City regulator intervenes as Burford alleges market manipulation

The City regulator has begun “wide-ranging inquiries” following the US hedge fund Muddy Waters’ attack on the UK-listed Burford Capital last week that sent its shares plummeting by 65% in 24 hours.

In what is fast becoming one of the most extraordinary financial battles in recent years, Muddy Waters – a so-called short seller, which makes money when share prices fall – made a string of accounting and poor management allegations against Burford, a business that specialises in providing funding for lawsuits.

Burford hit back on Monday with a detailed analysis of what it said was “evidence consistent with illegal market manipulation” and said it had informed both regulators and “criminal prosecutors”. It added that it had been a victim of sophisticated selling techniques, called “spoofing” and “layering”, to artificially drive down its share price.

Muddy Waters issued a brief statement in response, claiming that “the only manipulation is that of Burford’s return metrics, accounts, and disclosures”.

Shares in Burford fell again on Monday, down 5% to 803p, although this is well above the lows of just over 400p seen last week. Since Muddy Waters first revealed its short position in Burford last Wednesday – and alleged that Burford was a “poor business masquerading as a great one” – the company’s stock market value has collapsed by more than £1bn.

In the first evidence of regulatory involvement, the Financial Conduct Authority said it had a duty to undertake inquiries into manipulative behaviour and other market abuses.

“The FCA has been aware of these matters since the first tweet and price movements on Tuesday of last week and at that point we began undertaking wide-ranging inquiries. We will continue to make inquiries using the wide range of data and resources at our disposal,” it said in a statement.

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The collapse in Burford’s share price is further bad news for long-suffering investors in the former star manager Neil Woodford’s funds. Woodford holds a 7% stake in Burford, although the rise in its share price prior to Muddy Waters’ allegations was so meteoric – it jumped from £2 to £20 a share between 2016 and 2018 – that it’s likely that Woodford investors are still ahead.

In its analysis of trading in its stock, Burford said it had discovered “trading activity consistent with material illegal activity”, although it did not specifically accuse Muddy Waters.

It said it had spotted large amounts of spoofing activity in its stock. Spoofing is a controversial practice in which a dealer makes a huge number of trading orders at a price equal to or better than other market participants. These orders are subsequently cancelled, having the effect of artificially depressing the price of a share without any trades being concluded.

Burford said: “On 6 August, in the several hours following the 13:30 release of the Muddy Waters tweet about a forthcoming short attack, almost £90m of sell orders were placed and cancelled without being filled – for a stock whose average trading volume for an entire day was less than one-fifth that amount. That trading conduct is consistent with illegal market manipulation.

“Moreover, during five one-minute periods on 6 August, Burford’s shares fell 6%, or over £170m in value, some of its sharpest declines of the day. During these periods, executed sell orders totalled a mere £186,000. That mismatch between price movement and executed orders is consistent with market manipulation.”

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But Muddy Waters disputes the allegation. It suggests that spoofing is a tactic used by high-frequency, computer-driven trading firms and is not a practice used by the hedge fund, which it said takes concentrated positions.

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It has also emerged that another US hedge fund, Gotham City Capital, raised concerns about Burford Capital before last week’s allegations from Muddy Waters.

Gotham founder Daniel Yu also launched a passionate defence of short selling in an open letter to Burford. “Activist short sellers are profiteers, but so are litigation financiers,” he wrote.

“Just because a profit motive drives both short selling and litigation finance, it does not mean there are no public benefits resulting from both activities.

“I believe that activist short sellers throughout history have furthered justice by providing the public with new and often contrarian opinions and facts – usually at significant personal, reputational, legal and financial risk – information that the public would otherwise not be privy to.”


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