By Steve Goldstein, MarketWatch
The holdings of embattled U.K. fund manager Neil Woodford are being targeted by short sellers, the head of Muddy Waters Research said Thursday after disclosing a short position that drove the company’s market value down by over half.
Carson Block, the founder of Muddy Waters, was interviewed on the BBC’s Today program about his decision to go after Burford Capital /zigman2/quotes/221976524/delayed UK:BUR +0.46% , a litigation finance firm.
Burford shares fell another 3% on Thursday, taking losses since the Muddy Waters short was announced to about 60%.
“Well, for your listeners who might not know this, I’ll let them in on a secret—short sellers do definitely look for where Neil Woodford is invested, especially when he’s invested outside of large-cap value,” Block said. “He’s got a great track record in large-cap value, he does not have a great track record in life science and some of these smaller-cap stocks.
“So there’s always the temptation to go looking at where he’s been invested,” Block said.
Woodford’s flagship investment fund has been halted after a wave of redemptions. U.K. financial advisory firm Hargreaves Lansdown /zigman2/quotes/201025857/delayed UK:HL +1.70% on Thursday said CEO Chris Hill and CFO Philip Johnson won’t take a bonus after recommending the fund to its investors.
But Block said the ties to Woodford—Woodford Investment Management was Burford’s second-largest investor—wasn’t the reason it was targeted.
“I can’t remember the first time we heard of Burford and why it was brought up. But it’s a stock that has attracted the attention of smart-money investors for a while, saying, ‘Yeah this seems too good to be true, there are a lot of red flags.’”
Block said it was only recently that he felt comfortable to go beyond saying there were many red flags to “there’s almost certainly something bad going on, we can actually prove it.”
Block also defended his attack on the company’s accounting when EY signed off on their accounts.
“Companies almost always, when responding to an activist short seller or criticism from a financial journalist, fall back on, they use that halo of a Big Four prestigious [firm] blessed the accounts. No, that’s actually not how it works,” he said. “It’s not the auditors who prepare the financial statements, it’s actually company management who prepare the financial statements. So particularly in this case, management has a lot of latitude in building models without auditor second-guessing.”
Burford said Muddy Waters’ criticism of its accounting is without merit and that its chief executive and chief investment officer will buy the company’s stock for their personal accounts once a detailed response is published.