WATCHDOG PROBES ATTACK ON BURFORD
FCA intervenes amid claims of ‘illegal market manipulation’
Burford Capital traded blows with the hedge fund that triggered its share price collapse as financial regulators scrutinised claims of market abuse.
Burford, which helps firms and individuals pay for legal cases in return for a cut of any winnings, said it found ‘trading activity consistent with material illegal activity’ after its shares plummeted last week in the wake of an attack from Muddy Waters research.
The company has hired a Columbia university professor who specialises in analysing ‘short attacks’, as well as a roster of bigname lawyers including Quinn Emanuel urquhart & Sullivan, freshfields Bruckhaus deringer, and Morrison & foerster to work on its defence.
They claim to have found evidence of illegal practices – ‘spoofing and layering’ – to drive down Burford shares.
These techniques are typically associated with highfrequency traders, who use computer programs and algorithms to place and cancel orders at lightning speed.
But the claims of ‘illegal market manipulation’ sparked a furious response from Muddy Waters, which is shortselling Burford shares and profits when they fall.
The San franciscobased hedge fund said: ‘The accusation by Burford of “manipulation” by high frequency tradertype trading has zero to do with Muddy Waters. Such accusation is preposterous. If Burford wants to bring that to court, we will smack Burford and any supposed expert down hard.’
The escalating war of words came as the financial Conduct Authority revealed it is undertaking ‘wideranging enquiries’ involving Burford and Muddy Waters.
Burford became the target of a socalled short attack last Wednesday after Muddy Waters published a blistering criticism of its accounting practices. The 25page dossier wiped £1.5bn off Burford’s market value, causing another headache for fund manager Neil Woodford, who owns 9.5pc.
But Burford has since come out fighting, conducting a ‘forensic examination’ of trading data with the help of Columbia Law School professor, Joshua Mitts. They focused on market activity on August 6, when Muddy Waters said it was about to publish a report on an asyet unidentified company, and August 7, when Muddy Waters released its damning dossier.
According to Burford, they found evidence of two illegal practices – spoofing and layering. Both techniques are designed to make traders believe the market is pessimistic about a particular stock, and encourage them to sell.
Burford noticed that on August 6, in the hours following Muddy Waters’ teaser tweet, trading activity in its shares shot up.
By this time there were already rumours flying around in online trading forums that Burford was the target of the upcoming report.
Almost £90m of sell orders were placed and then cancelled – on a normal day, less than £18m worth of Burford stock is traded.
And during periods where very few sales were actually executed, the shares tumbled by more than £170m in value.
on August 7, Burford said it suffered the greatest declines in its share price over ten oneminute periods, during which time very low volumes of sales were actually executed but very high volumes were cancelled.
Chief executive Christopher Bogart said: ‘Burford’s marketleading 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.’