Leave it to former trial lawyers to talk so much, and yet say so little. BUR’s written response and numbing two-hour call did nothing to dispel our view that BUR a) aggressively marks its cases up to generate non-cash profits, b) manipulates its (non-IFRS) ROIC and IRR metrics in order to justify its fair value gains, c) deliberately confuses investors about the extent of its fair value gains in each period, and d) has a fragile balance sheet with too much leverage, particularly given the excessive costs the business runs (of which a significant portion could be management compensation). Moreover, we believe BUR is effectively sprinting on a treadmill whereby it is growing its portfolio aggressively not because there are so many great opportunities; but, rather because it has so aggressively taken fair value gains that sap the business of future earnings power, and it therefore needs to add litigation assets to the balance sheet in order to take more fair value gains. In this way, we also view BUR as possessing the same illness that, in our view, brought Enron and Noble Group down: Addiction to mark-to-model gains financed by debt. BUR exhibits another characteristic of Enron and Noble Group – baselessly attacking critics in an attempt to distract investors from their own shortcomings.
We welcome scrutiny by the Financial Conduct Authority on the Burford matter. We believe that management’s conduct has possibly given rise to sanctions claims by the FCA. Muddy Waters stands ready to assist the FCA in any inquiry, and as has been the case for the past nine years of our short activism, we have nothing to hide regarding our own actions.