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Burford Capital under fire from Muddy Waters over 'illusory returns' from Napo case

The hedge fund alleges that the litigation funder manipulated its return on the investment by categorising Napo's case over rights to a diarrhoea drug as a win with a significant return “when it should have been a loss”

Burford Capital Limited - Muddy Waters founder Carson Block
Muddy Waters founder Carson Block, on right

Shares in Burford Capital Ltd (LON:BUR) continued to recover on Tuesday as the litigation finance group fielded another attack from short-seller Muddy Waters. 

Following up from the initial shots fired earlier in the month, where the San Fransisco-based hedge accused the AIM-listed company of “egregiously misrepresenting” returns, an update was issued on Tuesday relating to a $7.4mln investment in fledgling biotech Napo Pharmaceuticals.

A win or a loss?

Muddy Waters attests that Burford manipulated its return on invested capital (ROIC) and internal rate of return (IRR) on the investment by categorising Napo's case against Salix Pharma over its diarrhoea drug as a win with a significant return “when it should have been a loss”.

Burford, in its original response on 8 August, said it had structured its financing agreement with Napo so that any funds recovered could come from not just Napo’s dispute with Salix, but from other litigation

“As it transpired, a litigation matter other than the Salix matter resolved first, and resulted in an entitlement for Burford,” the company said in its response, which it said explained the figure shown in its 2013 financial reports.

It did not clarify which “other” matter by name, however. 

'Masking adverse results'

Muddy Waters in its latest post on Tuesday said this was a “depraved” effort to “conceal adverse results”.

Thanking a bulletin board commenter called ‘Drunken Sailor’, the hedge fund pointed to a separate arbitration dispute between Napo and another of its licensees that “it was clear well before the end of 2013 that the outcome was completely adverse for Napo”. 

Without the win fee related to Napo, it is suggested that Burford would have reported a 2013 loss rather than the profit that it did.

Claim dismissed

On Tuesday, a spokesperson for Burford Capital merely said: “We have already explained at length on 8 August why Muddy Waters’ claim in relation to this matter is false”.

But Muddy Waters pointed to a loss for Napo decided by an arbitration panel in 2013. This, the hedge fund said, made it seem “likely that Burford’s supposed ‘entitlement’ was in the form of a debt Napo owed Burford, which would have been of questionable value at best to Burford” and said it “would strain credulity to claim that at the end of 2013, Napo had looked like a solid credit to Burford”.

Muddy Waters noted that Napo (and Burford) investor Invesco led a bailout of the Napo investment by putting $3mln toward the acquisition of Napo by Jaguar Animal Health, where “Burdord booked illusory returns on Napo that largely evaporated when Jaguar’s stock imploded beginning the day after the acquisition”. 

The hedge fund said Burford “stops just short of actually lying” but was looking to “deceive investors about its Napo returns and its overall investing prowess”.

Burford shares, which lost two thirds of their value after the initial attack, were up 4% to 791.5p on Tuesday morning.

Quick facts: Burford Capital Limited

Price: 730 GBX

LSE:BUR
Market: LSE
Market Cap: £1.6 billion
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