Burford Capital has defended itself and Invesco’s Mark Barnett against a “false and misleading” attack on both parties by US short-seller Muddy Waters.

In a statement on Thursday (8 August), the litigation financer its directors “intend to purchase a significant number of Burford shares” and the board would consider buying back stock following this week’s share price tumble.

On Wednesday (7 August), US hedge fund Muddy Waters said that it had started shorting Burford, accusing it and its largest shareholder Invesco of “unethical behaviour”.

That led Invesco to stating it was considering its legal options and “categorically refut[ing] any accusations of improper or unethical behaviour on behalf of Invesco or fund manager Mark Barnett”.

Burford followed up on Thursday with a statement of its own to the market, saying the claim that Burford was “arguably insolvent” was qualified “because Muddy Waters knows they would lose a lawsuit if they accused Burford of insolvency, and they know they can’t support such a claim”.

Invesco said that it had held investments, through a fund run by Barnett, in Napo since 2006. Burford noted that due to its shareholder register being made up of “some of the largest investors in the world, it is not at all unusual for Burford to be providing financing to companies held by its investors”.

It assured investors that it did not introduce Napo to Invesco, “and at the time Burford had no relationship with Mr Barnett, whose fund did not hold any Burford equity”.

Headline value

It also accused Muddy Waters of “throwing in Neil Woodford’s name for headline value”. Woodford is also a large shareholder of Burford, but was only mentioned in passing by Muddy Waters.

Burford said: “Out of those straightforward facts, the report attempts to outline a groundless conspiracy between Invesco and Burford.

“Invesco was an equity holder in Napo, with all of the risks and returns associated with equity holders. Burford was a secured creditor. Invesco engaged in the actions it believed advantaged its equity investment in Napo, including participating in various rounds of equity investment in the business.

The Muddy Waters move caused Burford’s share price to halve by close of play on Wednesday, though shares advanced by a quarter as at 2pm on Thursday.

“Burford engaged in its own negotiations, which often disadvantaged Invesco given Burford’s senior position in the company’s capital structure. There was no complicity and not a moment’s thought that Invesco was making further investments in Napo “purely to perpetuate a mythical ROIC” as the report suggests.”

Burford said the report’s most prominent claim that Woodford, Invesco and Burford acted in concert to engage in a multi-year deception over a $7m investment into US pharmaceutical Napo was “simply false and, further, makes no sense commercially”.

It said its financing of Napo’s case against Salix Pharmaceuticals was structured so that its recovery could come from other litigation in addition to Napo’s case against Salix.

“As it transpired, a litigation matter other than the Salix matter resolved first, and resulted in an entitlement for Burford.  That is the figure shown in Burford’s 2013 reporting,” Burford noted.

After Napo merged with Jaguar Animal Health and restructured, Burford received $8m in cash and a significant equity position in the merged entity. This left Burford “with its original investment fully repaid, a small cash profit and stock that was at that point worth more than $20m”.

Cheap stock

The Muddy Waters move caused Burford’s share price to halve by close of play on Wednesday, though shares advanced by a quarter as at 2pm on Thursday.

However, even at the current 765p level, shares are still more than 50% below where they were just two weeks ago. As a result, Burford said its CEO and CIO would purchase stock, while two non-executive directors have “sought clearance to make market purchases, as have numerous other Burford employees”.

“In addition, the board is also considering the company buying back its own shares, given the potential investment return the shares represent at their current price. Appropriate disclosure will be issued upon the completion of any purchases,” it said.

Having fallen initially by as much as 5.5%, shares in Invesco had almost recovered on Thursday, trading at $17.04, just 19 cents, or 1.1%, below Tuesday’s closing price.

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 8 August 2019.