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UK's Burford Capital under fire from US hedge fund over accounting practices

U.K.-based Burford Capital Ltd.'s share price tumbled after its accounting practices came under fire in a report published by U.S. hedge fund Muddy Waters, LLC.

Burford, a litigation finance firm, said it intends to "thoroughly" review the report — which it deemed a "short-attack document" — and respond to it as soon as possible.

The hedge fund's report accused Burford of misleading investors with the metrics it reports and criticized the accounting it uses to value litigation cases, the Financial Times reported.

Burford Capital, listed on the London Stock Exchange's AIM market, is the second-largest holding in Woodford Investment Management Ltd.'s Equity Income Fund, which was suspended in June. Neil Woodford has backed Burford since it launched an IPO in 2009 when he still worked at Invesco, according to the FT.

Muddy Waters is the latest observer to shed doubt on Burford's accounting, the FT said. Previously, some analysts had said a large slice of its revenues come from writing up the value of disputed court cases that have yet to conclude.

Burford responded to Muddy Waters' report in a statement Aug. 7, saying the report's critique had no merit and that its accounting was in line with the International Financial Reporting Standards used throughout the industry. It said it has had "clean audit opinions" from Ernst & Young every year since 2010 and that it provides cash-based investment reporting in "extraordinary detail."

Burford's share price tumbled 46% on Aug. 7, having fallen by nearly 20% on Aug. 6 after a tweet from Muddy Waters saying it would announce a new short position, the FT said.

Burford said the price movement did not result from any operational or corporate reasons.

"There is a clear line between appropriate commentary and market manipulation," the company said in a statement cited by the FT. It said it is investigating and intends to pursue "appropriate legal action" if it finds "actionable misconduct."

"Burford, like the most speculative stocks in Hong Kong, attracts gamblers with little faith in the companies' long-term prospects, and that's why stock drops on non-specific tweets," Muddy Waters founder Carson Block told the newspaper.