InvestmentsAug 7 2019

Woodford investment crashes after short-seller attack

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Woodford investment crashes after short-seller attack

The shares of Burford Capital, a £2.2bn UK-listed business that engages in litigation finance, fell as much as 60 per cent on August 7 after US short-selling firm Muddy Waters questioned its accounting standards and claimed Burford had “egregiously” misrepresented its returns in recent years.

The company has denied the claims, saying: "Burford uses the same IFRS accounting that is used widely across the financial services industry and has used consistent accounting policies for many years." The shares rebounded later in the week after the company defended its practices more forcefully, but remained almost 40 per cent down on the week.

Burford was the second largest investment in the Woodford Equity Income fund at the end of June, the month in which the fund was suspended. 

The shareholder register on Burford's website shows Woodford Investment Management owned 20.7m shares in the company as of the start of the week, equating to 9.5 per cent of the total.

At yesterday's share price the stake was worth £269.1m, but at the current £6.30 price this value has dropped to £130m.

However, FTAdviser understands Mr Woodford first invested in Burford Capital in 2014, when the shares were trading at £1.20, meaning he is still in profit on the investment. 

Burford Capital’s business model is to provide the funding for legal and other costs for individuals and companies taking legal action in the US. In return for this funding Burford receives a percentage of any final settlement. 

The note published by Muddy Waters on its website on August 7 criticised Burford for accounting methods it says are "aggressively marking" the valuations of its litigation cases.

Muddy Waters has disclosed a short-selling position on the shares, meaning the company and its clients will profit as the share price falls. 

The report stated: “We are short Burford because it is a poor business masquerading as a great one." 

In an announcement to the stock exchange made after the publication of the note, Burford’s management stated: “Burford's returns are robust. In fact, our litigation finance returns rose to their highest-ever levels as of 30 June 2019."

It added as part of the statement: "Burford has been audited by Ernst & Young since 2010 with clean audit opinions every year.” 

The company said it was "strongly suspicious" of the fall in its shares seen yesterday, prior to the publication of the report, and said it would "take appropriate legal action" if misconduct was found.

The largest shareholder in Burford is Invesco, where Mr Woodford used to work. The shares are owned in the Invesco Income and High Income funds run by Mark Barnett. 

That company has 30.3m shares, meaning clients of those funds have seen the value of this particular investment fall from £393m to £190m. 

A representative of Woodford Investment Management declined to comment. Invesco subsequently hit back at Burford and said it was in discussion with its own legal advisers.

The Woodford Equity Income fund was suspended on June 3, following withdrawals amounting to about £9m per working day in May.

The fund has lost 24 per cent over the past year, compared with a loss of 4 per cent for the average fund in the IA UK All Companies sector in the same time period.

It has lost 15 per cent this year to date, compared with a gain of 10 per cent for the average fund in the sector. 

The fund will remain suspended until December.

david.thorpe@ft.com