The Secret Broker: How to make £1.6 billion disappear in a day
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I was up the other night, checking on the UK’s afternoon gold price fix, when my Blackberry (I know, old broking habits die hard) lit up with a tweet.
Understandably, a lot of you don’t follow Twitter, but once in a blue moon, something useful actually comes through.
This tweet was by @muddywatersre, who are not an old Flower Power hippie band from the Mary Jane 70s but a renowned shorter of internationally listed shares.
It stated that in eight hours’ time, Muddy Waters Research – the owner of the Twitter account – would release a report on a UK listed company it had just built up a short on.
Muddy Waters is now in a blackout period until tomorrow 8 am London time when we will announce a new short position on an accounting fiasco that’s potentially insolvent and possibly facing a liquidity crunch. Investors are bulled up about this company. We’re not.
— MuddyWatersResearch (@muddywatersre) August 6, 2019
Now, this sent traders in the UK on a bit of a frenzy and instantly, over five stocks were marked down by more than 10% as the guessing game began.
If you are a CEO of a company and @muddywatersre has you in its crosshairs, then real panic will set in and you may experience what we would call a ‘Herman the German’ moment.
Herman was born into the perfect German family, where everything was Germanly engineered for him to perfection, from the day he was born. So much so that, Herman did not utter a single word, as everything was laid on for him in a perfect manner.
But his perfect world came crashing down on him on his fourth birthday, when he tasted a piece of his birthday cake.
“Ze cake, it is very dwy,” he proclaimed with a look of disdain towards his now very distraught mother.
When she looked at him and asked him why it has taken him four years to say anything to her, he said: “Vell, up until now, everyzing has been perfect.”
For the eight hours following the doomsday tweet, everyone had to wait to see which CEO was about to get their ‘Herman the German’ moment.
The shorted stock was a company called Burford Capital and before it was outed, it was the largest company listed on the AIM, the UK’s secondary market for up and coming stars. Its valuation was £3bn and it was considered a darling of the market by the ordinary punters, so this news hurt over 80,000 Poms with more pain than any Australian spin bowler could ever inflict.
But it gets better.
In all of this market mayhem there are actually a couple of Australian connections, the first one being the listed ASX litigation company IMF. That’s because @muddywatersre’s biggest beef was the accounting practices used by Burford, where they would book their potential litigation wins as profit.
Muddy Waters Research used IMF as an example of how the accounts should look.
Basically, IMF only reports the cost of its cases and if it wins one, it then enters the win as a profit. So, @muddywatersre was accusing Burford of having a CFO that could make 1+1 equal anything she wanted.
Did I mention a “she”? That’s because it later came to light that the CEO and the CFO are actually married to each other, a fact that had been hidden away from everyone who did not work there.
— MuddyWatersResearch (@muddywatersre) August 10, 2019
Pillow accounting at its very best! Money under the mattress became money on the mattress.
The second Australian connection is that one of Burford’s appointed NOMAD brokers is Macquarie Bank (Europe) and the guys there are very famous in the UK for having their own Fat Finger moment when they were the broker to My Sale PLC, an Australian company that they listed on AIM, with the old TNT director David Mortimer as a NED.
On the day My Sale PLC listed, it entered into the official listing paperwork that the capital raising pricing of the company shares to list on AIM was 2.62p. It should have been entered as 262p.
This slip of the finger meant that the company debuted on the market down an embarrassing 25% and that was without any @muddywatersre being anywhere near the thing.
They managed to get the stock down almost as much as Burford’s first trade, all by themselves.
The moral is, Twitter can offer traders more excitement than just the odd Trump tweet and this is why after 35 years, me and my Blackberry are still addicted to it.
You know how the day will begin but as Christopher Bogart found out, you will never know how it will end.
PS: Muddy Waters is not named after a hippie band as we mentioned, nor the blues guitar legend. It is named after a Chinese proverb that states: “It is easier to catch fish in muddier waters rather than clearer waters.”
The Secret Broker can be found on Twitter here @SecretBrokerAU. Feel free to contact him with your best stock tips and ideas.