Part Three - The communications ‘checkmate’

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 third and final in a trilogy exploring that attack and the crucial lessons it offers to all communications experts, reputation managers and brand strategists who operate or serve clients in the public domain.

Introduction

The Muddy Waters campaign in August 2019 penetrated the media incredibly effectively. This is because it harnessed two powerful dimensions beyond the simple activist short selling playbook: in the previous article, the Rebbelith team showed how it activated a network of stories or ‘narratives’ orbiting and connected to Burford, or contained in its growth narrative. It also levered the potential of modern information networks.The core components or ‘messages’ of that attack were indeed complex. But this narrative network meant that the complexity was described simply enough for a large audience. It also meant each component was reinforced by a ‘supporting narrative’. These added contagion and velocity to the overall campaign, and helped each message permeate the media intact and undiluted. This was a notably impressive communications achievement.However, the network also had a secondary, powerful and lingering effect. The combination of narratives it deployed created an intuitive story so well structured that it framed the media debate around Burford and its reputation.This ‘narrative entanglement’ formed a ‘communications checkmate’. It ensured responses launched by the company were restricted to operating within the narratives deployed against them. These constraints prolonged the life of these narratives for nearly a year.

Figure 1: The ‘communications checkmate’ - Burford’s ability to respond was constrained.

In this final article, the Rebbelith team will:

Response One - the Rebuttal

To its credit, just one day after Muddy Waters tweeted, Burford released a forceful rebuttal ⁱ of the attack. This was a technical counterargument premised upon revealing “factual inaccuracies, simple analytical errors and selective use of information” in the Muddy Waters claims. It focussed on addressing the company’s solvency, strong cash flow and low debt levels, asserting the appropriateness of its accounting and reporting, explaining that its governance structure was robust and declaring the company was actively considering investor feedback. It dismissed “inflammatory rhetoric” and subsequently assessed each of Muddy Waters’ claims one by one. The document was well received by many investors. A fund manager at Jupiter Asset Management described it as “the best rebuttal to a short attack I’ve ever seen.” ⁱBut the riposte followed the tired financial PR crisis communications textbook to the letter. It was also nine pages long. Most significantly, it didn't introduce an adequate counter narrative. Doing so could have driven the strength of its technical arguments more effectively into media coverage and embedded them in the public mind. Crucially, it could have set the company’s own messaging agenda.Burford only attempted to deploy such a counter narrative in the ‘concluding remark’. The company declared short sellers to be “a fundamental menace to an orderly market and to the value inherent in long-term investing”. But this was a tired and unimaginative cliche. It invited the standard response from all activist campaigns which presented the attackers, not the targets, as the champions of true value and shareholder interests by ‘revealing’ reality. In response to Burford’s remark in an article in the Financial Times on August 9th, Muddy Waters’ founder Carson Block was simply able to state, “Over the medium-to-long-term, if the activist is wrong, the company is not going to stay in the dirt.” ⁱThe company also rested on its announcement and failed to deploy media assets as effectively as its attacker. On the morning of the release Carson Block was being interviewed on the BBC’s Today Programme, giving a human voice to the narratives in his attack.

Response 2 - ‘spoofing and layering’

On 12th August Burford made a statement. This suggested the magnitude of its share price fall had been the result of illegal trading activity. Most crucially, it introduced this through a compelling, evidence-backed concept that successfully carried its argument to media and generated sustained coverage.Burford claimed it had found evidence of ‘spoofing and layering’ in trading activity around the time of the Muddy Waters attack. These tactics can drive the price of a stock lower artificially but depend on capabilities associated with the opaque world of high frequency trading by complex ‘black box’ computer algorithms.Whether intentional or not, ‘spoofing and layering’ created an effective counter narrative. It tapped into embedded media and public fascination with the esoteric, ‘secret world’ that hedge funds are perceived to inhabit. More importantly, it cast Muddy Waters as merely another player in that narrative and in that opaque world.In terms of narrative construction the move was fast and insightful. Even the term ‘spoofing and layering’ provided an effective shorthand description of an alternative cause for the company’s crisis. This narrative is still discussed intact by journalists a year later.

Figure 2: ‘Spoofing and Layering’ counter narrative - potential to escape ‘checkmate’

But Burford insisted on using this as the premise for challenging the attack in court. The subsequent legal battle would be played out in media over nearly a year. The coverage would lock the company into a newscycle that simply churned the clear narratives in the original attack.The court case meant Muddy Waters’ core ‘negative’ arguments around corporate governance, valuation and accounting were repeated again and again. Burford’s legal counter argument simply provided the opposing, ‘positive’ material needed to complete that story circuit. Burford’s strategy had simply created a self contained narrative ‘battery’ which would only run down upon the case’s conclusion, and that would be dependent on a third party.

Figure 3: Burford’s insistence on a legal battle created a ‘narrative battery’, locking the company into a newscycle that churned over the narratives in the original attack for nearly a year.

Reponse 3 - employee movements and valuation reporting

On 15th August Burford took steps to address directly the criticisms made by Muddy Waters. The company replaced the wife of the CEO as finance director and two long-sitting board members. But these actions were prescribed by the attack and operated within the communications checkmate. This meant they provided opportunities for simple, effective bite-sized repostes from Muddy Waters.

“It is clear from this that Burford is more interested in imposing fig leaves than real guard rails ... This seems more a question of who would do the job and who wasn’t married to the CEO.”

- Carson Block ⁱ

On 23rd September the company also released a report explaining how it valued its investments. One analyst at a firm acting as broker to Burford said the company’s fair value changes had been “directionally correct”, referring to the way in which they were marked up or down. ⁱBut even this report created debate and aspects of valuation remained perceived as unclear. The media still focussed specifically on the value of single large cases. Analysts continued to criticise Burford for not declaring the value given to the ‘Petersen case’ on the company’s balance sheet. One analyst commented, “Burford makes a virtue of being transparent but they won’t disclose what value is being held at, and we don’t understand why.” ⁱReplacing its finance director and two board members may have been necessities. The same can be said of the investment valuation report. But these actions were prescribed by the Muddy Waters attack and still operated within the constraints of its narrative network.Ultimately there was insufficient messaging activity and content released about anything from Burford other than the crisis. The company had not allocated communications resources to developing an adequate investor-focussed value narrative over the years, and its advisers had not identified the right media to carry that narrative.

What should have been done differently?

Investors should have been recognised as a unique audience requiring specific attention.

At the start of Burford’s journey, prospective media outreach should have focussed on the media and journalists that investors actually valued. A Rebbelith analysis of Burford’s key shareholders in the summer of 2019 revealed:

Figure 4: Mapping the media landscape - Modern capabilities would have allowed Burford to focus on media and journalists that their investors actually valued.

Figure 4 (continued)

Figure 5: Identifying valued media at a granular level of detail - where to focus attention to reach specific investors.

Narrative opportunities and vulnerabilities in valued media should have been identified, mapped and monitored.

These media should then have been analysed both in the past and continuously with respect to Burford’s key investor messages and core competencies. This would have revealed the location, structure and and progression of:

A narrative analysis conducted on the company’s share performance and profitability during its long bull run would have revealed three core narrative vulnerabilities. These focussed on unrealised gains, returns metrics and single large cases:

Figure 6: Identifying and visualising narrative vulnerabilities.

Crisis responses should have taken into account the company’s narrative network and identified any potential for a narrative ‘entanglement’

A data-backed, visual model of a company’s narrative network would have:

Figure 7: Mapping and navigating narrative networks before they become narrative entanglements

Valued media models would have allowed:

Figure 8: Locating titles carrying harmful messages and content, and mapping their reach

Figure 9: Visualising the reach of potentially harmful organisations, campaigns and messages

Figure 10: Mapping media reach to key stakeholders and bypassing harmful messages in certain titles.

Lessons

Muddy Waters deployed a very sophisticated communications campaign. Its impact was so high for three core reasons:

Every organisation, campaign or brand is embedded within a narrative network.

Figure 11: Brand reach constituents for major international retailer.

Whatever the industry, that network can be manipulated to create a narrative entanglement, putting a company’s goals, future and reputation at risk.

Figure 12: Brand reach narrative development for major international retailer (February - May 2019)

Burford is not alone and this phenomenon is not unique to investing or public companies.But these narrative and stakeholder networks often contain phenomenal opportunities for reaching key stakeholders and for commanding the media conversations that really matter.

Figure 13: Narrative potential in the video games industry.

With adequate awareness, analysis and an appropriate strategy, these narrative networks can be identified, understood and, crucially, navigated. Like the original ocean maps from which we draw our heritage, we believe this is best done with a Rebbelith, but one fit for plotting a course through the modern media.