With offices in New York and London Burford Capital is the largest litigation Finance Company in the world with over 2 billion dollars of litigation assets on their balance sheet. Burford buys litigation claims from corporations or law firms and funds the legal expenses associated with taking the cases to trial. If the litigation is successful, Burford then takes a cut of the Judgment. In the late 2010s, Burford's business was on fire.

Their profits were soaring and the company's stock price increased 15-fold making it one of the best performing stocks on the London Stock Exchange. Part of the reason for the investor optimism was that Burford was in the process of suing the government of Argentina in regards to an expropriation case, and if successful, the company could profit to a tune of billions of dollars. But Burford's bull case was turned on its head in the summer of 2019 when the famous short seller Carson Block of Muddy Waters research disclosed that he had a short position in this talk and accused them of engaging in an Enron type fraud. Block is a master at generating media hype to drive down the stock prices of companies he's shorting.

He even hired the adult film actress Stormy Daniels to speak at the media event where he tried to explain why Burford is a fraud. After Carson Block released his short report, investors panicked and the share price lost more than half its value in a matter of days. One of the key points of Carson Block's short thesis was that Burford was using manipulation to over hype the value of the Argentina lawsuit and the chances of a successful outcome were far less likely than investors were led to believe. Fast forward to April 3rd, 2023.

Burford releases a statement following a summary judgment ruling related to the Argentina case the court cited in favor of Burford's clients and what Burford calls a complete win against Argentina. Following the news, Burford's share price increased by 75 percent. While the precise damages have not yet been decided, Burford's share is expected to be in the range of 2 billion and 5 billion dollars. Burford has 218 million shares outstanding, which converts to 9 to 24 dollars per share.

At first, this looks like a massive win for Burford's shareholders and management teams and a huge loss for short seller Carson Block. However, there's is a big difference between a successful Court ruling and actually having cash in the bank. If you've been paying attention to Argentina over the past couple years, you'll have noticed that their economy isn't exactly in great shape. The country's inflation rate recently exceeded 100, putting over a third of the population under the international poverty line.

The Argentinian peso has lost more than 90 percent of its value relative to the US dollar over the past five years. Alone in the black market, exchange rate has depreciated even further. Just last year, the government narrowly avoided default with an emergency IMF deal. Given the disastrous state of the Argentinian economy, does the country have enough money to make good on its legal obligations? More importantly, Argentina is a sovereign country when one third of their population are already suffering from poverty.

Why would the government agree to pay out billions of dollars to the fat cats at Burford Just because a New York Court tells them to, couldn't they just refuse to pay? In this video, we'll look at how the Argentinian government came to owe Burford Capital billions of dollars. What this says about the money Waters Short report and most importantly, will Burford and his shareholders ever see a penny of the money they are owed to understand what's going on, we first had to understand what Burford does. Let's suppose that you're a small pharmaceutical company that developed a new drug and got a patent on it. It comes to your attention that one of your competitors just made a very similar drug and you want to sue them for patent infringement.

These types of litigation can take years to work their way through the courts and cost millions of dollars in legal fees. and as a small company, you may run out of cash before seeing the lawsuit through to its conclusion. That's where Burford comes in. They'll offer to pay you an upfront fee to cover all the litigation expenses In the event of a successful judgment or settlement.

Burford will be entitled to Summer all the winnings. Burford Specializes in taking on large and complex cases because they have the legal expertise and capital to see them through to the end. And if they win the case, the payday can be huge and now it's time to go to. Argentina In 2012, the Argentine economy wasn't doing well.

Their trade deficit was massive which put downward pressure on the peso, causing inflation to Surge Argentina's left-wing president Christina Fernandez blamed the country's trade deficit in high inflation on corporate greed. Specifically, she blamed Ypf, which was and still is the largest oil and gas company in Argentina. Ypf used to be a state-owned Enterprise but in 1993, the government decided to privatize it and dual listed it on the Buenos Aires Stock Exchange and New York Stock Exchange where it remains listed. to this day, President Fernandez complained that Ypf was focused too much on paying dividends to its shareholders and wasn't investing enough to increase its oil production.

The lack of growth in oil production meant that Argentina had become a net importer of oil, which Put negative pressure on the country's trade balance and economic growth. So on April 16, 2012, the Argentine government announced that they'd be expropriating a 51 stake in the company and replacing the entire management team. Specifically, they expropriated the 51 stake in Ypf that was owned by the Spanish energy giant rep. Soul Argentina has a long history of expropriating private assets, especially those owned by Foreign investors.

In fact, investors were so concerned about the risk of expropriation that when the company ipo'd in 1993, they specifically included provisions of what compensation the Argentine government would be required to pay in the event of an expropriation. In the event that the government expropriates a controlling stake in Ypf, they are required to make a tender offer. Its all Ypf shareholders. The price per share of the tender offer would be the 12-month trailing earnings per share, multiplied by the highest price to earnings multiple the stock traded at over the past two years.

If you applied this formula in 2012, you would get a value of about 88 dollars per share, a significant premium to the trading price. However, Christina had no intent of following the rules. She expropriated the 51 stake from Repsol with zero compensation and did not make any tender offer. This was obviously a disaster for Repsol which saw their multi-billion dollar investment in Ypf disappear overnight.

But it was also a disaster for the other shareholders. Other than Repsol, Two of their largest shareholders were an Argentinian company called the Peterson Group which owned a 25 stake and an American hedge fund called Eton Park which owned a three percent stake. Neither of their Stakes were expropriated, but the results were almost as devastating. The whole reason that President Fernandez expropriated Ypf was to cut the dividend and spend more money on new oil production.

She had zero interest in maximizing shareholder value, and thus the shares instantly became worth much less. Peterson in particular, was hard hit. They borrowed billions of dollars to buy the stake in Ypf and relied on the dividends to make their interest payments when the government cut the dividend to zero. Peterson went bankrupt as they had no way to make their interest payments.

the they wanted to sue the government, which had obviously violated the expropriation rules, but they had neither the capital nor the expertise to take on the Republic of Argentina. So they went to Burford asking for help. Burford paid about 20 million dollars and agreed to cover all litigation expenses in exchange for 70 percent of any settlement related to the Peterson claims. They also made a similar arrangement with Eton Park.

The legal process has been long and complex. Argentina has made various arguments as to why the lawsuit should be dismissed. Perhaps their most compelling argument was sovereign immunity. Sovereign immunity states that foreign governments are exempt from the jurisdiction of U.S courts.

This argument went all the way up to the U.S Supreme Court which ruled against Argentina in 2019. There are some exceptions to sovereign immunity if the lawsuit was in relation to a commercial activity of the foreign State outside the territory of the U.S The lawsuit can still go forward if the ACT causes a direct effect in the United States. The expropriation itself happened in Argentina. However, Ypf was listed on the New York Stock exchange and raise money from U.S investors, including one of the plaintiffs, the American hedge fund Eton Park.

This was a big win for Burford. They had not won the case yet, but with a sovereign immunity issue having been resolved favorably, their chances of success increased substantially. Burford Had not yet received any cash, but the value of their litigation asset had increased exactly how much the value should increase in this intermediate stage of litigation is a matter for accountants to figure out, and this is where the waters start to get muddy. Foreign is an investment company.

They invest in litigation cases. If you invest in marketable Securities Like stocks or bonds, it's very easy to determine the value of your portfolio on a daily basis. You just have to look at what value your stocks and bonds are trading at on the exchanges. Litigation claims are much more difficult to Value because there is no liquid secondary market.

So instead of using Mark to Market accounting, Burford uses fair value accounting. Here's how it works: when Burford first buys a litigation asset. it is valued at Cost After that, the valuation of the asset can change based on certain Milestones such as a significant favorable ruling, a favorable court judgment, an exhaustion of appeals by the defendant, or the issuance of a tribunal award in an arbitration case. These events make it more likely that Burford will win the case.

so the valuation of the asset increases commensurately in a small number of instances. Burford sells Stakes of their assets to third parties. Burford will incorporate the valuation of these transactions into the carrying value of their assets. All these changes to evaluate before the case is resolved are called fair Value adjustments.

Eventually, each litigation case will be resolved. If Burford definitively loses the case with no realistic Prospect of an appeal, the asset will be marked down to zero. If Burford wins the case, the carrying value will be increased to the value of the Judgment. Importantly, the fair value of judgments are recognized on Burford's income statements.

So, if the value of one of their litigation assets increases because it hits some, Milestone referred will contemporaneously recognize this as income. even though they haven't received any cash yet. From 2015 through 2018, Burford's net income skyrocketed from 66 million dollars to more than 300 million dollars. However, you can see that starting in 2016, the vast majority of their net income came from fair value gains.

In 2019, their fair value gains were greater than their entire net income. Almost all the fair value gains during this period came from marking up the value of the Argentina litigation. Investors took note of Burford's skyrocketing profits and bid the company's share price of 10 fold during this period. And that's where Carson block of Muddy Waters Research started to get interested.

He thought that Burford was artificially inflating its net income by boosting their fair value gains important to talk about and you guys touched on it with him. Is this Peterson claim? and that's why he was on your show the other day was because I brought up questions on Twitter about who the buyers of the Peterson claim were and I question whether the company which manages funds that are off its own balance sheet, whether the company moved part of the Peterson claim from its own balance sheet to an outside fund balance sheet that it manages and recorded a gain on that and it turns out after I tweeted that that we found that at least 30 percent of that sale was to a Burford managed fund and Chris Bogart didn't talk about that and he's not really. he's not really willing I think to have that conversation. but that I think is a very serious issue because it really calls into question the the proceeds that Burford's received on on the Peterson claim along with with another question that nobody has posed and it's a key question.

can that Peterson claim be satisfied in local currency legally? in other words, under the U.S court judgments if Argentina did decide to pay it, could they pay it off in Argentine pesos and that's something I think people also should start pressing the company on because I think they might be surprised by the answer. It's a complicated story. Carson Block Carson Block who has short shares of Burford claimed that Burford manipulated the value of the Argentina litigation asset by arranging for a third party fund that they managed to purchase part of the claim at an inflated price. He's basically saying that Burford sold the asset to themselves so they could create a fictitious accounting gain.

He makes the argument that the Argentina court case is likely to be worthless because any legal judgment would be made in Argentine pesos instead of U.S dollars. The peso is depreciated by roughly 98 since the expropriation happened in 2012.. So if Argentina made the payment using pesos at the 2012 exchange rate, it would be almost worthless. Burfoot acquired the Argentina litigation claim from the Peterson group in 2015 for an initial cash consideration of 17 million dollars.

The next year, they sold a 10 stake in this claim for 40 million dollars, giving it a 400 million valuation. In the following years, they continued to sell stakes in it in 2019. Shortly after the favorable Supreme Court decision, they sold a 10 interest for 100 million dollars, giving the total claim and implied valuation of 1 billion dollars more than 200 times greater than their initial investment. Just four years prior.

Burford has an asset management business where they invest third party Capital into litigation assets. A portion of these sales were made to third-party funds that they manage. Carson Block claimed that Burford had their Asset Management funds purchased six in the Argentina litigation claims that inflated prices to boost the carrying value on Burford's own balance sheet. Burford Responded by saying that these transactions were done at arm's length with the best interest of the fund's investors in mind.

Also, there were some completely unrelated institutional investors who did purchase six in the Peterson claims at the one billion dollar valuation. Following the Muddy Waters short report, Burford released some historical data about their fair value accounting practices to assuage investor fears. They showed that of the cases that they have won, 33 percent of the profits were recognized ahead of time as fair value gains. Of the cases they lost, 47 of those losses were recognized ahead of time as fair value.

write: Downs This means that they have historically been more likely to make negative fair value adjustments than positive fair value adjustments. So if anything, they've been too conservative with their accounting. The opposite of Muddy Waters Allegation: To be fair, those numbers only consider cases that have already been resolved as of 2019, Briford had 776 million dollars worth of fair value adjustments on their balance sheet. Of this, 734 million dollars, or almost 95 percent were related to the Argentina litigation.

So the Crux of the issue is the Argentina litigation. Everything else is frankly too small to matter at this point, and fast forward to 2023. We don't have to speculate about this any further, as Burford won the case foreign on March 31st, 2023. The U.S District Court for the Southern District of New York found Argentina liable in the expropriation of Ypf and substantial damages are expected to be awarded.

Importantly, the damages will be paid in U.S dollars not Argentine pesos. This was one of the Carson Block's main bear cases, which has been resolved in Burford's favor. There are two outstanding issues that have to be decided before damages are awarded. Firstly, for technical reasons, it is unclear whether Argentina appropriated Ypf on April 16, 2012 or May 7 2012.

based on the tender offer formula, the value per share of Ypf would be much higher if the expropriation happened on April 6th, yielding a gross value of seven and a half billion dollars for the Peterson Group shares in 900 million dollars for Eaton Parks shares. If they instead use the May 7th date, the values would be four and a half billion dollars for the Peterson group and 550 million dollars for Eaton Park. The second unresolved issue is the interest rate. The experiment appropriation happened in 2012.

Argentina will have to pay not only the value that they stole in 2012, but also the interest accrued Over the past 11 years, there is uncertainty as to what interest rate the court will apply. Burford is arguing for an interest rate between six and eight percent. However, courts in Argentina sometimes use a rate as low as four percent, so the interest rate will likely be somewhere in between four and eight percent. In either case, it is a simple interest rate with no compounding.

With those numbers, we can get to a range of what will be Burford's share of the winnings. At the low end, Burford will get a minimum of about two billion dollars, and at the high end, they'll get a maximum of about 5.1 billion dollars on a per share basis. This translates to between 9 and 24 dollars per birth for chair. At the time of recording this video, Burford's Us listed Shares are trained for about 12.55 cents.

so Burford's gang could easily exceed the company's entire valuation. But even if Burford gets a multi-billion dollar claim against the Republic of Argentina would Argentina be willing or able to pay them. Argentina has a long history of financial troubles, including two sovereign debt defaults in the past 20 years in 21 IMF bailout. since 1956 due to excessive money printing, the inflation rate has been stubbornly high exceeding 20 since 2016..

in fact, the situation has gotten even worse recently with inflation crossing the 100. Mark in early 2023, Despite the economic turmoil, Argentina is still a large company with an annual GDP of about 500 billion dollars. At the high end, the total claims they would have to pay relayed to the Ypf case would be somewhere in the neighborhood of 13 million dollars. They could theoretically pay the settlements, but they would have to raise taxes at the same time that people are already protesting about high inflation and poor economic conditions.

So what would happen if Argentina refuses to pay? Fortunately, we do have some president to work with. Remember that the Spanish company Repsol was the largest shareholder in Ypf at the time of expropriation. Repsol did not partner with Burford and instead opted to file a lawsuit against Argentina on its own. suing Argentina for 10.5 billion dollars Argentina refused to pay The Spanish government was Furious calling the expropriation an act of aggression against Spain as Repsol was Spain's largest Energy company.

In retaliation, Spain blocked Imports of Argentinian Biofuel, which represented close to one billion dollars per year. Spain also said that they would block any trade deal negotiations between Argentina and the EU until the Ypf matter was resolved. The Argentine government could have continued refusing to pay, but in 2014 they came to the conclusion that wrecking their diplomatic and trade relations with Spain was too economically damaging. So they agreed to pay Repsol 5 billion dollars to resolve the lawsuit.

Roughly half of what the Spanish company originally asked for Burford is a U.S headquartered company, and the summary judgment against Argentina was decided by a court in New. York The U.S is Argentina's third largest trading partner, far bigger than Spain. If the U.S government placed economic sanctions against Argentina, the cost would be far greater than the 13 billion dollars they would potentially be asked to pay. With that being said, as the largest oil company in Spain, Repsol was a strategically important company.

Burford is a specialty finance company and it does not have strategic significance to the US economy. so the motivation for the US government to put pressure on Argentina will likely be far less. The most likely scenario is that Burfoid in Argentina will come to a negotiated settlement whereby Argentina will pay some fraction of the damages awarded in court. That's why Burford's share price only increased by five dollars following the favorable summary judgment, even though the face value of the settlement is likely to be at least nine dollars per share.

All right guys, that wraps it up for this video. what do you think about Burford Let us know in the comments section below. as always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.