Burford Response and Shorting Regulation

Burford Capital (BUR) have issued a response to the allegations of false accounting from Muddy Waters. It goes into some detail and appears to at least contradict some of the allegations, if not all. It could take some weeks to analyse and verify who is correct but it leaves outstanding the basic issue of whether the accounting treatment of on-going law suits is prudent. My view is not simply because the outcome of any law suit is basically uncertain. Even if the case is won, there is no certainty that the litigants will get paid.

But there is one law suit that looks fairly certain to proceed. US lawyers Rosen Law Firm are already lining up folks to join a class action over the matter against Burford Capital Ltd. See https://www.rosenlegal.com/cases-register-1647.html . More background information is available here: https://tinyurl.com/yxvnc3yj .

Burford are also threatening legal action against Muddy Waters. So it looks like another lawyers’ beanfeast.

As one commentator said, those aiming to profit from shorting a stock tend to throw all kinds of mud at their target in the hope that some of it sticks. The target company is often unable to respond quickly and the issues are often so complex (as in the Burford case), that investors don’t know who to believe. So the damage is done, the share price collapses and the shorter makes an immediate handsome profit. Is this morally sound? I think not.

As I said in a previous blog post, “it is surely wrong for anyone to make such allegations and publicize them with the objective of making money from shorting the stock without first asking the company concerned to verify that what they are alleging is true – at least as far as the facts they report are concerned rather than just their opinions”. Muddy Waters did not apparently do that in this case and most shorters do not.

As someone who writes frequently on companies, it is good journalistic practice to verify with the company what you are about to publish. It is so easy to make simple factual errors or misinterpret the facts. There is nothing wrong per se in shorting as it can help to ensure that stock valuations are fair and reasonable and maintain liquidity. Most shorters do not publicise what they are doing.

Paul Scott of Stockopedia did a good analysis of the allegations and counter allegations at Burford. This is what he also said: “My feeling is that short sellers should be required to submit such a dossier to the target company, and give them say 7-days to respond privately. This would allow companies to point out the mistakes in the draft report. It does appear that the MW report might have misinterpreted some of the cases it comments on. Or at least, Burford seems to have provided reasonable explanations in most cases”. But Paul was also critical of their accounting policies and reliance on a few big cases.

I agree with him that such a regulation would be a good idea. It would stop a lot of wild and inaccurate allegations being published and at least give the target company the opportunity to issue a quick rebuttal if the allegations were still published.

The difficulty might be in framing such a regulation to cover those publishing a critique on a company at the same time as shorting the stock while excluding general market commentary and company analysis. But it would not seem impossible to do so.

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

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Hate Crime, Fake News and Market Abuse

Yesterday saw a lot of media coverage after the Crown Prosecution Service announced that online offences of “hate crime” would in future be treated as seriously as offline offences. This is in response to the rising volume of such abuse on social media.

What is a “hate crime”? In summary, it is abuse based on race, ethnicity, religion, disability, sexual orientation or gender identity. Why just those categories? Don’t ask me – I am looking forward to abuse of baldies and fatties being made hate crimes. But this is just one aspect of the problems created by social media where anonymous posters can attack anyone whose views they do not like. Anyone in public life now regularly suffers the most vile comments from people who do not like their opinions – just ask any Member of Parliament who can tell you about it. Indeed, I have suffered from it myself.

Sometimes they do this because they know they can hide behind an anonymous google or hotmail account on the net, or by using a fictitious name. But even when it is clear who they are, there is little legal or social pressure to inhibit them. Indeed a new word has been invented to cover such behaviour – internet “troll”, which Wikipedia defines “as a person who sows discord on the Internet by starting quarrels or upsetting people, by posting inflammatory, extraneous, or off-topic messages in an online community (such as a newsgroup, forum, chat room, or blog) with the intent of provoking readers into an emotional response or of otherwise disrupting normal, on-topic discussion, often for the troll’s amusement.”

In extremis this can degenerate into “harassment” which is now a criminal offence in the UK, in addition to being subject to civil claims. For example, repetition of false allegations that cause alarm or distress is harassment. Again this is so much easier to propagate on the internet and in social media. Indeed one problem is that it can be going on without the victim being aware of it because there are now so many different platforms on which it can appear that even monitoring for it is not easy.

Another very topical subject which is linked to the above is that of “fake news” which allegedly had an impact on the US Presidential election and the Brexit vote in the UK. In effect, social media can be used maliciously to distribute false information with the intention of changing public opinion.

This can also be seen in financial markets where fake news can be used to affect share prices. Just create a rumour about a takeover bid on social media and the share price of a company will take off before the company can even deny it. Profits can be made from such behaviour, and even if the company denies it they may not be believed. Now simple cases like this are undoubtedly offences under the Financial Services and Markets Act but there are very few convictions for it. Social media have become impossible to police by the authorities in practice.

A Commons Select Committee was inquiring into fake news before the General Election caused the inquiry to be abandoned (along with all other business in Parliament). See https://www.parliament.uk/business/committees/committees-a-z/commons-select/culture-media-and-sport-committee/inquiries/parliament-2015/inquiry2/ . No report will be produced, but there was a substantial number of submissions to the inquiry. One that is particularly worth reading as it covers the abuses of financial commentators is present here: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/culture-media-and-sport-committee/fake-news/written/48219.html

For example, it says: “Short selling and market abuse – FN (Fake News) is a short sellers dream.  Before the advent of online FN short sellers had to rely on word of mouth rumour and the occasional share tipster. Today the magnification possible wields instant and widespread damage.”

Note that I see no problem with short selling so long as it is not “naked” and where the seller has a genuinely held view on the financial prospects of a company. But the ability to affect market activity by issuing slanted news commentary from the market operator is surely dubious.

Bloggers and other “financial journalists” who comment on companies are often not regulated by the FCA, can operate behind anonymous front operations or from foreign jurisdictions that are not subject to UK libel laws. In any case UK libel laws are ineffective in tackling the abuses that can be propagated as the aforementioned article explains.

Such writers and their publishers actually have a financial motive sometimes to generate the most debate by making the most outrageous claims because this will generate more hits and links to their web site. That helps to sell advertising on the site, to attract more visitors, which generates more publicity and so the circle continues.

Regrettably the law is only slowly catching up with the problems created by social media. A story put on social media can get around the world several times in a few hours, while any legal action can take months.

These problems created by “fake news”, or simply somewhat inaccurate news, might be helped if there was some way to get the news corrected. But try asking Google to remove a false story or outrageous claim. They are unlikely to do so. They even resisted strongly the EU demand to support the “right to be forgotten” about the past history of individuals (even when palpably false) and even as implemented it is of limited use.

Now the defenders of this new world argue that it is necessary to avoid regulation so as to preserve free speech. But we have surely reached the point where fuller consideration of these issues needs to be undertaken. At present, the risk of abusive attacks is likely to inhibit people getting involved in public life so free speech and democracy will be undermined rather than protected.

These are undoubtedly complex issues, difficult to cover in a short article, let alone suggest some solutions. But what do readers think, without getting into a debate on the merits of short selling?

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

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