Litigation funder Burford Capital today said it had been the victim of market manipulation and said it had gone to court to get the London Stock Exchange (LSE) to disclose the identities of those involved.
Burford’s shares tanked in value last month in response to a short attack by activist fund Muddy Waters.
Following the attack Burford said there was evidence of market manipulation to artificially move its share price.
It commissioned a study by Joshua Mitts of Columbia Law School who today said there was evidence to back Burford’s claims.
“This evidence indicates that Burford’s stock was subject to market manipulation in the form of spoofing and layering on 6 and 7 August, and that the decline in the price of Burford’s stock on those dates was driven by large waves of sell-side order cancellations,” he said.
Muddy Waters boss Carson Block dismissed the suggestion that it had a hand in the manipulation of Burford’s stock.
“Burford is recycling this spoofing and layering quasi-allegation to distract attention from the real issues of its manipulation of financials, decrepit governance, and questions it refuses to answer. Spoofing and layering are issues that have arisen in the high frequency and computer-driven trading world, and Muddy Waters has zero capability to engage in these practices,” he said.
Burford has petitioned the High Court to obtain from the LSE the identities of those who placed the allegedly manipulative orders.
Burford said it intends to seek redress from those responsible through civil litigation and possible criminal prosecutions.
Burford’s legal claim focuses on 5-7 August when £1.7bn was wiped from Burford’s market capitalisation.
The claim said that Muddy Waters had built up a “significant, but at that time undisclosed, short position” in Burford, amounting to 0.71 per cent of Burford’s share capital.
Muddy Waters tweeted on 6 August that it would be announcing a new short position the next day but did not identify the target.
Burford’s share price fell on the afternoon of 6 August to a closing price of 1,121p, having closed at 1,381p on 5 August.
On 7 August Muddy Waters announced it had shorted Burford’s shares and published a dossier alleging serious governance issues and questionable accounting practices at the business – something Burford has denied.
“There are strong grounds to consider that a large proportion of the decline in Burford’s share price was the consequence of unlawful trading activity known as ‘spoofing’ and ‘layering,’” the legal claim said.
Spoofing is a form of market manipulation where traders place large orders to buy or sell shares with no intention of executing the trade.
The placing of large numbers of buy or sell orders can move the share price by creating an artificial impression that a stock is in demand or that it is overvalued.
Layering is a technique where a trader enters multiple visible orders on one side of the market at multiple prices, which causes the share price to move.
“It has become clear that the fall in Burford’s share price over the relevant period was not solely the result of negative market sentiment resulting from the (unfounded) allegations in the Muddy Waters report,” the claim said.
The claim, based on Mitt’s report, also suggests that the alleged market manipulation was coordinated with Muddy Waters.
“Professor Mitts’ report thus provides clear evidence that Burford’s share price was the subject of deliberate and abusive market manipulation, and it also suggests that such manipulation was coordinated with Muddy Waters,” the claim said.
“The dramatic fall in Burford’s share price over the relevant period did not merely reflect genuine market concerns that the shares had previously been overvalued, but was caused or substantially contributed to by an unlawful attack by market manipulators, apparently acting in concert with a short selling attack by Muddy Waters over the same period,” the claim alleged.
Burford has demanded from the London Stock Exchange information on the identities of those trading in its shares over the period of 5-7 August.
The funder also said it “will continue to press for regulatory and criminal action to be taken” and said it had asked City watchdog the Financial Conduct Authority to investigate the manipulation of its share price.
Burford’s share rose three per cent to 819p this afternoon.
LSE declined to comment on whether it was providing Burford with the information that had been requested.