Speedy Hire Presentation, Burford Analysis and Treatt Trading Statement

On Tuesday the 1st October I attended a company seminar organised by ShareSoc in Birmingham, mainly to present my new book. But there was an interesting presentation given there by Speedy Hire (SDY). This is not a company I have looked at before because it seemed to be in a sector driven by construction activity which tends to be cyclical and in a fragmented market with few barriers to entry. This is probably why other listed companies in the sector such as HSS and VP are on low valuations (typically P/Es of less than 10). Speedy Hire is on a prospective P/E of 9.5 and a dividend yield of 4.2% according to Stockopedia.

So why was the company interesting? Firstly Speedy Hire seems to be somewhat of a turnaround situation from dire 2016 results. The presenter, Chris Morgan, explained how the company has a new focus on improving the proportion of services in the revenue mix which have better margins and there is a new focus on SME customers which they consider a significant opportunity. They are also undertaking a “digital transformation” to reduce costs and improve service. That includes a new “app” that enables customers to order items whereas most orders are taken over the phone at present. This is currently in essence a very labour intensive business – for example they have over 50 people on credit control alone.

There are clearly opportunities to improve efficiencies in the business by investing in technology which small local hire companies would be unable to match. There is also a focus on improving the return on capital employed (ROCE) which I always like to see – it’s now about 12.8% excluding the recent Lifterz acquisition so is moving in the right direction. On the 3rd October the company issued a positive trading statement with revenue up 6% and higher growth in the sectors focused upon mentioned above.

In summary a company that may be worth a closer look as management seem to be improving the business substantially.

After the Speedy Hire presentation I covered my book “Business Perspective Investing” (see https://www.roliscon.com/business-perspective-investing.html ) which explains the important things that you should look at when choosing companies in which to invest. It suggests ignoring the typical approach of looking for “cheap” shares based on low P/Es and high dividend yields but focusing on the business model and other attributes.

As Burford Capital (BUR) is a company in the news after the shorting attack by Muddy Waters, I chose to run through why I would never have invested in the company based on the check lists given in the book. In essence it fails too many of them, no doubt to the consternation of some in the audience who held the stock. Here are just some of the problems:

  1. High barriers to entry? None I am aware of – I suspect anyone could set up a litigation funding company given enough capital.
  2. Economies of scale? I doubt there are any as legal claims are labour intensive.
  3. Differentiated product/service? I am not clear that they differ much from other litigation funding businesses.
  4. Low capital required? Absolutely the contrary as they have to fund legal cases for years at enormous cost before they get any payback.
  5. Proprietary technology or IP? There is none.
  6. Smaller transactions? The opposite. Burford’s profits depend on a few large legal cases.
  7. Repeat business? I question whether there is any. Legal cases tend to be one-offs.
  8. Short term contracts? The opposite. The cases they take on can run for years.
  9. No major business risks obvious? Significant risks of losing major cases.
  10. Low debt? The contrary as they use debt to finance their legal cases.
  11. Appropriate corporate structure? Odd to say the least until recently with the CFO being the wife of the CEO and no executive directors on the board.
  12. UK or US domicile? No they are registered in Guernsey.
  13. Adhere to UK Corporate Governance Code? No.
  14. AGMs at convenient time and place? No, they are in Guernsey.
  15. No big legal disputes? Apart from participating in the legal actions they fund, they also have received a claim from their founder and former Chairman recently.
  16. Accounts prudent and consistent? Is recognition of the value of current legal claims prudent (upon which the reported profits rely) and the accounts conservative? It’s very difficult to determine from the published information but I have serious doubts about them.
  17. Do profits turn into cash? Not in the short term. They are effectively recognising what they consider to be the likely chance of success in current profits. But winning legal claims is always in essence uncertain. I have been involved in several big cases and your lawyer always tells you that you have a very good chance of winning as they wish to collect their fees, but even if you win collecting any award can be uncertain.

I could go on further but the above negatives are sufficient to rule it out as a “high quality” business so far as I am concerned. That’s ignoring the allegations of Muddy Waters and the counter allegations by Burford of share price manipulation (i.e. market abuse).

Treatt (TET) issued a trading statement today (4th October). This is a company that specialises in natural ingredients for the flavour and fragrance markets, particularly in the beverage sector. I hold a few shares in it.

The statement says that there has been “a significant fall in certain key citrus raw material prices…..”. This is impacting revenue growth although they have been diversifying into other product areas. Profit before tax and exceptional items is still expected to be in line with expectations – which was for a fall in EPS for 2019 based on consensus broker forecasts.

Now when a company says its input prices are coming down by more than 50% as in this case, you would expect the company to be making bumper profits as a result. But clearly this is not so. It would seem that their customers expect to pay less which suggests this is a “commodity price” driven business where competitors track the prices of the raw material downwards.

This might be a well-managed business in a growth sector for natural ingredients but there may well be low barriers to entry and an undifferentiated product in essence. So it may well fail the checklists in my book.

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

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Burford, ShareSoc Seminar, Woodford Patient Capital and Patisserie

Burford Capital (BUR) have published a report by Professor Joshua Mitts over the alleged manipulation of their share price in early August, i.e. market abuse by “spoofing” and “layering”. It links it to the shorting attack by Muddy Waters and is fairly convincing.

They have also published a “witness statement” for an application in the High Court for disclosure of trading information from the London Stock Exchange so as to identify who was trading. In it they also appear to be suggesting that there may have been some “naked” short selling taking place, i.e. sales not covered by borrowed stock which they indicate is illegal under EU Short Selling Regulation 2012.

My opinion on the merits of Burford as an investment or who is going come out smelling of roses in this battle are unchanged – it could be neither. Incidentally I will be discussing the merits of Burford as an investment at some length in my presentation on my book “Business Perspective Investing” at the ShareSoc Birmingham Seminar tomorrow evening (Tuesday) – see https://tinyurl.com/yxryk2h2 . It’s not too late to register and it should be an interesting discussion.

Woodford Patient Capital (WPCT) issued their interim results this morning. Net asset value per share was down 26% on the previous year end. The share price removed unmoved but it was already at a discount of nearly 40% to the Net Asset Value and more write-downs in their portfolio have been made since the half year end. The discount is quite extreme for any investment trust. There have been more board changes and there is a lengthy article in the Financial Times this morning on the pressure faced by Neil Woodford to quit managing the trust. The article suggests the board has lost confidence in Mr Woodford and is courting other asset managers – but who would want to take it on?

I happened to visit a Patisserie Valerie café in York during my Northern vacation last week. Now under new management of course. But the service was absolutely dire, prices were high and there were few customers there when other cafes in the town were busy. One customer walked out because of the slow service. Looks like the new management have taken on a problem.

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

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Burford, Channel Island Registrations and Brexit

Firstly lets talk about Burford Capital (BUR). Tom Winnifrith, who has been complaining about the accounts and other issues at that company for a long time, sent a letter of complaint to the FCA and FRC (the Financial Reporting Council) asking them to investigate the allegations of Muddy Waters. The FRC have responded with this comment: “Burford Capital is incorporated under the Companies (Guernsey) Law 2008 and is accordingly not subject to the requirements of the Companies Act 2006”. They also said that the shares are traded on AIM which is not a regulated market. The FRC’s Corporate Reporting Review Team therefore does not have powers to make enquiries about the matters raised.

In summary, although the FCA and the FRC have some powers relating to the company’s directors and its auditor, Mr Winnifrith will have to complain to the Guernsey Financial Services Commission who are the regulatory authority.

As I said in my recently published book, company domicile does matter and is definitely worth checking before investing in a company. I specifically said: “In general for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [see Chapter 7]”. So that’s yet another reason why I would not have invested in Burford, apart from my doubts about the prudence of their accounting.

Brexit

At the risk of offending half (approximately) of my readers, here are a few comments on the latest political situation and the prorogation of Parliament. Speaker John Bercow has said that “shutting down parliament would be an offence against the democratic process and the rights of parliamentarians….” while there was an editorial in the Financial Times today that said “it was an affront to democracy” and that Mr Johnson had “detonated a bomb under the constitutional apparatus of the United Kingdom”. But I tend to side with Leader of the House Jacob Rees-Mogg who called it “completely constitutional and proper”. Suspension after a near record long parliamentary session to allow the Government to put forward its programme in a new Queen’s Speech is entirely appropriate and not unusual. There is also time before the suspension, and after, for Parliament to debate whatever they want before Brexit date on October 31st. Also Parliament is often closed down in September for the party conferences so this is not unusual.

It’s simply a case of sour grapes from remainers who realise they may not be able to stop Brexit or cause further trouble in resolving the impasse in Parliament. John Bercow is particularly to be criticised because he is supposed to be independent and should not be making such comments on a well-established procedure supported by precedent.

Parliament has been debating Brexit for many months and it is time to draw such debates to a conclusion because it gives the false hope to the EU that the UK will change its mind over leaving. The UK voted to leave and we should get on it with, preferably with some kind of Withdrawal Agreement, or otherwise none. Business is damaged by the on-going uncertainty which is why the pound has been falling. Boris Johnson is simply forcing the pace which is quite right.

If the opposition parties or remainers in the Conservative party do not like what is happening they can call for a vote of no confidence. It that was passed then a general election would no doubt be called, which the Conservatives might actually win, or the election might take place after the Brexit date which would put the remainers in a very difficult position. That is why they are so clamorous. They simply don’t like the position they find themselves in which has actually been caused by those in Parliament who have wanted to debate the matter endlessly without coming to a conclusion.

There are some possible legal challenges but should, or will, the judiciary interfere in what is happening in Parliament? I don’t think they should and I doubt they will. Are Scottish judges, where one challenge is being heard, really going to attempt to rule on a matter of UK wide importance? This seems unlikely in the extreme.

In summary, I think everyone should calm down and let the matter take its course. Those who are not happy with the turn of events can challenge it in Parliament via their elected representatives if they wish. But Brexit needs to be resolved on Oct 31st, one way or another. Not delayed yet again. There are so many other issues that Parliament needs to deal with that more debate on the matter is simply unacceptable.

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

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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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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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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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