Eddie Stobart Logistics and Reasons to be Fearful

No sooner had I published a book that says investors cannot trust the accounts of companies when making investment decisions (“Business Perspective Investing”) than we have yet another case of dubious financial reporting. The latest example is that of Eddie Stobart Logistics (ESL) which has announced that “the Board is applying a more prudent approach to revenue recognition, re-assessing the recoverability of certain receivables, as well as considering the appropriateness of certain provisions”. CEO Alex Laffey is leaving with immediate effect, profits seem to now be uncertain, the dividend is being reviewed and the shares have been suspended. In other words, it’s one of those shock announcements that undermines investor confidence in company accounts and in the stock market in general.

That follows on from the case of Burford Capital where revenue recognition has also come into question and I personally doubt the accounts are prudent. We seem to be getting about one case per week recently of accounts that are called into question or where significant restatements are required. I may need to revise my book sooner than expected because it contains a list of examples of dubious and fraudulent accounts in companies which is rapidly becoming out of date!

ESL is of course one of Neil Woodford’s largest investment holdings – he holds 22% of the company. Mr Woodford has also suffered from a write down in the value of his holding via Woodford Patient Capital Trust in Industrial Heat due to slow business progress. This is a company focused on “cold fusion” technology. Mr Woodford seems to be adept at picking risky investments of late which is not how he built his former reputation. Even the Sunday Times is now attacking Neil Woodford with an article today headlined “Neil Woodford’s worthless tech bets” which covers his investments in Precision Biopsy and SciFluor Life Sciences and which are now alleged to be almost worthless. I feel it’s going to be a very long time before his reputation recovers.

As regards more wider issues, there was a very good article by Merryn Somerset Webb in Saturday’s Financial Times under the headline “So many reasons to be fearful”. She points out that due to low interest rates making it seem irrelevant how long it might be before exciting companies actually produce returns, value stocks are trading lower relative to growth stocks than they have for 44 years. The pound is also at a 35-year low against the dollar and US stock prices at a 50-year high relative to US GDP.

Bond yields are so low that even in nominal terms they are negative in many parts of Europe. What should investors do? She comes up with some suggestions such as investing in commodities such as gold or silver, or even oil because there is a risk that with Governments running out of options to stimulate their economies, they may start printing money which will drive up inflation.

She also comments on a likely new “cold war” to be fought by the USA and China over trade which will may profoundly affect many of our investments. She argues that the next 30 years may be very different to the last 30.

Altogether an interesting article well worth reading if just to remind ourselves that the world is rapidly changing and that we live in very unusual times.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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D4T4 Solutions AGM

This morning I attended the Annual General Meeting of D4T4 Solutions Plc (D4T4) at their offices in Sunbury-on-Thames. This is an AIM-listed niche software solutions business which has been listed since 1997, originally on the main market under the name IS Solutions. I did hold the shares years ago but recently bought back a few as the acquisition of Celebrus gives it some real IP as opposed to it being primarily a service business as it used to be. The two founders are still on the board, one as CEO and one as a non-exec director. Peter Simmonds is the Chairman – he also chairs Cloudcall and used to be CEO at DotDigital.

I was surprised to see about 20 private shareholders present. I would have guessed it would be very few in the August holiday season. They had a lot of questions and comments only a few of which I cover here.

The company issued a statement in the morning. It stated trading was “in line with expectations”. But there was a mention of a second-half bias which seems to have spooked the share price today, even though it is likely to be less than last year.

What does the company do exactly? That is not easy to define but it is primarily a data analytics platform used by companies with large amounts of data such as banks. When I ask Peter after the meeting closed what their key USP was he said it is the real-time data analysis which hardly anyone else can do. This explains why one of their main partners is SAS, a very large US analytics business, who resell the software and is by far the largest customer of D4T4 – £15m out of £25m total revenue. This is clearly a risk which prompted several questions in the meeting. But it was explained that there are many more end-user customers and they have been taking steps to get closer to the end customers.

The CEO did say they wanted to expand from two major sales partners to others and had a third in the pipeline.

Note that according to this morning’s announcement more than 80% of their revenue is in dollars so the falling pound will probably help them. This is a typical software business with a very international spread of business who are unlikely to be harmed by Brexit, whatever the form.

The company had a good year last year – revenue up by 37%, and adjusted profits up by 47%. That’s after revising prior year figures because of the adoption of the IFRS15 accounting standard.

One question raised was why did the wages bill rise by 17% when the number of employees remained unchanged. This was explained by the bonuses paid after a good year financially and the fact they were now recruiting staff in the USA who tend to be a lot more expensive.

There was a long discussion over a proposed new LTIP. Concerns were expressed about the non-explicit holding period. I simply voted against it because I just don’t like LTIPs particularly where the performance targets have not been declared. Shareholders have no idea how much it is going to cost them. The Chair of the Remuneration Committee, Peter Whiting, even said at one point that “LTIPs are not a real cost”. He did seem to back down later when I challenged him on this, but he does not like the current accounting treatment. But all share option schemes are a cost on shareholders because of the dilution and hence should be recognised as such in the accounts. It’s very clear that LTIP schemes have enabled the ramping up of total director and senior management pay in companies.

It seems the performance targets will be disclosed in due course. I suggested that a simple cash bonus combined with conventional share options would be better because staff do not value long-term options. However the Chairman said that if they offered market price options rather than nil-cost ones the dilution might double.

The company has just recruited a new CFO and it was mentioned that a lot of candidates asked whether the company had an LTIP scheme in place. Anyway when it came to a vote, via a poll, 99.9% voted FOR the LTIP. There were only two resolutions that got much less than 99% in favour. These were 95% for the Remuneration Report and 95% for re-election of founder John Lythall as a non-exec – probably because of his length of service.

One interesting question that was asked was about tax rates they would be paying. It was mentioned in response that they are looking to use the “patent box” provision which might reduce their tax rate this year to 10%.

Altogether a useful meeting although I did suggest to the Chairman that it would help to have a presentation on what the company actually did as some investors might not be too clear on that. That could be one reason why the company is only moderately rated on fundamentals.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Burford, GE and Media Regulation

As most readers will be aware, Burford Capital (BUR) has been under attack by Muddy Waters over its accounts, corporate governance and other matters. Muddy Waters, led by Carson Black, has been shorting the stock. Now we have a similar attack on venerable US company General Electric (GE) who have been accused by Harry Markopolos of false accounting over liabilities on long-term care insurance policies. This caused the share price of GE to drop by 11% on one day last week. You can see Harry talking about his report on CNN here: https://www.youtube.com/watch?v=MGvsXPY26KI

As in the Burford case, the accusers have not bothered to contact the companies they are attacking before publishing their accusations. I have previously pointed out this is bad journalistic practice because it’s easy to make mistakes over simple facts particularly when relying on third party sources who can often be unreliable.

The Problem

These are just two of numerous such examples over the last few years including some in which I had an interest. Sometimes the allegations escalate to the point that a company is severely damaged and never recovers. Or the business is revealed to be a simple fraud – as in the case of Globo. But sometimes the allegations go nowhere and the companies recover. For example, Carson Black attacked a number of Chinese companies listed in the USA before 2012 including Orient Paper. The company hired third parties to investigate the claims and showed they were of little substance and the SEC took no action although the company did settle some civil claims against it over the matter.

A similar UK case was that of Blinkx – subsequently renamed RhythmOne (RTHM) and recently taken over by Taptica. The allegations here were that video advertising revenue was often fictitious in that and other similar companies and the whole sector came under suspicion although many of the allegations were false or based on innuendo. A lengthy period ensued of claim and counter-claim but no action arose by the regulatory authorities – the FCA or AIM regulators. The share price did recover but only after a long period and after significant changes at the company. Investors in the shares were unable to quickly separate fact from fiction about the allegations and hence many investors sold out – that is similar to events in the Burford case where it might be many months before any conclusions are reached by the relevant regulatory authorities and the share price remains depressed.

These attacks on companies are often publicised by the media – both the traditional paper press and by on-line news sites of which there are many in the financial world (this blog alone might be considered one such of course). As any journalist will tell you, “bad news” stories tend to gain more public attention than “good news” stories. Exaggeration and hyperbole are common because by doing so the web sites attract attention and hence more readers or subscribers – in effect these stories are often “clickbait” in current parlance.

Clearly the motive for many of these attacks, and why the attackers do not contact the companies concerned before promoting their stories, are financial. The attackers hope to make money from shorting the stock, or advising others to do so. In the case of Blinkx, the attack was based on evidence provided by a third party who had a direct financial interest in supplying the required information.

Needless to point out perhaps that the traditional national media such as newspapers have always paid for stories although paying criminals or police officers for stories is viewed with disdain. But newspapers do usually try to corroborate facts before they publish and usually invite comments from those attacked.

Which brings us on to how the more traditional media are regulated to avoid the abuses that one sees in the blogosphere.

OFCOM regulates television and radio, including “catch-up” services, i.e. “broadcast” media. It now covers the BBC although one sometimes might not realise it. OFCOM requires programme makers to show “due impartiality and due accuracy” without “undue prominence of views and opinions”. See https://tinyurl.com/mazam3q where there is extensive guidance.

OFCOM does not regulate on-line media so video programmes on YouTube are not regulated in any way by an independent third party. YouTube only has its own guidelines which it tries to enforce against harmful content, but it has opposed any suggestions of outside regulation. As OFCOM says in its own report on Addressing Harmful Online Content, “While regulation has evolved, most online content is subject to little or no specific regulation”. In reality such media of all kinds and covering so many subjects have grown at an enormous rate in recent years and have reached the point that regulating it as is done with broadcast media would be very difficult.

The traditional paper press are regulated by either IPSO or IMPRESS which were set up relatively recently (by 2016) after the Leveson Inquiry. IPSO has a Code of Practice for Editors for example that covers such matters as accuracy. It includes these requirements: “(i) The Press must take care not to publish inaccurate, misleading or distorted information or images, including headlines not supported by the text; (ii) A significant inaccuracy, misleading statement or distortion must be corrected, promptly and with due prominence, and — where appropriate — an apology published. In cases involving IPSO, due prominence should be as required by the regulator; (iii) A fair opportunity to reply to significant inaccuracies should be given, when reasonably called for; and (iv) The Press, while free to editorialise and campaign, must distinguish clearly between comment, conjecture and fact”. IMPRESS has a similar “Standards Code”.

IPOS and IMPRESS are effectively voluntary schemes unlike OFCOM which was created by an Act of Parliament. As a result they are often seen as relatively toothless and the printed press have more ability to promote comment and less necessity to be “fair” than the broadcasting organisations. So for example the Daily Telegraph ran the GE story under the headline “Did Jack Welch build his GE house on sand?” with a sub-title of “A financial investigator has accused America’s best known industrial giant of accounting jiggery-pokery” with extensive coverage of the allegations although they did cover some of the rebuttals from the company. But asking loaded questions that promote the allegations is simply a rhetorical way around the rules. Such questions are similar to that of the question, “when did you stop beating your wife” which is difficult to answer without acknowledging the allegation.

What other things might inhibit on-line media? Libel law is one although few companies will pursue that avenue because: 1) It is very expensive; 2) It takes many months, if not years, to conclude such legal actions and 3) the associated negative publicity can simply compound the problem. In addition UK companies would have great difficulty pursuing those based in the USA or in other foreign countries where libel laws are less strict about the burden of proof. As the internet is a global service and content can be published and hosted on servers in numerous countries, that compounds the difficulties faced by the accused.

Financial regulators have some capabilities to stop market abuse. The Financial Conduct Authority (FCA) has powers under the Market Abuse Regulations (MAR) to prevent Market Abuse. To quote from the FCA: “Market abuse is a concept that encompasses unlawful behaviour in the financial markets and, for the purposes of this Regulation, it should be understood to consist of insider dealing, unlawful disclosure of inside information and market manipulation”. That covers a wide spread of media and covers the use of bulletin boards to disseminate false information. In reality although the FCA’s Handbook would appear to give it powers over market manipulation where false or inaccurate information is being published with the purpose of affecting share prices, the FCA seems remarkably reluctant to use those powers. In addition, there is the question where the story is complex (as most financial ones are), whether the treatment is fair or not. That is often a matter of judgement and can be disputed for a long time before any conclusion is reached. Financial regulators are typically unwilling to get into such minefields. Investigating such matters can take large resources in any regulator when they often have more obvious and urgent frauds to deal with, and very limited resources to pursue them.

You can see from all of the above that there are very limited deterrents to those seeking to profit from alleged failings in companies, and even fewer deterrents to ensure that what they promote to the public is always accurate, fair and reasonable.

Discouragement in advance of publication of articles on the internet is not there and penalties afterwards are non-existent except in very rare circumstances. Internet publishers are simply not regulated in any meaningful sense and you or I could publish pretty well anything on the web so long as it was not criminal (e.g. “hate speech” or “extreme pornography”). Criminal libel was removed from UK law in 2010, when the Coroners and Justice Act 2009 came into effect and abolished the offences of sedition and seditious libel, defamatory libel and obscene libel. Libel can only now be pursued in the UK under civil law by the offended with only damages being awarded if the complaint is upheld. Such actions have to take place in the High Court which means they are very expensive even for trivial complaints. Newspapers appear to be willing to afford the risk of large damages they sometimes incur for the sake of a “good story”, and many on-line bloggers have few financial resources that would even cover the legal costs of a successful case.

Fixing the Problem

What could be done to improve the situation and bring more morality back into this area of the financial markets? I suggest the following should be considered:

  1. An offence of criminal libel be introduced where any person or organisation makes false allegations from which they or associates may financially benefit directly or indirectly (e.g. by boosting readership), or when they repeat such allegations made by third parties.
  2. The above offence would impose an obligation on publishers to check their facts with third parties including a company which is the subject of the story before publication while allowing the company reasonable time to respond.
  3. Where an organisation is the publisher of financial commentary, rather than an individual, then they would be required to be licensed by a body such as OFCOM and be required to adhere to a code of conduct laid down by that body. This would need to cover those who run financial information web sites, bulletin boards and chat-rooms. The code of conduct would need to be similar to that for broadcasting organisations and would require an obligation to quickly remove for review any article that was the subject of a complaint. It would need to be made clear that reference to “publishers” would need to encompass those who not just had editorial responsibility and control over content but also those who simply hosted comments or stories from others, i.e. Facebook and most bulletin boards and blogging sites would be treated as publishers and not be able to use the excuse that they were simply technically hosting a service and not providing content.
  4. There should be a specific obligation imposed on directors of companies, and on their auditors, to investigate allegations of fraud or misconduct when it is brought to their attention whether or not there is an intention to publish the information. The directors should also immediately request suspension of the shares when serious allegations are made until some clarity on the credibility of the allegations is reached (this is so as to avoid sales by directors before publication of the claims, or share trading by those making the claims).

Note that such laws and regulations would not necessarily totally prevent those based overseas from publishing false allegations but it would certainly inhibit the circulation of the allegations within the UK and hence reduce the impact on financial markets in this country.

Would it allow frauds to remain undiscovered, and shareholders to remain in the dark about misleading accounts? If the allegations were true then clearly not as truth would be a good defence, and investigations by company directors and their auditors would reveal truths that could not be concealed.

Could it inhibit individuals from posting their comments or opinions on the web? It would be unlikely to do so but any organisation that published the comments on a financial subject would need to take responsibility for the content, and have systems to ensure very quick review and removal of offending items – most financial web sites already have such systems in place. But they might take steps to ensure they know who is publishing the information whereas at present anonymous malicious posts are common. Anyone who repeatedly makes false allegations could then be blacklisted.

Is introducing the criminal law into libel a disproportionate remedy? When the amount of money that can be made by financial market abuse is so large, and the alternative remedies so ineffective, it is surely appropriate to toughen up the regime. The penalties for abuse need to be substantially increased. Would the police or regulatory authorities have the resources to pursue such matters? Probably not but the solution to that might be to permit private prosecutions.

It is interesting to note that the Daily Telegraph reported recently (on 17/8/2019) on a private prosecution by Steve Egan against brothers Jason and Justin Drummond over alleged fraud at a company called Media Corporation (MDC) where they were directors. That company’s shares were delisted from AIM in 2013 and the company ceased its internet and gaming operations soon after and transmogrified in an investment company. I covered the events at this company for ShareSoc in their newsletters and the last one called the company a “comic turn”. The events at the company certainly inspired no confidence in the directors from me and I considered the accounts of the company were questionable.

Common Abuse

What I have not discussed in the above is the publication of abuse without any factual allegations being involved. Such comments about individuals such as is a “sender of fascist lawyer’s letters” when a victim complains or simple derogatory comments such as “fatty” aimed at ladies can be both extremely annoying to the recipient and damage their reputation but can be difficult to pursue under libel law. Good manners have simply disappeared in the modern world. Readers of such comments might be amused by them but the victims are not.

Many politicians and media personalities now suffer from such abuse without any recourse and so do companies. I have been on the receiving end of such comments personally in the past as is well known. It is a fact of life that standards in public life have gone significantly downhill in the last few years. This is partly due to the ease of distribution of such comments at trivial cost using the internet, the lack of practical and effective remedies and the fact that it is easy for the abusers to hide behind anonymity.

Even such reports as that on Burford by Muddy Waters are riddled with abuse. They don’t just present facts from which the readers can draw their own conclusions. They mix comment with the facts in derogatory form so as to strengthen their arguments.

If OFCOM licensed and regulated financial news/commentary web sites, it would be easy for them to put a stop to such behaviour by suitable regulations and prevent the “monetisation of abuse” that currently happens. By stimulating debate and response, web sites can generate traffic and hence gain financial benefit. It’s the equivalent of “trolling” on social media where perpetrators gain notoriety and personal satisfaction from upsetting others and starting arguments.

It would not be my intention to outlaw the making of derogatory comments about companies in the financial world. Most companies would not be damaged by such comments and not suffer any financial losses even if the shareholders might, which incidentally is another problem with current UK libel law. But individuals might suffer for no good reason. Restoring good manners to modern society is an impossible task for the law, but stopping market abuse is not.

It is of benefit to maintain an orderly market in company shares that companies can still come under criticism from investors. This helps to prevent the various “manias” that can sweep the market for company shares in hot sectors such as internet companies in the dotcom era. But it is surely the case that the pendulum has swung too far in favour of laissez-faire regulation of such matters.

Company directors may be expected to be thick-skinned but we now have a situation where company investors can suffer very substantial financial losses from the activities of professional doomsayers. That includes not just individual investors but institutional investors including pension schemes.

It is market abuse however you look at it.

Conclusion

No doubt this article will stimulate some active debate from readers. It is important to state that I am not opposed to people shorting stock as such although I would like to see tougher regulation of stock-lending which often supports it. In particular the institutional holders who lend stock without the knowledge or consent of the beneficial holders and who gain little benefit need to be restrained I suggest. But shorting stock might contribute to better market liquidity and price stability. Any market only works if there are people with contrary opinions on whether a stock is a fair price – for every buyer there needs to be a seller. What is surely wrong is that shorters can magnify their gains by making public allegations that are poorly grounded in sound evidence and on which the target companies have had no opportunity to comment before publication.

This is surely an area of the financial markets where more regulation is required.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Burford Governance Changes

Burford Capital (BUR) have announced a number of changes to their board to meet the concerns of investors about corporate governance at the company. It includes the CFO (wife of the CEO) moving to another role, and refreshing the board in due course.

This is what Chairman Sir Peter Middleton had to say: “Companies are owned by their shareholders, and when the shareholders speak, it is the role of boards and management to listen.  While we may take a different view on some of these points, shareholders have clearly spoken and we have listened, just as Burford has throughout its existence.  We trust that these governance enhancements operate to bolster investor confidence in Burford as it enters its next era of growth and success.”

I hope the directors of the Ventus VCTs (see previous blog post) are listening also.

Burford is also looking for a US listing (on the NYSE or Nasdaq) as investors have made it clear they do not support Burford being solely listed on AIM.

These changes will help to make the company more of a sound investment proposition but the question remains over whether their financial accounting is prudent, and has been historically accurate. Muddy Waters clearly suggested otherwise. The key question for investors is whether a new CFO will take a different approach to their accounting and decide it should be done differently.

Unfortunately the new CFO, Jim Kilman, was the former investment banker at Morgan Stanley for the company and has been acting as an advisor to the company since 2016. It hardly looks like they undertook a formal recruitment process but have just appointed someone they already know, and who knows them, to the position as a stop-gap measure. That is not the best way to reassure investors on financial prudence.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Ventus VCT AGMs – A Disappointing Result, National Grid and Sports Direct

I have mentioned previously the attempt by a shareholder in the Ventus VCTs (VEN and VEN2) to start a revolution, i.e. replace all the directors and appoint new ones. See https://tinyurl.com/y6e5fafo . Nick Curtis was the leader of the revolt but at the AGMs on the 8th August the required resolutions were narrowly defeated with one exception. This was after the boards of these companies paid a proxy advisory service £38,000 to canvas shareholders, which of course shareholders will be paying for as it is a charge on the companies.

There is a report on the meetings by Tim Grattan in the ShareSoc Member’s Area which gives more details. One surprising bit of information that came out was that the performance incentive fee payable to the manager would be paid in perpetuity even if the management agreement is terminated. This is an outrageous arrangement as it would effectively frustrate any change of manager, i.e. it’s a “poison pill” that protects the status quo.

In addition the performance fee calculation is exceedingly complex, and allegedly double counts the dividends because it is based on the sum of total return and dividends. It seems to be yet another incomprehensible performance fee arrangement which I have often see in VCTs.

Comment: I think the existing directors deserve to be removed solely for agreeing to such arrangements. I have repeatedly advocated that performance fees in investment trusts (including Venture Capital Trusts) are of no benefit to shareholders and typically just result in excessive fees being paid to fund managers. There is no justification for them. Fund managers say that they are essential to retain and motivate staff, but I do not know of any VCT where the fund manager has voluntarily given up the role because of inadequate fees being paid even though some of them have had quite dire performance.

The boards of these VCTs are reflecting on the outcome. Let us hope that they decide it is time to step down and appoint some new directors who need to be truly independent of the manager. The candidates for the board put forward by Nick Curtis are a good starting point.

If the board does not respond appropriately, then I think shareholders should pursue the matter further with another requisition for an EGM to change the directors. It can take time to educate all the shareholders in such circumstances so perseverance is essential in such campaigns.

The Financial Times had more lengthy coverage on National Grid (NG.) and its power outage last week, which I covered in a previous blog post. It seems the company is blaming the power failures on the regional distribution operators for cutting the power to the wrong people, e.g. train line operators rather than households. But they suggest otherwise. Meanwhile an article on This is Money suggests that the increased sales of electric vehicles will cause the grid to be overloaded by 2040, even though sales of such vehicles are well behind those in some other countries. They were only 2.5% of sales in the UK in 2018, versus 49% in Norway. Surely what the UK needs is more back-up capacity based on batteries, gas turbines or like the Dinorwig pumped storage power station in North Wales. That can bring large amounts of capacity on-line in seconds and is well worth a visit if you are on holiday in the area.

Other interesting news is the recent events at Sports Direct (SPD). After problems with the last audit and getting the results out, Grant Thornton have announced that they do not wish to continue as auditors. All of the big four audit firms have refused to tender for the audit and other small firms have also declined it seems. Corporate governance concerns at the company seem to be one issue.

A UK listed company does require an audit so what does the company do if there are no volunteers for the role? The FRC is being consulted apparently on how to resolve this problem. Needless to say, these issues are having a negative effect on the company’s share price.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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National Grid Power Cuts

Last Friday the electricity network suffered a number of major failures with power cuts closing Kings Cross station and associated lines, traffic lights in South-East London being cut and other areas of the country affected. This caused me to consider whether National Grid (NG.) has been running too close to the wind in terms of capacity to cope with exceptional events.

I have not held shares in the company since late 2017/early 2018 but I do recall attending one of their AGMs when a shareholder questioned whether the country and the company had enough spare electricity capacity (National Grid has a monopoly on electricity distribution in the UK and also acts as a “system operator”). The shareholder concerned was reassured by the directors so far as I recall.

Keeping the power on is quite essential in the modern world. Heating appliances rely on it to operate, phone networks fail if the electricity supply is down (unlike some years ago when landlines operated on batteries), hospitals and other essential services rely on electricity being available and even cars will soon be reliant on the electricity supply. But it seems that the grid suffered three “near-misses” in the months before Friday’s disruption. On Friday the problem appears to have been caused by the failure of a gas power plant in Bedfordshire and a North Sea wind farm at the same time. This combination caused automatic systems to be triggered that cut supplies to certain parts of the country to avoid a wider shutdown. Note that this is nothing to do with reliance on unreliable supply sources such as wind power generation. It’s about network management, being able to get alternative supplies into action quickly and having spare capacity.

Has the company been under investing in capacity and system resilience while paying out enormous sums in dividends to investors, as some people allege?

It’s worth reading the company’s last Annual Report where the risks the company faces are covered in some depth. They have added “two new principal risks” one of which is given as “failure to predict and respond to significant disruption of energy that adversely impacts our customers and/or the public”, so it seems they were already aware of this issue.

They also cover the risk of state ownership if the Labour Party gained power and they say “The Government would have to pay fair compensation for the Company’s property….”. That is simply untrue. It would only have to pay what Members of Parliament considered fair which may be very different to a truly independent valuation or what the company’s shareholders might consider reasonable.

It would appear to me that the company has been excessively optimistic over its ability to maintain the supply network when an unusual combination of events arises, and has been discounting other major risks to shareholders.

It is surely time for the Government and National Grid’s regulator (OFGEM) to take a close look at the company.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Burford – Illegal Market Manipulation?

Burford Capital (BUR) have issued an announcement that makes a number of allegations about the events surrounding the recent shorting attack involving Muddy Waters. It includes:

  • Spoofing and layering to move the share price, e.g. putting in numerous share sales on the order book and cancelling them before they can be filled.
  • That includes numerous such transactions just before Muddy Waters issued a tweet giving Burford as the target, and as that tweet was delayed only Muddy Waters or its associates could have known of the timing.
  • Exiting their short position by buying Burford shares at the same time as continuing on the same day to make their allegations.
  • Falsely alleging the company was “insolvent” which would have been picked up by algorithmic traders.

They allege these activities are simply illegal and have informed the regulatory authorities on the matter, plus hired three large law firms (Quinn Emanuel Urquhart & Sullivan LLP, Freshfields Bruckhaus Deringer LLP and Morrison & Foerster LLP) plus a Professor at New York’s Columbia University who is an expert to look into the trading activity.

For those not familiar with market manipulation techniques, just read the Burford announcement for a good explanation: https://tinyurl.com/y6xrs38h.

Let us hope that the UK’s Financial Conduct Authority (FCA) promptly looks into these complaints, and that the Financial Report Council (FRC) also investigates the accounts and past audits of the firm. Despite Burford being a very large company, it is listed on AIM so the AIM regulators (i.e. the LSE) and its NOMAD should also be looking into the matter surely?

As I said in a previous blog post here: https://tinyurl.com/yy9pamh5, one of the problems in most shorting attacks is the mixture of possibly true and false allegations, which the shorter has not even checked with the target company, along with unverifiable claims and innuendo. The shorter can make a lot of money by such tactics while it can take months for the truth or otherwise of the allegations to be researched and revealed. By which time the shorter has long moved on to other targets.

Shorting is not wrong in essence, but combining it with questionable public announcements is surely market manipulation which is covered by the law on market abuse.

To remind you, I have never held any position in Burford Capital, short or long, and there are good reasons why not which I give below. But I have held shares in other companies which have been the victim of shorting attacks – in one case justifiable in another not, so I would like to see some reform of this area of the market.

As regards Burford, just reviewing this company against the check lists given in my new book, it would have failed as an investment proposition on several counts. These are:

  • Smaller transactions (Chapter 2). Burford’s profits are very dependent on a few large legal cases. Any problems in such cases could wipe out the profits whereas companies who have many smaller contracts rather than a few large ones are less vulnerable to surprises.
  • Repeat business (Chapter 2). Every legal case they pursue is a “one-off” transaction which means there is no certainty of future such business.
  • Short term contacts (Chapter 2). The legal case the company pursues can take years to finally resolve, i.e. they are long-term contracts rather than short-term ones. This means they are complex in accounting terms and risky.
  • No risk of Government regulation (Chapter 4). This area of legal practice is very much subject to Government regulation and has significantly changed in recent years.
  • Applicable listing rules (Chapter 7). The company is listed on AIM which is a much lighter touch regulatory regime than that for fully listed companies despite the fact that it is a very large business (market cap still £1.8 billion even after recent share price falls).
  • Adhere to corporate governance code (Chapter 7). Corporate governance at this company is odd to say the least with directors serving for more than ten years and no executive management on the board. In addition the CFO is married to the CEO.
  • AGMs at convenient time and place (Chapter 7). The company holds its AGMs in Guernsey where it is registered.
  • Accounts easy to understand and accounts prudent and consistent (Chapter 8). I would certainly question whether both the recognition of the value of on-going legal claims in the accounts is prudent. It is also very difficult for any outsider to judge the merits of the claims.
  • Do profits turn into cash (Chapter 10). From the 2018 accounts: Pre-tax profit was £307 million while Cash Outflow from Operating Activities was £233 million. Enough said.

The above are just a few easy points to pick out, but I could go on at some length on why I would not have invested in Burford and did not despite it being regularly tipped in the financial press.

See here for the book details that includes the checklists used in the above analysis: https://www.roliscon.com/business-perspective-investing.html

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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