted Burford, on the grounds that "it is a poor business masquerading as a great one".
"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," Muddy Waters alleged.
"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," Muddy Waters added.
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.
In response to the research firm's note, Burford said it had never been contacted by Muddy Waters, but stated that its cash position and access to liquidity was strong, and that its returns were robust.
In addition, Burford said it has used the same IFRS accounting that is used across the financial services, and has used consistent accounting policies for many years.
"In addition to our audited IFRS reporting, Burford provides cash-based investment reporting in extraordinary detail, including providing line-by-line investment detail about every litigation finance investment we have ever made," the company said.
Burford said it will review the Muddy Waters's report thoroughly and respond to it "as quickly as possible".
Burford Capital (BUR)