Oligarch’s Yacht Leaves Questions About Burford in its Wake

(Bloomberg) -- A $490 million yacht at the center of London’s largest divorce doesn’t jump out from the sea of financial figures produced by Burford Capital Ltd. but it can illustrate why the embattled litigation funder’s accounting has become a key question for investors -- both long and short.

The 115-meter (380-foot) MV Luna has been holed up in a Dubai port as Russian oligarch Farkhad Akhmedov fights a U.K. court order that transfers it to his ex-wife. Behind the scenes, Burford has provided Tatiana Akhmedova with 18 million pounds ($21.8 million) in exchange for a potential share.

Now the company and the way it records the gains in cases such as the dispute over the nine-deck ship is under unprecedented scrutiny. Short-seller Muddy Waters published a 25-page report saying that Burford inflates its investment’s returns. Once an investor favorite, the shares nearly halved in value this week after rising 1,021% since listing in October 2009.

"What Burford brought to bear is a small revolution in the world of law -- outside capital for the first time being brought in to support cases," said Steven Cooklin, founder and CEO of rival funder Manolete Partners Plc. “It caught people’s imagination. It’s sexy but fraught with danger.”

Burford called Muddy Waters’ allegations “false and misleading.”

Short Attacks

Short attacks "are a fundamental menace to an orderly market,” the firm said, adding that it regularly needs more capital to fund its growth. Burford’s financial reporting and accounting, audited by EY, "is transparent, appropriate and has been consistent for many years."

Litigation is an "esoteric" asset class, Muddy Waters founder Carson Block said, arguing that Burford’s fair-value accounting policy of adjusting its returns in the middle of a legal case allowed the firm to overstate the potential gains. Burford said in its first half report that almost 50% of its income came from so-far unrealized gains.

While Burford stands out for its transparency because it’s a public company, the available information isn’t always helpful to investors, said Malcolm Stewart, who wrote a thesis on the accounting of litigation funding and worked in the industry since the late 1990s.

An early estimation of the prospects of a legal fight, he said, may not account for costs that are common by the time the case comes to trial.

“It’s completely subjective how you reach that conclusion,” he said.

‘Rollercoaster Ride’

And in the event of a defeat, a funder may also need to bear some of the costs of the other side. “It can be a rollercoaster ride," Stewart said. Manolete Partners’s Cooklin said that many of Burford’s cases run for years, in contrast to competitors.

"We don’t have a long history of those assets being marked up and then losing money on them,” Burford Chief Executive Officer Christopher Bogart said on a conference call Thursday.

Bogart and other executives tried to reassure investors this week. The shares have swung wildly; more than 1.1 billion pounds of market value was wiped out in the day after the report came out, though the stock has recovered slightly since then. On Friday, they traded just above 800 pence, less than half its 12-month high of 2,045 pence from last August.

Muddy Waters said that Burford has, counter to investor opinion, relied on a small number of cases to boost its returns. Burford had notable success in a case concerning the nationalization of Argentina’s oil producer YPF SA when the U.S. Supreme Court cleared the way for a shareholder lawsuit. A recent sale of part of the asset implied a $1 billion value for Burford’s original investment.

Two Helipads

Another case that stands out for its twists and turns is that of the Luna, once owned by Roman Abramovich, another Russian billionaire.

Burford provided Akhmedova with financing for a share of up to 30% of any results, according to Akhmedov’s spokesman. The yacht, which has 50 crew and two helipads, was impounded in Dubai and put into dry dock in an initial victory for Akhmedova and Burford. But Akhmedov persuaded the local courts to release the boat. His crew are aboard and she’s set to sail in the next few weeks, his spokesman said.

Muddy Waters used the example to express doubt on Burford’s accounting, saying that it was "absurd" to recognize a return so early in such a complex case. Burford said there was nothing unusual about accounting for a partial recovery. Asset recovery business is a small part of the overall portfolio, the firm said, and it doesn’t typically fund personal litigation.

Damage Claim

"All that was required here was the enforcement of a U.K. judgment," Jonathan Molot, Burford’s chief investment officer, said in reply to a fund manager who questioned Burford’s involvement in the litigation.

But the case may end being more expensive after Akhmedov announced plans to sue his ex-wife and the litigation funder for $200 million in damages suffered from the seizure of the yacht. A spokesman for Burford said in a separate statement that such claims are "par for the course in this type of situation." Akhmedov has to comply with the English court judgment, he said.

A spokesman for Akhmedova said the demand for damages was "misconceived."

“The fact that the Luna has not sailed from Dubai demonstrates that the various freezing orders that Ms. Akhmedova has obtained around the world have prevented its departure,” he said.

It’s not the first time a litigation funder has struggled after an adverse ruling. Juridica Investments Ltd., a once-listed litigation-financer based in Guernsey, halted new investments in 2015. The shares plunged that year following a U.S. Supreme Court ruling that required Juridica to write down assets by $30 million. The company -- founded by American attorney Richard Fields and chaired by an English lord -- focused on U.S. litigation and used fair-value accounting.

Rivals

The Muddy Waters allegations have also seen Burford’s rivals seek to distance themselves. IMF Bentham Ltd., which is backed by Paul Singer’s Elliott Management, was quick to say it used different accounting methods. Manolete’s Cooklin, which counts George Soros as a shareholder, questioned why Burford wasn’t already self financing.

Litigation finance has often attracted risk-takers, said Stewart, an accountant who brought some of the earliest class-action claims in Europe.

“Naturally lawyers are risk averse, there are only a few who are risk seekers,” he said. “If you’re that type of guy, you can see why why it has that type of attraction.”

--With assistance from Lisa Pham.

To contact the reporters on this story: Jonathan Browning in London at jbrowning9@bloomberg.net;Thomas Beardsworth in London at tbeardsworth@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Christopher Elser, Vivianne Rodrigues

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