Burford Investor Caro-Kann Issues Point-by-Point Rebuttal of Muddy Waters Allegations

Well, not everyone is buying Muddy Waters’ claims that Burford Capital mis-represented its accounting. Investor Caro-Kann Capital is long Burford shares, and has released a lengthy and detailed report outlining the firm’s point-by-point rebuttal of Muddy Waters’ allegations.

In Caro-Kann’s report, the investor likens Muddy Waters’ attack on Burford to trying to find ‘a black cat in a dark room.’ Essentially, they’re searching for something that is extremely difficult to find, especially if it’s not there at all.

While the 50+ page report lays out a host of arguments, we’ll focus on the major ones here. In the Napo Pharmaceuticals claim, Muddy Waters alleges that Burford accounted income that didn’t materialize, then concocted a scheme with its largest investor – Invesco – to raise funds through a subsidiary to capitalize Napo so it could pay back Burford. Caro-Kann say this accusation was meant to be “a Mike Tyson uppercut,” but in fact amounts to “a phantom punch.”

Caro-Kann concludes that Burford’s accounting of the Napo claim was actually conservative. They note that Burford accounted the claim at $15.75MM in 2013, when the entitlement became unconditional. Legally, Burford could have accounted the claim at $30MM. Additionally, by the end of 2015, Burford had not yet accounted for any accrued interest on the claim (interest was accruing at 18%). And at the end of 2016, Burford accounted for Napo at $21.3MM, when legally it could have done so for $51.1MM.

So according to Caro-Kann, Burford management was actually being conservative in its valuation of the claim. Clearly management was not certain about collectability, so they were extra cautious here. This shows “thoughtfulness and conservatism, as opposed to aggressiveness to impress investors with returns as implied by Muddy Waters.”

Caro-Kann also notes how Muddy Waters pointed out that Burford affiliate Nantucket, which was the proxy for owning shares in the Napo subsidiary Jaguar Health, listed its headquarters at the same address as Burford shareholder Invesco. The implication here is that the “cozy address sharing” led to Burford and Invesco colluding to capitalize Napo, so Burford could recover. According to Caro-Kann, the shared address was actually a result of clerical error, as evidenced by prior and subsequent filings. So this turns out to be much ado about nothing (also let’s not forget, we do have this thing called the internet… so the idea that Burford and Invesco have to share an office to collude is kind of outdated. Clearly Muddy Waters was just trying to– ahem– muddy the waters with this part of the accusation). 

Caro-Kann also targets Muddy Waters’ allegation that Burford misreports its IRR. Citing the Desert Ridge case, Caro-Kann notes that while Burford did sacrifice 4% of IRR on the deal, it did so in order to increase eventual profit on the deal by 77% (from $17.6MM to $31.1MM). ROIC subsequently increased from 254% to 448%. Muddy Waters omitted these stats from its IRR analysis, which Caro-Kann finds misleading. “We bet that every hedge fund manager out there would take such an IRR reduction in order to gain a higher ROIC,” the report says.

There are other — many, many other — points made by Caro-Kann in their report. One example is how Muddy Waters claims that Burford delayed recognizing a trial loss for several years (the Progas case). Yet Caro-Kann found that Burford did the same with Teinver – which was a huge win for the funder. So in reality, the funder was applying a consistent reporting method to its wins and losses.

Caro-Kann finishes their report by declaring their “tremendous respect” for short-sellers who expose corporate malfeasance. While they consider Carson Block and Muddy Waters to be among the best short-sellers, they profoundly disagree with Block’s findings as relates to Burford Capital. “Muddy Waters’ prior track record does not mean that they are always right,” read the report. “Burford is one such example. We believe Muddy Waters is mistaken in their conclusions about Burford Capital’s reporting and accounting practices, as well as its financial position.”

Caro-Kann labels itself “arguably the most publicly recognizable long investor in Burford,” having published a long thesis in December 2018. Now this rebuttal will add to their public profile. It will be interesting to see how Block – who has been anything but shy when it comes to debating his Burford claims – will respond to this lengthy and detailed report.

We will continue to follow this story as it develops.

Click here to read the full report.