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Analyst 1: You had just mentioned that you didn’t like the response that the management team gave to the Muddy Waters report. I reread it a few months ago and I thought, given the time constraints, the fact that it involved the CEO’s wife and all that sort of stuff, that they did a pretty good job in a very limited timeframe. I was just wondering, what in particular jumped out to you that you didn’t like about the response?
Analyst 2: I think the response was quick and comprehensive, as you state. They answered most allegations comprehensively. I had three main questions and I don’t even recall them in detail. I’m happy to share a letter that I sent them. Basically, I told myself, if they respond to these three questions, I’ll stay and if they don’t respond to these three questions, then I’ll leave. They didn’t answer them in a two to three month period post the scandal, so I moved on.
To answer your question more directly, I found the tone quite aggressive in the response and I did not like that.
Analyst 1: You found the tone in response to you aggressive?
Analyst 2: Yes; to my letter. They basically said, thank you for the questions; we’ll try to come back when we communicate with the world. But I did not like how they responded to Muddy. It was defensive and it was almost aggressive.
Analyst 1: It’s the old thing where, if you attack the short sellers, that is the biggest red flag there is.
Analyst 2: Yes. As I said, I haven’t followed it closely so if I make factual mistakes, please correct me, but what I really did not like was, there was the scandal, the stock has fallen and they are saying they might be buying back stock, that they are so convinced that they are buying it themselves. These guys sold a third of their shares – I think £90 million – in that year. Then the scandal hit; they say they are bullish and get involved and one guy buys a couple of hundred thousand. I think Bogart and Molot bought single digit millions and I thought, are you kidding me? That is your conviction?
I checked two months ago and they had not materially increased their holdings and they didn’t repurchase shares. Why is that, if you are so convinced?
Analyst 3: The beauty – or lack thereof – is in the eye of the beholder a little bit. I was not involved, personally. We had a number of really thoughtful partners that were, at the time. Obviously, having a thousand underlying holdings, as an allocator, you see these types of things a lot. In my experience, there are generally one of two directions that management teams will take. They either become more transparent or less transparent. That was always the lens that I looked through. Granted, I had a little bit of an unfair advantage in that I had known Chris for several years and I had known his wife for a few years and I knew that she was extremely competent. If you looked, on paper – particularly on the financing side – at the things that she had done for Burford, that talked to me about why she qualified for the job.
Besides that, I feel as if you actually look at their responses to Muddy Waters, they went over and above to be transparent. For example, literally putting out an investment table with every line item of an investment. They absolutely do not have to do that.
Analyst 2: That was there before. If I can hop in, another example is the disclosure of pay; their compensation was not disclosed. I suppose they have to do it, now that they are listed in the US, but they did not disclose in the years before and I think there is a reason for that.
Analyst 3: I also came from a world where we paid people way more than the Burford CEO got paid and we were an LP, so that wasn’t really a big deal to me, to be honest. I knew what the aggregate figure was and how they divvied it up between their team; it was kind of up to John and Chris. We had funds that were paying much more than that. I think it was more about finding something to create a narrative around. My general experience – and this is high level, so take it with a grain of salt – is that when you are looking at a public company, you can generally come up with a short narrative because there is incomplete information. The question is, are you going to trust the short seller with incomplete information, pulling together a mosaic theory of, sometimes, very compelling, intellectual and negative information; usually the negative is satisfying, but wrong and, usually, the optimist is not intellectually appealing, but correct.
I think it came down to, do I think they are trying to be more transparent in answering these questions and do you trust the people? Also, there were things that were not talked about as to why the stocks fell so much. I think that part of that was they were priced for executing well. To be fair, looking forward to today, they have executed well. If we go forward another three to five years, they were priced just fine. It’s not as if they were cheap and they fell 70%.
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