Editorial: Silvercorp’s short-seller headache

The murky and often frivolous world of financial blogs showed its serious side in mid-December.

Vancouver hedge-fund executive and owner of the Alfred Little financial blog, Jon Richard Carnes, has lashed out at the British Columbia Securities Commission (BCSC) after it accused him of fraud, calling the allegations “false and without merit.” In a letter published Dec. 20 on his Alfred Little website, Carnes said he is preparing a “point-by-point rebuttal” of the BCSC’s allegations and is taking legal action to “defend my reports and hold accountable those public servants at the BCSC who have ignored my warnings about [Silvercorp Metals].”

In a notice of a hearing made public on Dec. 19, the BCSC alleged that Carnes targeted the Vancouver-based, Chinese-focused silver miner Silvercorp Metals as “the next issuer he would try to profit from by issuing a negative report” in mid-2011, and that he began building a short position in the company’s shares beginning on Aug. 15, 2011. The commission alleges that Carnes “attempted to find a mining expert to support his theory that Silvercorp’s Chinese filings contradicted its North American regulatory filings for the company’s SGX mine, as the Chinese filings had lower production, quality and resource estimates.”

“When two mining experts failed to support his theory and with his put options about to expire, [BCSC] staff maintains that Carnes wrote a false negative report about Silvercorp and published it anonymously on Sept. 13, 2011, on Alfredlittle.com, a financial blog controlled by Carnes.”

The BCSC also accuses Carnes of making “numerous false claims about the second mining expert to support his theory, including that the expert had “serious concerns” about the reliability of Silvercorp’s North American filings.

The second mining expert explained that the differences between the Chinese filings and the North American filings were due to different reporting standards and different legislated cut-off grades.

The independent provincial government agency charges that after Carnes’ report on Silvercorp was published, its shares dropped 20% — wiping out $275 million in shareholder value — and when Carnes closed his short position the next day, he made a gross profit of US$2.8 million. The regulatory body, responsible for overseeing capital markets in B.C. through the Securities Act, noted that its allegations have not yet been proven, and that a hearing date will be set in 2014. An email from The Northern Miner to Carnes asking for further comment was not returned by press time.

In the Dec. 20 letter he posted on his website, Carnes pointed out that he has used Alfredlittle.com for three years to publish his investment insights, “both long and short,” and that it was directly due to his efforts that seven of the companies he accused of fraud during that time were delisted by exchanges in the U.S. “The SEC charged three of the companies with fraud,” he wrote. “I have saved thousands of investors hundreds of millions — perhaps even billions — of dollars from the hands of fraudulent Chinese companies.”

Silvercorp’s senior vice-president Lorne Waldman said the company is pleased that the BCSC is taking steps against Carnes and notes that the company is still “vigorously defending” class actions in both Canada and the U.S. “stemming from Mr. Carnes’ short and distort campaign.”

“We have always maintained that we were a victim of a short and distort campaign,” he writes in an email. “Mr. Carnes made over $2.5 million from his scheme, which harmed Silvercorp, its reputation, its shareholders and its confidence in the public markets.”

As for Carne’s most recent online posting, Waldman says that “the BCSC has stopped investigating Silvercorp, and the company has never had to withdraw or restate any of its public filings. We already brought defamation action against Mr. Carnes in the U.S., however, his ‘opinions’ were protected as freedom of speech.”

John Gruetzner, principal and founder of Beijing-headquartered consulting company Intercedent, writes in an email that the final outcome of the case is “important to the long-term ability of TMX to attract Chinese resource listings.”