A US investor who sparked a collapse in the share price of a London-listed firm has defended his role to the BBC, admitting he is financially motivated.
Carson Block’s bet against Burford Capital, a litigation funder, caused a 66% fall in the shares on Wednesday.
He has criticised the accounting methods of Burford, which says his critique is “without merit”.
It is a blow to high-profile stockpicker Neil Woodford, whose suspended fund owns 7% of Burford.
Mr Block’s company, Muddy Waters, is known as a short-seller – in other words, taking bets on companies in the expectation that the shares will go down.
He told the BBC’s Today programme that short-sellers like him had had targeted companies in which Mr Woodford has a stake.
Mr Woodford’s once-popular Woodford Equity Income Fund has been suspended since June and is unlikely to be reopened until December.
What is short-selling?
It is a strategy intended to make profits from a fall in the value of a given share price.
Investors sell shares they do not own in the hope of making a profit from buying them back at lower prices.
They borrow the stock from another major investor, sell it, and then buy it back at a lower price when the shares have fallen.
Mr Block said: “For your listeners who might not know, I’ll let them in on the secret.
“Short-sellers do definitely look for where Neil Woodford is invested, especially when he’s invested [in smaller companies]. He’s got a great track record in [investing in bigger firms], he’s not had a great track record in life science and some of these smaller cap stocks, so there’s always the temptation to go looking where he’s been invested.”
But that was not the main motivation in targeting Burford, he said.
“I can’t remember the first time we heard of Burford,” he added. “It’s a stock that has attracted the attention of smart money investors for a while, saying, it seems too good to be true, there’s a lot of red flags.”
Muddy Waters describes Burford as being a “perfect storm for an accounting fiasco” with “laughter-inducing” corporate governance.
The company’s shares had started falling sharply on Tuesday, prompted by rumours that a “bear raid” or attack by a short-seller was coming, before taking a dive again on Wednesday when Muddy Waters published its 25-page critique.
The shares fell another 4% in early trade on Thursday to trade at 482p a share – down from levels above 1,400p at the start of the week – although they later rose 30%.
Mr Block admitted that he was financially motivated – and that everyone else was too.
According to reports, he took a 0.7% short position in the company before Muddy Waters’ report was published, suggesting he has made money.
“Of course we have a financial motive and they have a financial motive. Everybody who’s doing this has a financial motive,” he said.
He added: “I’ve been doing this nine years and I’ve certainly made my share of enemies. I’ve had a number of controversial calls and look, I’m still here doing this.
“It’s not an easy job, because you know the people on the other side have far more resources than you do and they are going to use everything they can to discredit you.”
In its rebuttal on Tuesday, Burford told the stock market: “Short sellers of this ilk are not long-term investors. Rather, their goal is to panic investors into selling their holdings and thereby to drive down the share price. If investors oblige them, then the attack succeeds, long-term investors are harmed and the short-sellers pocket a quick payday.”
‘Hawaii isn’t Ireland’
Burford argues that it uses the same accounting practices that are used widely across the financial services industry and has used consistent accounting policies for many years.
It also says it has been audited by Ernst & Young “since 2010 with clean audit opinions every year”.
Mr Block told Today that companies facing questions always fell back on “that halo” of being audited by a “big four” accounting firm.
“No, that’s not how it works. Little-known fact among investors: it’s not the auditors who prepare the financial statements, it’s actually company managements.”
He used an analogy to explain his issue with the accounts: “If I say, ‘I’m going to take you on vacation, meet me at the airport, oh Hawaii is amazing, it’s got great beaches, my favourite hotel is this one,’ and then you meet me at the airport and I say, ‘We’re going to Ireland,’ Hawaii has nothing do with Ireland and all that discussion about Hawaii has nothing to do with where we were going.
“And that’s basically what all this discussion about realised gains in the investment materials is. It has nothing to do with – or very little to do with – what flows into the income statement.”
Muddy Waters has taken high-profile bets on other companies in the past. These include Singapore-based agricultural commodities trader Olam, China’s largest dairy farm operator; Hong-Kong listed China Huishan Dairy Holdings; and last month, China’s most valuable sports company, Anta.