TIDMBUR
RNS Number : 6828I
Burford Capital Limited
12 August 2019
12 August 2019
ANALYSIS IDENTIFIES EVIDENCE CONSISTENT WITH
ILLEGAL MARKET MANIPULATION IN BURFORD SHARES
Burford Capital Limited ("Burford Capital" or "Burford" or "the
Company"), the leading global finance and investment management
firm focused on law, announces the preliminary findings of its
analysis of the trading of its shares last week. We believe that
trading shows evidence consistent with illegal market
manipulation.
While Burford continues to analyse the data, it has made
regulatory authorities and criminal prosecutors aware of these
preliminary conclusions and Burford is considering its own options.
Burford has retained the law firms of Quinn Emanuel Urquhart &
Sullivan LLP, Freshfields Bruckhaus Deringer LLP and Morrison &
Foerster LLP in connection with these matters.
A forensic examination by Burford and its expert(1) of the
detailed trading data made generally available by the London Stock
Exchange for 6 August (the day on which Muddy Waters tweeted about
a forthcoming - but unidentified - short target) and 7 August (the
day on which Muddy Waters released its short attack on Burford)
discloses trading activity consistent with material illegal
activity.
Spoofing and layering
Background
Spoofing is the placement of a high volume of trading orders at
a price equal to or better (i.e., lower) than the
best-bid-best-offer price and subsequently cancelling these orders
to move the price in a given direction without actually concluding
any trades. For example, consider a stock where the current best
offer is GBP9.99 per share. A spoofer might place a high volume of
sell orders at GBP9.98, causing the best offer to decline to
GBP9.98, immediately cancel those sell orders before they can
execute, and then place a high volume of new sell orders at
GBP9.97. The strategy of repeatedly placing and cancelling sell
orders at or below the best offer without actually selling any
shares artificially drives down the share price.
Layering is similar to spoofing, except that instead of placing
and cancelling a high volume of orders at the best offer price, the
manipulator places these orders deeper in the order book, at prices
above the best offer. Continuing the prior example, suppose the
manipulator worries that the artificially "spoofed" sell orders at
GBP9.98 will be inadvertently executed before they can be
cancelled. Instead of placing these orders at GBP9.98 (or GBP9.99,
the original best offer), the manipulator may place a high volume
of orders at GBP10.01, GBP10.05, or some other price slightly above
GBP9.99. These orders are virtually certain not to be filled but
they affect pricing by suggesting falsely that there is a large
volume of shares for sale.
Spoofing and layering are both illegal and have resulted in
criminal convictions in the past. As an example, layering led to
the 2010 "flash crash" when the Dow Jones Industrial Average fell
600 points in five minutes; the perpetrator was found guilty of
fraud.
6 August trading following the Muddy Waters tweet
On 6 August, in the several hours following the 13:30 release of
the Muddy Waters tweet about a forthcoming short attack, almost
GBP90 million of sell orders were placed and cancelled without
being filled - for a stock whose average trading volume for an
entire day was less than one-fifth that amount. As discussed above,
that trading conduct is consistent with illegal market
manipulation. Moreover, during five one-minute periods on 6 August
(14:17, 14:30, 14:35, 14:43, 14:45), Burford's shares fell 6%, or
over GBP170 million in value, some of its sharpest declines of the
day. During these periods, executed sell orders totaled a mere
GBP186,000. That mismatch between price movement and executed
orders is consistent with market manipulation. To show the impact
we believe this behavior had on Burford's shares, compare five
other minutes of trading on 6 August with more significant levels
of actually executed orders: during the one-minute periods of
14:07, 14:59, 15:14, 15:15 and 15:43, executed orders totaled
GBP1.5 million - eight times as much as the periods identified
above - and the price of Burford's shares rose by nearly 2% during
those five one-minute periods.
7 August trading around and following the Muddy Waters
report
On 7 August, a day on which over 28 million Burford shares
traded, Burford's share price suffered its greatest declines over
just ten single minute periods with very low volumes of executed
sales and very high volumes of cancelled sales orders. Indeed,
Burford's share price declined by a full 60% over those 10
one-minute periods even though only 739,724 shares were actually
traded - around 0.3% of Burford's shares.
The following table shows the ten one-minute periods during
which the price of Burford's shares fell the most on 7 August, as
well as the number of sell orders(2) created, cancelled and
executed.
Time (approx.) Price Decline # of Sell Orders # of Sell Orders # of Sell Orders
(approx.) Created Cancelled Executed
08:22 -4.6% 359,541 352,878 32,905
-------------- ----------------- -----------------
08:53 -7.6% 291,364 275,306 27,885
08:59 -9.7% 354,681 442,350 122,988
-------------- ----------------- -----------------
09:22 -4.5% 260,083 250,894 9,568
09:51 -5.3% 287,962 261,342 16,714
-------------- ----------------- -----------------
09:57 -4.5% 777,319 825,095 271,231
10:03 -9.1% 372,296 426,233 164,833
-------------- ----------------- -----------------
10:51 -4.6% 352,630 343,851 14,962
11:22 -4.9% 230,362 181,128 66,754
-------------- ----------------- -----------------
13:52 -5.2% 322,016 309,847 11,884
--------------- -------------- ----------------- ----------------- -----------------
These ten minutes collectively reflect a 60% decline in the
price of Burford's shares. Yet it is striking how few shares were
actually sold over these windows.
For example, at 08:53, the minute which saw a 7.6% price
decline, there were only 27,885 shares actually sold - less than
10% of the number of shares underlying the orders created, 291,364.
It strains credulity to believe that a decline on the order of
hundreds of millions of pounds in market capitalization was driven
solely by actual trading amounting to a few hundred thousand pounds
absent market manipulation.
To see why in our view it is unreasonable to conclude that the
decline in Burford's share price was driven by actual sales of
shares, simply compare 08:53, when 27,885 shares were sold and the
share price declined 7.6%, with 11:22, when more than twice as many
shares were sold but the share price decline was just over half in
magnitude. What accounts for the difference between 08:53 and
11:22? The former had nearly 100,000 more orders for shares
cancelled than the latter - suggesting that it is the volume of
sell-side cancellations, not executions (actual trades), that drove
down the price.
The Muddy Waters delayed tweet
A large wave of sell order cancellations arrived in the few
minutes preceding Muddy Waters' first tweet on 7 August identifying
Burford Capital as the target of its short attack.
On 6 August, Muddy Waters posted a tweet stating that at "8 am
London time" the next day "we will announce a new short position on
an accounting fiasco that's potentially insolvent and possibly
facing a liquidity crunch."
An examination of Twitter microdata shows that Muddy Waters'
first tweet on 7 August actually announcing the identity of Burford
Capital as its victim was posted at 08:53:48, a delay of 53 minutes
and 48 seconds from the previously promised time of 08:00.
Muddy Waters did not publicly reschedule its announcement to
08:53 or otherwise provide any public indication of the actual
timing of the report's release.
The LSE data show that an unusual flood of sell-side
cancellations began to arrive in the three minutes immediately
preceding this tweet. Specifically, from 8:50am-8:53:47am, sell
orders totaling over 578,000 shares were cancelled - approaching
Burford's entire regular daily trading volume in less than four
minutes. In fact, during those three minutes and forty-eight
seconds before the tweet, there were 578,112 shares worth of
cancelled sell-side orders as compared to only 36,597 shares sold
in actual executed sales, a ratio of 15.8 to 1. We currently see no
non-manipulative explanation for that market phenomenon.
Given that Muddy Waters made no public announcement about the
actual timing of the release of the report, we do not see why a
legitimate market participant without knowledge of the actual
tweet's expected release time and content would be placing and
cancelling a large number of sell orders in the three minutes
before the release of the tweet.
It is also worth noting that according to FCA data Muddy Waters
initiated its short position in Burford on 5 August, the day before
its teaser tweet about a report being forthcoming, reduced its
short position by 20% on 6 August, the day of the teaser tweet, and
exited a further 63% of the position on 7 August, the day of the
report's release. In other words, while Muddy Waters was suggesting
that Burford was insolvent, it was at the same time buying Burford
shares.
Twitter and algorithmic trading
Muddy Waters asserted in a tweet and in its report that Burford
was "arguably insolvent".
There is no factual basis for that statement and we debunked it
in our rebuttal to the report. To reach it, Muddy Waters needed to
engage in an entirely contrived and unrealistic analysis that we do
not believe it has defended or reiterated since.
Burford is informed that posting certain phrases, such as
"insolvent", on Twitter can induce an algorithmic sell off in a
stock, and that a wider analysis of short seller tweets in general
shows that references to "liquidity risks" and "insolvent," which
appeared in Muddy Waters' tweet at 08:56, lead to sharp price
declines. Statistically speaking, these terms jointly increase the
odds of an artificial price decline in a manner that is highly
unlikely to have been caused by random chance.
Next steps
Burford is continuing its analysis and considering next steps.
Burford also intends to continue to monitor trading activity going
forward and will refer any further evidence it believes to be
indicative of manipulation to the appropriate prosecutorial
authorities.
Christopher Bogart, Chief Executive Officer of Burford,
commented:
"We are committed to working with investors to address any
questions and concerns they may have about Burford and its business
and we are grateful for their feedback. Burford's market-leading
business today is the same as Burford was a week ago. What has
changed is that a substantial amount of market value was wiped out
by activity we believe is consistent with illegal market
manipulation that has nothing to do with Burford's business. That
is wrong and that is illegal."
(1) The analysis summarized in this release was predominantly
conducted by Professor Joshua Mitts of Columbia University, who
specializes in the analysis of market data surrounding short
attacks such as this. See, e.g.,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3198384.
Burford's and Professor Mitts' analysis is ongoing, and it is
possible that the final results will differ, perhaps materially,
from these preliminary findings. However, Burford's view is that it
is important for the market and investors to be appraised of these
preliminary results even though they are preliminary and may later
be refined or amended.
(2) Figures for orders reflect number of shares underlying those
orders. Rows in the table may not sum given the inherent nature of
isolating single minutes of trading.
For further information, please contact:
Burford Capital Limited
Elizabeth O'Connell, CFA, Chief Financial Officer +1 212 235 6825
Macquarie Capital (Europe) Limited - NOMAD +44 (0)20 3037
and Joint Broker 2000
Jonny Allison
Alex Reynolds
+44 (0)20 3100
Liberum Capital Limited - Joint Broker 2222
Richard Crawley
Jamie Richards
+44 (0)20 7260
Numis Securities Limited - Joint Broker 1000
Charlie Farquhar
Jonathan Abbott
Montfort Communications Limited - Financial +44 (0)20 3770
Communications 7908
Robert Bailhache - email
About Burford Capital
Burford Capital is the leading global finance and investment
management firm focused on law. Its businesses include litigation
finance and risk management, asset recovery and a wide range of
legal finance and advisory activities. Burford is publicly traded
on the London Stock Exchange, and it works with law firms and
clients around the world from its principal offices in New York,
London, Chicago, Washington, Singapore and Sydney.
For more information about Burford: www.burfordcapital.com
This release does not constitute an offer of any Burford fund.
Burford Capital Investment Management LLC ("BCIM"), which acts as
the fund manager of all Burford funds, is registered as an
investment adviser with the U.S. Securities and Exchange
Commission. The information provided herein is for informational
purposes only. Past performance is not indicative of future
results. The information contained herein is not, and should not be
construed as, an offer to sell or the solicitation of an offer to
buy any securities (including, without limitation, interests or
shares in the funds). Any such offer or solicitation may be made
only by means of a final confidential Private Placement Memorandum
and other offering documents.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
STRGGUCWRUPBUAP
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August 12, 2019 02:00 ET (06:00 GMT)
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