7/8/2019 Burford Capital stock price illustration.
The attack by US short-seller Muddy Waters caused Burford Capital's shares to plunge © Charlie Bibby/FT

The UK litigation financing firm at the centre of a devastating attack from a hedge fund started out as a hobby for its Canadian chief executive Christopher Bogart.

Over dinner with a friend from law school, who was frustrated trying to tally his need to be paid by the hour with his clients’ demands for contingent fee deals, Mr Bogart conceived a new company to fund legal cases.

A decade after Burford Capital floated on Aim, with a value of £80m in 2009, it had become one of the most remarkable successes of the London junior stock exchange, worth more than £3bn last week.

That all changed with the publication of a damning report by Carson Block’s Muddy Waters on Wednesday, which sent Burford’s share price crashing by almost half.

The document raised questions about Burford’s accounting practices and governance, including the relationship between Mr Bogart and his wife, who is the company’s chief financial officer, and could cast a shadow over the litigation funding industry if its most prominent player fails to win back investor support.

Mr Bogart admitted on Friday that the report had led to sleepless nights. “It has certainly taken over my life,” he said.

The chief executive started out at white-shoe law firm Cravath, Swaine & Moore before launching Burford with Jonathan Molot, then a law professor at Georgetown University.

“There was a perfect storm,” Mr Bogart recounted. “The pressure from the financial crisis led companies to dramatically increase their demands for alternative economic arrangements on law firms, leading to a funding vacuum that we set out to fill.”

Mr Bogart and Mr Molot, who is now chief investment officer, listed Burford in its first year to rapidly raise capital, naming the venture after the medieval Oxfordshire town where one of its early executives, Selvyn Seidel, owned a property.

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The company rode a litigation boom after the financial crisis and its success sparked the launch of similar companies. “Burford didn’t create litigation funding but it put it on the map,” said one former member of staff.

Mr Bogart and Mr Molot each made more than £60m last year when they disposed of a third of their shares in Burford — the first time either had sold a single stock. Mr Bogart talked at the time of his “reluctance” to do so “given our enthusiasm for the future of the business”.

The company, meanwhile, made profit after tax last year of £272m and has amassed a war chest of assets totalling $2.5bn. Most of the money will be channelled into corporate lawsuits, with the aim of making a high return in exchange for shouldering the risk.

Funding lawsuits can be high-stakes, generating three or four times the investment if the case succeeds, but resulting in a total loss and heavy costs if it does not.

“They were very astute taking on good cases in the early days, these are not fly-by-night guys,” said one rival funder.

Burford’s most feted success has been the financing of a landmark claim by Petersen, a Spanish conglomerate. Burford stumped up $18m to finance its claim against Argentina stemming from the renationalisation of an oil company. While the case is ongoing Burford has already raked in $236m selling on the potential future payout to third parties.

Its large investments in cases have included some embarrassments, however. A $4m investment in a controversial pollution lawsuit against Chevron in Ecuador in 2010 backfired when the lawyers Burford supported were accused of committing fraud. Its biggest financial hit came when it lost about $11m backing a failed arbitration against Pakistan.

Burford has expanded beyond corporate disputes as competition has increased. In 2016 it backed Tatiana Akhmedova in her divorce from Russian oligarch Farhad Akhmedov, which resulted in a £453m settlement, the UK’s largest divorce payout.

Its links to some other high-profile individuals have also put Burford in the spotlight.

Stricken investor Neil Woodford was the cornerstone investor in Burford’s IPO and the company remains the second largest holding in his suspended equity income fund.

“Whenever Chris [Bogart] was in England he would visit all of the investors and travel up to Oxford to see Neil,” said an ex-employee.

Despite the rapid rise in its valuation, Burford has remained small, employing just 100 people. It has maintained a governance structure out of kilter with its stock market weight, a chasm that attracted the attention of Muddy Waters.

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The report said it was “laughter-inducing” that Elizabeth O’Connell, chief financial officer since December 2017, is married to Mr Bogart. The pair have been married for 27 years.

“It wasn’t commonly known in the market that the CEO and CFO were married, but it was disclosed and it wasn’t a secret,” said a former staff member.

The US hedge fund also flagged other governance risks. Burford’s four non-executive directors, who include Peter Middleton, the 85-year-old City grandee and former chairman of Barclays, have each served on its board for 10 years, meaning their independence could be compromised according to the UK corporate governance code.

Attention has also been drawn to Burford’s unusual structure that means none of the management team sit on its board, resulting in no transparency on the salaries of any of its executives.

Last year’s share sell-off by Mr Bogart and Mr Molot was also a focal point for some of the attention on Burford this week. But rivals played down its significance. “I think the rest of the industry was surprised it took that long,” said an executive at another litigation fund.

The two co-founders now own about 4 per cent each of Burford’s shares, having purchased just under 500,000 more between them on Thursday, worth a combined £3.1m, in a show of resilience after the Muddy Waters report.

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