Hedge Fund Attacks Invesco Manager Over Burford Capital

US hedge fund Muddy Waters says that Burford Capital, held by both Neil Woodford and Invesco's Mark Barnett, is a "perfect storm for an accounting fiasco”

Holly Black 8 August, 2019 | 10:11AM
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Invesco has denied any wrongdoing by fund manager Mark Barnett after he was accused by a US hedge fund of improper behaviour.

Muddy Waters Research this week published a research paper on litigation finance firm Burford Capital which sent the stock price plunging by 65%.

California-based Muddy Waters said it had taken a short position in Burford Capital – meaning it is betting against its shares – because of “unethical behaviour by its largest shareholder, Invesco”.

In the 25-page report the hedge fund group likened the situation to the infamous Enron accounting scandal. Muddy Waters also raised concerns about the light disclosure regime and esoteric nature of Burford’s business, and said Burford had been “egregiously misrepresenting… the states of its overall business”.

Peter Sleep, investment director at 7IM, said: "The red flag at Enron was that there were profits but it wasn't paying the corresponding amount of tax and the same seems to be true here." 

burford share price

The board at Burford has strenuously denied the report’s criticisms, saying they are “without merit”. Some commentators have said that it had been a so-called “bear raid” strategy by the firm, where a stock’s price is forced lower by the spread of adverse news.

In a show of solidarity, Burford’s chief executive Christopher Bogart and chief investment officer Jonathan Molot said they intended to purchase shares in the firm once they had publicly responded to the report.

In a statement, Burford said it had never been contacted by Muddy Waters and called the release of the report a “short attack”. It said the firm’s cash position is strong and that the business is growing rapidly.

The firm also defended Mark Barnett, saying that the allegations that he had acted in concert with Woodford and Burford was "simply false, and further, makes no sense commercially". 

Burford Capital specialises in providing litigation finance – a sort of “no win, no fee” legal offering for businesses. Shares climbed from 119p to £14.25 over the five years to 7 August and the company became a firm favourite in a number of fund manager portfolios.

The two most high-profile investors in the fund are Neil Woodford and Mark Barnett, whose Woodford Equity Income and Invesco High Income funds own 7% and 8% of the company respectively. The stock makes up 6% of Woodford’s portfolio and 3.9% of the Invesco fund. Barnett also holds 2.8% of the stock through his Invesco Income fund, where it accounts for 3.2% of assets, and through his Perpetual Income & Growth Trust, where it accounts for 2.1% of assets, according to Morningstar Direct data.

Other major investors include the Merian UK Mid Cap fund, Jupiter Absolute Return and Omnis Midcap and Growth.

burford ownership

Muddy Waters’s short position in Burford is not present on the FCA’s register. Hedge fund Gladstone Capital Management is the only entity currently holding a short position – of 0.5% which it has held since June 4 - according to the register. 

Muddy Waters said that Burford was a “perfect storm for an accounting fiasco” and called the governance strictures at the business “laughter-inducing” – pointing out that the chief finance officer is the wife of the founder, a situation it said was “ripe for abuse”.

The hedge fund said that Burford’s returns had relied on a small number of successful cases – with four legal cases producing around 66% of realised gains between 2012 and the first half of 2019. “One of these four contributors was actually a loss at trial, and was bailed out by Burford’s largest shareholder, Invesco, at the direction of Neil Woodford protégé Mark Barnett,” it said. The loss related to a pharmaceutical firm called Napo.

Sleep added: "The report, to me, looks pretty sensible. They have done some good research and found out some interesting facts. I think the market is quite rightly taking it seriously." 

Invesco said: “We categorically refute any accusation of improper or unethical behaviour on behalf of Invesco or fund manager Mark Barnett. Invesco has been a long-term shareholder of Burford Capital and held investments in Napo since 2006.

“These investments were made and overseen in line with our robust investment and independent oversight processes. Invesco’s legal advisers are reviewing the accusations and we expect we will be able to make a broader statement in due course. 


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Burford Capital Ltd1,046.00 GBX0.00

About Author

Holly Black  is Senior Editor, Morningstar.co.uk


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