We are short BUR. For years, it was the ultimate “trust me” stock. Thanks to a light disclosure regime, the esoteric nature of its business, and unethical behavior by its largest shareholder, Invesco, it turned Enron-esque mark-to-model accounting into the biggest stock promotion on the AIM. This has all recently changed though. Just this year, BUR began publishing more detailed investment data. This data proves that BUR has been egregiously misrepresenting its ROIC and IRRs, as well as the state of its overall business. We have identified seven methods by which BUR manipulates Concluded Investment ROIC and IRR.

Muddy Waters Capital LLC remains short Burford Capital Ltd. Third party behavioral analysis strongly indicates that Burford’s management was deceptive in their written and verbal responses to our initial report. Muddy Waters engaged Qverity to analyze management’s statements in the August 8, 2019 response statement and ensuing call for deception. Qverity provides behavioral analysis, and is founded and staffed by former United States Central Intelligence Agency experts in detecting deception. Its principals authored the books “Spy the Lie” and “Get the Truth”. We have attached the Qverity report. Note that the report was prepared prior to Burford’s announcement about CFO and board changes.

No. Don’t be silly. We stated that beginning with BUR’s 2013 Annual Report, BUR egregiously manipulated its ROIC and IRR on a $7.4 million investment by categorizing Napo as a win with a significant return when it should have been a loss. BUR responded “The claim is simply false”. BUR then elaborated “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.”, Well that certainly sounds ominous for MW. But in reality it shows just how depraved are BUR’s efforts to conceal adverse results.

Burford’s presentation on fair value accounting fails to address the key issues. This is typical Burford speak – to write so much, and yet say so little. The little substance there is supports our thesis about Burford’s valuation abuse. At the end of the day, as we have repeatedly stated, Burford cherry picks what it deems is a “concluded investment”. We have shown where Burford deemed litigation that was still ongoing to be “concluded” and recorded a favorable result, and also where Burford funded a futile appeal of adverse litigation result and thus deferred recording an unfavorable result. The verbose discussion of Burford’s concluded cases is only helpful in illustrating how much of its booked fair value gains are from cases it has not deemed “concluded”: $717 million in un-concluded versus approximately $130 million of FV gains in “concluded” cases. We believe Burford is manipulating the cases it deems “concluded” in order to avoid truing up marks.

Burford’s abysmal second-half performance speaks to the company’s exaggerated marks, which are married to a flawed business model. Second half net realized gains were paltry, despite Burford seemingly having strong incentive to prove that it can monetize the investments on its ever-expanding balance sheet. Petersen accounted for approximately two-thirds of 2019 net realized gains. In other words, outside of Petersen, FY 2019 monetizations were dismal. This fact further illustrates the concentration of Burford’s returns among a narrow range of cases.

Burford’s 2019 financials use reclassification, redefinition to inflate cash receipts, operating profit, and to otherwise present a misleading picture of the business. Cutting through the new bullshit, we adjust Burford’s cash receipts to show a YoY decline of -11.8%. We also adjust reported 2019 operating profit lower by approximately -8%. Burford manipulated its 2019 vintage “Direct” return recoveries up 13x by reclassifying a complex strategy case into Direct – after the end of the fiscal year. In 2019, Burford changed its definitions of deployments and realizations by including hedging in them for the first time. Removing this misleading padding (i.e., using the previous definition), balance sheet deployments actually declined in 2019 by – 35.5%, rather than the claimed -30.6%. Realizations, as previously defined, show a decrease – 22.9%, versus the reported -14.2%. We wonder whether all this goalpost movement was the real reason Burford delayed releasing its 2019 accounts.