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Muddy Waters’ Latest Target Is Missing a Big Point

Chris Bryant

(Bloomberg Opinion) -- For a company whose senior management team is staffed largely by hard-headed litigators, Burford Capital Ltd. is doing a lousy job of fighting off an attack by short-seller Carson Block.

In a call with investors last week, Burford’s management declared confidently that its rebuttal of a highly critical report from Block’s Muddy Waters Research had “knocked it on the head.” Yet the shares of the London-listed company – which provides funding for corporate litigation – remain more than 40% below where they were when rumors of the impending short-campaign first emerged last week. This suggests Buford still hasn’t done enough to alleviate investor concerns, particularly regarding the company’s byzantine governance.

In fairness, there’s blame on both sides here. It’s unhelpful that Muddy Waters declared a company with more than $400 million of cash and equivalents to be “arguably insolvent.” Comparing Burford’s accounting to Enron seemed calculated to encourage shareholders to sell first and ask questions later.

As one might have expected from such a lawyer-heavy enterprise, Burford has responded vigorously, claiming it has identified trading patterns that demonstrate illegal market manipulation (something Muddy Waters denies). If proven, such behavior would be reprehensible. But it kind of misses the main point: How does Burford address some of the more reasonable issues raised by Block’s firm?

A two-hour call with analysts and investors last week should have been the chance for Burford’s executives to shore up confidence. But shareholders have hardly recovered their nerve subsequently.

Some of the answers in the session – such as how to better understand the company’s cash flow statement and how to clarify the book value of a prized piece of Argentinian litigation – were fuzzy. On governance matters the message was outright jarring. When asked, for example, why it was that Burford prefers to be listed on the less-regulated Aim market, its management team insisted that a switch to the main London market would be “expensive” and “burdensome.” 

“We’re not entirely clear of the benefits other than possibly, at a moment like this, it might make people feel any better,” the chief executive Chris Bogart said, although he did leave open the possibility of a second listing in the U.S.

Saying that takes some gumption when your shares have just lost more than 1.5 billion pounds ($1.8 billion) of value, thereby burning countless U.K. retail investors as well as loyal institutional shareholders. (Bogart has taken a personal financial hit but he’s hardly on the breadline, having sold about 60 million pounds worth of shares last year).

One reason why investors might indeed feel better about a main market listing is that Burford would then be bound by the U.K. Corporate Governance Code, instead of Guernsey’s, as is the case now. As I’ve pointed out, Burford’s governance is a long way from satisfactory. Given the level of managerial subjectivity involved in determining the value of the legal cases funded by the company (and by extension its profits), it’s troubling that the chief executive and finance director are husband and wife.

Under the U.K. governance code, non-executive directors who serve for more than nine years are considered likely to have impaired independence. Yet all four members of Burford’s board, made up entirely of non-executives, exceed that tenure.

One result of these arrangements is that Burford doesn’t have to disclose how much its top executives are paid. This seems remarkably coy. Would Burford investors who’ve done well backing the stock (until last week) care that much if those salaries were huge? The seeming reluctance to countenance change undermines the management’s insistence that Burford has a “strong focus on issues like governance and transparency.”

“We are, after all, a firm run by lawyers,” Bogart said last week. “We know what it looks like when companies don’t do the right thing. That’s part of what we do every day for a living. And we have deliberately built a business that has high standards and high principles around these issues.”

With respect, if Burford really was aware of how its governance practices look, it wouldn’t be run like this. It should rethink, quickly.

To contact the author of this story: Chris Bryant at cbryant32@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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