Watchdog investigates Burford short seller
City watchdog to scrutinise US short seller’s actions as litigation funder alleges it was victim of illegal activity
The US short seller Muddy Waters faces close scrutiny of its lucrative raid on Burford Capital, after its battered target alleged criminal manipulation of the stock market and the City watchdog pledged “wide-ranging” inquiries. The Financial Conduct Authority said it had been examining the attack on Burford since last Tuesday, when rumours that it would be targeted first circulated among traders and triggered a mass sell-off. It said its inquiries would continue.
‘The FCA has been aware of these matters since the first tweet and price movements on Tuesday of last week’
THE US short seller Muddy Waters faces close scrutiny of its lucrative raid on Burford Capital, after its battered target alleged criminal manipulation of the stock market and the City watchdog pledged “wide-ranging” inquiries.
The Financial Conduct Authority said it has been examining the attack on Burford since last Tuesday, when rumours it would be targeted first circulated among traders and triggered a mass sell-off.
A gnomic afternoon tweet by Muddy Waters had indicated a British company was in its sights. The California-based firm did not publish its highly critical report on Aim-listed Burford’s finances and governance until Wednesday morning.
An FCA spokesman said: “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 wideranging inquiries. We will continue to make inquiries using the wide range of data and resources at our disposal.”
The City watchdog confirmed its interest as the war of words between Burford and Muddy Waters escalated, as each side fiercely denied wrongdoing and branded the claims of the other “preposterous”. The company said it was in contact with authorities over what it claimed was “activity consistent with material illegal activity”.
Burford said its own preliminary conclusions followed a “forensic examination” of stock exchange data by Professor Joshua Mitts, a Columbia University academic.
It focused on specific short periods of trading last week when a high number of orders for Burford shares were placed but subsequently cancelled. Burford claimed its findings demonstrated illegal practices known as “layering” and “spoofing”, hallmarks of attempts to artificially drive down the price. Short sellers profit when a share falls in value.
Burford said it saw “no non-manipulative explanation” for the “unusual flood of sell-side cancellations” recorded in the seconds just before Muddy Waters sent a tweet on Wednesday morning with a link to its report.
“We have been a victim of what is probably a crime,” Christopher Bogart, Burford’s chief executive, claimed to The Daily Telegraph. “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.”
Muddy Waters immediately hit back, claiming that “the only manipulation is that of Burford’s return metrics, accounts, and disclosures”. The short seller said that spoofing and layering were issues that arise in high frequency and computer-driven trading, which it has “neither the capability nor the incentive to engage in”.
“We posted an innocuous tweet the day prior to publishing our report. We were very surprised by the share price fall, so felt we had to de-risk our position,” Muddy Waters said.
It added on Twitter: “If Burford wants to bring that to court, we will smack Burford and any supposed expert down hard.”
Burford, which counts struggling fund manager Neil Woodford as its second largest backer, is continuing its analysis and “considering next steps”. It will continue to monitor trading activity, it said.
Burford shares, which changed hands for £14 prior to Muddy Waters’ attack, ended the day down 11pc at 755p, valuing the company at £1.7bn.