(Alliance News) - US research firm Muddy Waters Capital hit back on Monday at the allegation by short-selling target Burford Capital Ltd that it found "material" illegal market manipulation around the time of the release of a critical report by Muddy Waters.
Meanwhile, another short-selling firm - Gotham City Research - waded into the tussle, welcoming the "long overdue" scrutiny of Burford.
Last week, litigation finance firm Burford saw its stock price more than halve after it was forced to defend itself from an attack by Muddy Waters Capital.
The US short-selling outfit announced on Wednesday it had taken a short position on Burford shares, saying it was "a poor business masquerading as a great one". Muddy Waters accused Burford of publishing "heavily manipulated" results figures and arguing Burford was "arguably insolvent".
This followed Muddy Waters writing on Twitter on Tuesday, without naming Burford, that it had opened a "new short position on an accounting fiasco that's potentially insolvent and possibly facing a liquidity crunch".
Last Thursday, Burford replied to the report, saying the seven main claims by Muddy Waters were "simply false" and "do not stand up to scrutiny". In particular, Burford emphasised its cash position stood at USD400 million.
Earlier on Monday, Burford said it believes trading around this time "shows evidence consistent with illegal market manipulation" and that the AIM-listed firm has "made regulatory authorities and criminal prosecutors aware of these preliminary conclusions", while also retaining three law firms itself.
Burford alleges that shortly after Muddy Waters' tweet, and again on Wednesday following the publication of the report naming Burford, there was "trading activity consistent with material illegal activity".
In particular, Burford signalled the evidence points to potential "spoofing" and "layering" activity. These are techniques in which large share sale orders are opened at a lower price than the current share price but are later cancelled.
Burford noted that it suffered its "greatest decline" in share price within just ten minutes during which time only "very low" volumes of executed sales were undertaken but "very high" cancelled share sales volumes were seen.
Burford specifically noted that last Wednesday in the few minutes before the report publication by Muddy Waters there was a 15.8 to one ratio of cancelled sales orders to executed sales orders taking place.
"We currently see no non-manipulative explanation for that market phenomenon," Burford said.
Burford Chief Executive Officer Christopher Bogart said: "We are committed to working with investors to address any questions and concerns they may have about Burford and its business and we are grateful for their feedback.
"Burford's market-leading business today is the same as Burford was a week ago. What has changed is that a substantial amount of market value was wiped out by activity we believe is consistent with illegal market manipulation that has nothing to do with Burford's business. That is wrong and that is illegal."
Later on Monday, Muddy Waters released a brief response to Burford's charges, saying: "The only manipulation is that of Burford's return metrics, accounts, and disclosures."
The renewed spat follows another US short-selling firm wading into the debate.
Late Sunday, Gotham City Research voiced support for its fellow US short-seller's move against Burford.
In a letter from founder Daniel Yu, Gotham City - which holds no position in Burford - described "public scrutiny" of Burford as "long overdue" as it had "the privilege of raising cheap public capital and enjoying an absurdly high valuation".
"We think Burford is inappropriately financed," Gotham City said. "Litigation assets – whose associated cash flows' size and timing are notoriously unpredictable – should not be financed with debt. This poses a real risk of an eventual asset/liability mismatch nightmare."
In a separate announcement on Monday, Burford said Chief Investment Officer Jonathan Molot bought a further GBP2.9 million worth of shares in a transaction on Friday.
Molot bought 339,963 shares at 856 pence each, taking his total holding to 9.3 million shares.
The share buy follows Molot acquiring 350,643 shares at 663.77p on Thursday, worth GBP821,395.
Shares in Burford were 3.7% lower at 818.38 pence in London on Monday. Just a month ago, they traded at 1,539.00p.
Burford Capital (BUR)