Part Two - The attack

How a single tweet crashed a stock market wonder

In August 2019 a stock market wonder crashed following just a single tweet. The valuation of the company, Burford Capital, has never recovered to its previous levels following the attack by activist short selling hedge fund Muddy Waters.This article is the second in a trilogy exploring that attack. Through new narrative and network maps, readers will be taken through a visual journey of what happened. They will see what a ‘narrative entanglement’ looks like and gain an understanding of why they and information networks are so important, both to communications experts and reputation managers, but also to all brand strategists.

Narrative entanglements & information networks

At first glance the attack on Burford was one dimensional. It appeared simply to follow the activist short selling playbook. This prescribes the public questioning of a company’s accounting practices, its governance and its valuation to stimulate a correction in its share price by exposing ‘true value’ to the market.But the Muddy Waters campaign included two further dimensions which this article will reveal and explore.

It is these dimensions that make this campaign such an important lesson for brand strategists, corporate communications teams and reputation management experts operating in all areas of business.

Dimension One: Creating a narrative entanglement

Muddy Waters linked ‘idiosyncratic’ narratives - those which were a direct product of Burford and its growth story - with embedded or ‘supporting’ narratives - famous scandals that provided ‘shorthand’ descriptions to give the attack historical precedent and perceived significance.These links created a network of narratives that surrounded and ‘entangled’ the company, limited its ability to respond effectively and guided almost all of the future media debate.

Idiosyncratic narrative 1: The ‘wonder stock’ - inverting a success story

Muddy Waters described Burford as “the biggest stock promotion on AIM”.The previous article explored the effect of recurring media themes on the company’s growth ‘narrative’. These included the repeated coverage of inappropriate IRR metrics and the focus on single large investment cases. It showed, firstly, that whilst these themes helped drive the Burford success story and its share price they also embedded vulnerabilities within it and, secondly, that a communications strategy should and could have identified their presence and the narrative vulnerabilities they presented.

Figure 1: Narrative vulnerabilities in Burford’s share price and profitability (idiosyncratic narrative 1)

It was these same recurring themes that Muddy Waters highlighted so successfully to raise doubt about the company’s valuation, its profitability and even the viability of its business model. This actually ‘inverted’ Burford’s share price success story to reveal powerful narrative vulnerabilities. These were then ‘supported’ by invoking famous scandals to add context and contagion to the attack. One of these scandals occurred 19 years ago. Another was just peaking in the summer of 2019.

Supporting narrative 1: Enron - increasing contagion and perceived significance

Muddy Waters’ letter invoked the Enron scandal to support its interpretation of Burford’s accounting methods. This increased the penetration and spread of those core attacks in media. It also gave them a perceived ‘narrative heritage’ or ‘precedent’.This is because Enron is a household story. It contains an established narrative that still serves as a shorthand description for fraud conducted knowingly, at scale and with a high level of complexity. The Enron narrative unfolded nearly two decades ago but invoking it immediately transported anyone reading the letter (including the media) to that story, and it framed how people interpreted Muddy Waters’ claims around Burford’s accounting. It is a well-paved ‘memory highway’ to a whole event - to a whole narrative.

Figure 2: Invoking Enron as supporting narrative (supporting narrative 1)

Idiosyncratic narrative 2: Corporate connections and investors

Muddy Waters drew specific attention to Burford’s relationship with two of its key investors. Specifically, their attack suggested links between one of these and the success of a single large investment case.This connected narrative vulnerabilities in Burford’s growth story - ‘unrealised gains’ and single large investment cases - to the company’s corporate connections and investors. To raise contagion and add a narrative support, it then tied these connections to a major scandal that was dominating financial and investor media.At the time of the attack, two of Burford’s largest shareholders were funds run by Woodford Investment Management Ltd and Invesco Asset Management Ltd.Muddy Waters claimed that a fund run by Invesco’s Mark Barnett helped a US biotech company, Napo Pharmaceuticals, to repay money owed to Burford from a legal case. The Muddy Waters letter ⁱ described this as a “bailout”, without which the case - a significant contributor to net revenue booked by Burford - would have been loss-making. ⁱ

Figure 3: Linking key investors to narrative vulnerability ‘single large cases’ (idiosyncratic narrative 2)

This again highlighted the importance of single large cases in order to question the viability of Burford’s business model. But it simultaneously questioned the role the company’s investors played in these cases and, just as importantly, highlighted potentially problematic corporate connections.By specifically targeting the role played by Invesco and Mark Barnett, Muddy Waters also drew attention to a man who had initially invested in the company during its 2009 IPO when he himself worked at Invesco. This man was Neil Woodford.

Supporting narrative 2: The Woodford Scandal

Neil Woodford was undergoing his own scandal and liquidity crisis in the summer of 2019. Even before this scandal he was a household name in investing. But this changed when a significant liquidity mismatch emerged between what his firm invested in and the redemption terms that were granted to investors. This caused a public scandal that fuelled media interest for months and placed the asset management industry itself under scrutiny.Muddy Waters’ attack was launched at almost the optimum point in time to coincide with an exponential increase in media interest around Woodford.

Figure 4: Invoking the Woodford Scandal as supporting narrative: Muddy Waters’ attack was launched at almost the optimum point in time to coincide with an exponential increase in media interest around Woodford. (supporting narrative 2)

It linked Burford to the investment manager not just through financial connections, but by using the very potent and contagious narrative that was unfolding around it - a narrative of deception, opacity, complexity and risk to normal peoples’ savings. Even Burford itself suggested Woodford’s name had been included in the letter “for headline value”. ⁱ

Idiosyncratic narrative 3: Corporate governance - The CEO’s wife and board tenure

Muddy Waters described Burford’s governance structures as “laughter inducing” ⁱ . To justify this claim it made several key observations.It highlighted that the finance director at the time was married to the chief executive. This, the report said, was “unforgivable” at a company that records non-cash accounting profits and that “the very least the company could do is have an independent CFO.” It also observed that from 2010 to 2019 Burford had changed its finance chief four times. Furthermore, the attack claimed that, because its directors had sat on its board for around ten years, they were no longer independent under the UK corporate governance code.

Figure 5: Corporate governance connected to the CEO’s wife and the tenure of the board (idiosyncratic narrative 3)

Supporting Narrative 3: ‘appropriateness of AIM listing’

The attack also drew attention to Burford’s listing on the London Stock Exchange junior Alternative Investment Market (AIM) index. The company’s market capitalisation was large compared to its AIM peers, and the attack described it as a midcap firm. It questioned whether the company’s disclosure requirements were lighter than they would have been for the main market.This small reference raked up embedded negative commentary about ‘light touch’ regulation on AIM said to help the junior market attract pioneers and entrepreneurs from around the world without burdening them with costly red tape. This had led to the market being likened to the financial ‘wild west’ ⁱ .It was a reputational link that Burford could have done without, and the narrative effectively raised the contagion and perceived implications of the attack’s claims around corporate governance.

Figure 5: The company’s market capitalisation was large compared to its AIM peers, and the attack described it as a midcap firm. It questioned whether the company’s disclosure requirements were lighter than they would have been for the main market. (Supporting narrative 3)

Burford’s narrative entanglement

When combined, these idiosyncratic and supporting narratives were devastating. Their newsworthiness, coordination, depth and variety placed Burford in a narrative ‘entanglement’.

Figure 6: Mapping narrative networks - understanding Burford’s narrative entanglement

Dimension Two: A modern use of information networks

‘Priming’

Muddy Waters demonstrated a modern understanding how information networks behave. On august 6th 2019, the day before their attack was launched formally on twitter, they ‘primed’ their social media network to receive new information with a clear signal.

On 7th August the key tweet launched the attack fully, activating the narrative entanglement and levering the hedge fund’s significant social media network reach.

‘Pulsing’

Muddy Waters then raised the impact of the attack still further. In the hours and days after the initial attack they ‘pulsed’ slightly different messages through different media channels sequentially, all supported by the narrative entanglement they had created. These ‘pulses’ kept the attack fresh for three reasons:

Static network ‘potential’

Muddy Waters recognised the enormous value of developed social media assets. Its twitter account functioned at a distribution capacity comparable to a fully fledged specialist financial newspaper. Its static network alone was over double the size of London daily paper City A.M., three times that of Financial News and over six times larger than FT Adviser or Citywire.

Figure 7: Static network ‘potential’: Muddy Waters’ twitter account functioned at a distribution capacity comparable to a fully fledged specialist financial newspaper.

The hedge fund’s social media relationships with the journalists and publications most valued by Burford’s key shareholders were also strong.

Figure 8: Mapping the attacks instant reach to publications and journalists valued by Burford’s key shareholders.

Muddy Waters’ initial content was instantaneously received by 18 of those 63 titles or commentators, and they would subsequently reach more.

Figure 8 (continued)

Burford’s underdeveloped social media assets did not intersect with investor-valued journalists or titles at all.

Figure 9: The result of Burford’s undeveloped social media assets: no intersections with investor-valued journalists or titles at all

Network depth and maturity

The investment community orbiting Burford was highly interconnected. That network also had significant overlap with Muddy Waters. This allowed information to spread rapidly and organically between those investors and their wider connections. The neglect of Burford’s social media network development meant there was very minimal overlap between the company, their investors and the wider investment community.

Reflections

Burford’s media team or advisers displayed neither awareness nor the presence of a strategy built upon adequate analysis, and were thus forced into a communications ‘checkmate’ by a narrative entanglement.Their attacker also understood how information flows in the modern media environment, how networks behave and the different characteristics of various media channels. They fully appreciated the importance of developed, high quality social media assets and used them to their potential.

Next time...

The next and final story will reveal the effects of this attack, the inadequacies of legacy communications practices in the face of modern communications campaigns, and the constraints it placed on Burford’s ability to respond.

• Read Part Three: The Communications ‘Checkmate’