One of Woodford Equity Income fund’s most successful holdings has been accused of misleading financial reporting.
Star fund manager Neil Woodford faces more trouble, with one of his largest holdings seeing its share price fall by more than 60% on 7 August.
In a report released by US short-seller Muddy Waters, the London-listed Burford Capital was accused of inflating its earnings and having questionable financial reporting standards.
Burford Capital provides money to law firms in order to finance lawsuits and takes a cut for doing so. However, according to the report by Muddy Waters, the company’s reporting of earnings has been misleading.
Muddy Waters also claimed that only a small number of cases were actually responsible for its returns. The report noted: “[This is] in stark contrast to the impression many investors seem to have that the portfolio produces meaningful returns across its breadth.”
The report also took aim at what, in Muddy Waters’s view, was weak corporate governance. According to the report: “[Burford Capital’s] governance strictures are laughter-inducing. The chief financial officer is the wife of the founder/chief executive officer. Under the best of circumstances, this should alarm investors.”
Burford Capital denied Muddy Waters’s claims, arguing they were “criticisms without merit.”
It added: “Short sellers of this ilk are not long-term investors. Rather, their goal is to panic investors into selling their holdings and thereby to drive down the share price. If investors oblige them, then the attack succeeds, long-term investors are harmed and the short sellers pocket a quick payday.”
The market, however, was spooked, as shares in the company were down by around 65% from their opening on Wednesday. Share prices are now sitting at around 58% down from the report’s release, as at 11am on 8 August.
Burford Capital’s trouble is another blow for Woodford. The company had been one of Woodford Equity Income fund’s most successful holdings and accounted for almost 6% of the whole portfolio. The heavy share price fall comes at a time when speculation is mounting that Woodford may also lose control of his Woodford Patient Capital investment trust.
Woodford, however, is not the only fund manager hit by the news. Mark Barnett, through his numerous funds at Invesco, is the company’s largest shareholder.
Muddy Waters has accused Barnett of “bailing out” Burford Capital after one of the company’s cases went bad.
Barnett and Invesco strongly deny any wrongdoing and are currently considering the possibility of legal action.