Burford Capital, a litigation funder, lost about half of its value – more than £1bn – in a day yesterday. It’s because one of best known short-selling companies Muddy Waters – investors who bet that a company’s shares will go down – released a report that said Burford’s accounts were wrong. The Neil Woodford fund which is closed to withdrawals owns 7% of Burford so is also caught up in the matter.
Carson Block, the boss of Muddy Waters, has been speaking to BBC Radio 4’s Today Programme about his concerns.
“The analogy I like is if I say ‘I’m going to take you on vacation, meet me at the airport oh Hawaii is amazing, it’s got great beaches, my favourite hotel is this one’ and then you meet me at the airport and I say ‘we’re going to Ireland’. Hawaii has nothing do with Ireland and all that discussion about Hawaii has nothing to do with where we were going.
“And that’s basically what all this discussion about realised gains in the investment materials is. It has nothing to do with – or very little to do with – what flows into the income statement.
Burford says EY is its auditor and Mr Block said this was always the answer firms gave when responding to a short seller.
“They always fall back on that halo of big four, prestigious, bless the accounts.
“No, that’s not how it works. Little known fact among investors: it’s not the auditors who prepare the financial statements, it’s actually company managements… particularly in this case management has a lot of latitude in building models without auditors second guessing”.