Burford Capital's New York offices in Manhattan.

Burford Capital's time under the spotlight continues, with an enthusiastic assessment of its business model from a California investment firm Monday followed by a eye-catching report Tuesday of a potential "revenge porn" case in the U.K.

The litigation funder has had a rocky two months since short seller Muddy Waters Research dropped a 25-page report assailing its business model. And more bad news came Tuesday, when the Financial Times dropped a report implicating the company's asset recovery business in a "revenge porn" scandal.

Daniel Hall, a top investigator for Burford, reportedly got his hands on sexually explicit material featuring oil billionaire Harry Sargeant III and woman who works in a "heavily regulated industry that is reputation sensitive."

As first reported by the Financial Times, the unidentified woman has now retained Covington & Burling to potentially bring a private prosecution against Burford in England over a violation of that country's revenge porn laws. Sources connected to Covington have confirmed the engagement.

Ironically, the matter is tangential to Burford's core business of litigation funding and stems instead from its 2015 acquisition of Focus Intelligence Ltd., an asset-tracing and corporate investigations firm founded by Hall, a U.K. qualified solicitor.

According to court documents, Hall and Focus were retained the previous year by Mohammed Al-Saleh, a former business partner of Sargeant in a Florida-registered oil trading business that provided fuel to the Department of Defense during the Iraq war. With capital from Dundrod Investments, an affiliate of Burford, and consulting advice from Burford, Al-Saleh secured a $28.8 million judgment from claims that Sargeant improperly diverted proceeds from that contract, and he then hired Focus in 2014 to help recover Sargeant's assets.

Sargeant then sued Hall, Burford and Dundrod in Miami federal court in 2017 claiming that Hall violated state and federal laws governing computer fraud in a case that was later dismissed. And Hall and Burford have responded with a malicious prosecution suit that is slated for trial later this year.

According to the Financial Times, court documents show Hall sent an email in 2016 to three colleagues at Burford with an attachment called "HS3 [Harry Sargeant III] couple.jpg", writing "Look what I have … Ho ho ho. A 'viewing' is probably worth having back in London."

But in a statement provided by Burford, Hall said that he "lawfully obtained a cache of 168,000 Sargeant emails from his former employer, of which a very small fraction contained salacious material. The video in question was never deployed in any fashion nor distributed externally and steps were taken during subsequent litigation to anonymize the other party involved."

The day before the Financial Times report dropped, Burford was the beneficiary of some positive news, California-based investment firm Caro-Kann Capital explained why it was taking a "long" position on the company, which trades on London's AIM exchange, in a nearly 70-page report of its own entitled "Muddy Waters Dreams of a Black Cat That Just Is Not There."

"The hardest thing of all is to find a black cat in a dark room, especially if there is no cat," Caro-Kann said in its introduction, citing the proverb of unknown origin.

In its August broadside against Burford, Muddy Waters listed seven specific techniques the company purportedly uses to misrepresent its actual returns, leading with the provocative claim that the firm categorized a litigation loss as an investment with significant return.

"This was meant to be Muddy Waters' Mike Tyson uppercut, a good night and good luck to the Longs. Given the market's knee-jerk reaction to the report, it seemingly was," Caro-Kann said.

Indeed, Burford's shares dropped by 64% at one point on the day the report was released, and the firm, while largely steady over the last month is trading at roughly half of its value before the attack.

Instead, according to Caro-Kann, Burford understated the value of the investment in question, accounting its gains at less than half the figure to which it was legally entitled.

"Why did Burford apply such a conservative approach? Burford did so because it was not certain about collectability of its entitlement," the company said. "This shows thoughtfulness and conservatism as opposed to aggressiveness to impress investors with returns as implied by Muddy Waters."

Among other claims, Muddy Waters also argued that Burford's return on its investments was dependent on a few outlier cases. But Caro-Kann turned that logic on Muddy Waters.

"The return streams and attribution of highly successful fund managers are not normally distributed—limited number of ideas tend to generate the vast majority of a fund's alpha," the firm said in its report. "What would venture capital as an asset class look like if you applied the same treatment? Perhaps more telling: What would Muddy Waters' track record look like if you wipe out its biggest and best calls?"

A spokeswoman for Burford declined to comment on the Caro-Kann report, but investors had an answer of their own, as Burford's stock climbed over 5% in trading Tuesday.

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