Burford is right to go on the attack against Muddy Waters. If you dish it out, you have be ready to take it, too.
But today’s Burford counterpunch seems like a misfire. Allegations of market manipulation are up to the regulator to investigate; they’re not for one-sided stock company announcements.
That said, the claims do seem convincing. Perhaps this is because they’re researched by Columbia University’s Professor Joshua Mitts. So proud is Burford of his credentials that it recommends we read a previous work of his on short-selling for further proof.
It shouldn’t have. Mitts’s earlier study is about a breed of anonymous short-sellers in the US who publish false allegations about their targets to make a fast buck when the shares temporarily fall. Using what he calls Reputation Theory, he explains how the crooks have to keep changing their pseudonyms because once their research transpires to be bogus, investors stop trusting them.
This is the direct opposite to the Burford case.
Here, “spoofing” aside, the market reacted as it did because Muddy Waters has a great reputation. When it calls out bad companies, it tends to be right. In the cases of Sino-Forest, St Jude Medical and another Woodford stock, Prothena, devastatingly so.
Burford, on the other hand, has neglected its reputation. It sat on the junior AIM market despite being worth £3 billion; retained little-league City brokers instead of a JPMorgan or BAML and had a risky business model. Oh yes, and the boss’s wife was the finance director.
Perhaps if it had spent some time discussing Reputation Theory with Mitts before last week it wouldn’t be in this mess.
