LONDON (ShareCast) - (Sharecast News) - AIM-listed Burford Capital hit back on Wednesday, dismissing a report by Muddy Waters after the US-based research firm accused the litigation and risk management company of "egregiously misrepresenting" its returns and "the state of its overall business", sending its shares tumbling.
"The board of Burford Capital takes note of the short attack report issued this morning by Muddy Waters, a firm known for such tactics, and believes that the report's criticisms are without merit," it said.

Muddy Waters, which is short Burford, said it's a poor business masquerading as a great one. It argued that the company "woos investors" with non-IFRS metrics, particularly internal rate of return and return on invested capital.

"These metrics are meaningless," it said. "They are heavily manipulated and greatly mislead investors about Burford's actual returns. We have identified seven techniques through which BUR manipulates its metrics to create what we believe is an egregiously misleading picture of its investment returns."

The research group, which was founded by notorious short-seller Carson Block, said these manipulations usually involve Burford giving itself credit for a recovery when one is uncertain, or even highly unlikely, or ignoring cases that are likely to be failures.

"The manipulation techniques are: 1) categorising a loss as a win, 2) counting as 'recoveries' awards or settlements with uncertain to highly unlikely collections as equivalent to cash returns when calculating IRR, 3) misleadingly representing investments that BUR inherited from acquisitions as favourable IRR, 4) choosing its own cost denominator in a case with a recovery when the total cost is much greater, 5) delaying recognising a trial loss for two years, 6) keeping trial losses out of the 'Concluded Investment' category, and 7) failing to deduct various costs against recoveries, including the very operating expenses associated with the investments themselves."

Muddy Waters went on to say that Burford is "a perfect storm for an accounting fiasco", with "laughter-inducing" governance strictures.

Responding earlier in the day to the slump in the share price that kicked off on Tuesday, Burford insisted that it was not down to operational or corporate issues. Instead, it said the drop was related to a "potential short attack or bear raid".

"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," it said.

Burford also insisted that it uses the same IFRS accounting that is used widely across the financial services industry and that its cash position and access to liquidity is "strong". The group admitted that it will likely need to take on additional external capital to continue its growth, but said this was "a cause for celebration, not for alarm" as it means the business is growing rapidly.

The company also said that once its response to Muddy Waters' allegations has been published, its chief executive and chief investment officers plan to snap up some shares for their personal accounts.

At 1600 BST, the shares were down 50% at 552.50p.

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