Silvercorp Slapped With Lawsuits for Deception

Allegations that Silvercorp Metals (NYSE:SVM,TSX:SVM) misled investors have evolved into a foundation for two class-action lawsuits.

Silvercorp describes itself as China’s largest primary silver producer and notes in a 2011 press release that its key SGX mine, located within the Ying mining district, has “some of the highest grades in the industry.” The same press release, which was circulated in response to scrutiny that surfaced in 2011, notes that the company’s most recent NI 43-101 report grades the mine’s silver at 845 g/t.

It is these statements — and others like them — that some are now calling into question.

Anonymous reports of deception

In the press release mentioned above, Silvercorp claims that on September 1, 2011, it received an anonymous letter alleging that it had participated in potential fraud and deception. The letter was addressed to the Ontario Securities Commission, the company’s auditors and various media outlets. About two weeks later, the company said malicious writings were published on the websites AlfredLittle.com and Chinastockwatch.com.

Silvercorp has said it is the victim of a short-and-distort scheme whereby short sellers profit from bets on falling share prices. That, the company believes, is the motive behind the scathing accusations against it, which have ranged from overstating profits and production to misleading investors about the size and quality of its resources.

The claims made against Silvercorp are allegedly supported by extensive due diligence that includes video coverage of trucks transporting the company’s ore, assay results conducted on ore that fell from some of these trucks and documents from government agencies.

The impact has not been negligible. Silvercorp saw its stock price drop about 20 percent in one day after the allegations began circulating.

Silvercorp fights back

From the beginning, the company has insisted that the claims against it are false, selective and ignorant. Silvercorp quickly went on the defensive, providing rebuttals to the various allegations and publishing a variety of supporting documents — such as bank statements — in an effort to reassure investors and restore its reputation. The company also set up a task force to identify its anonymous accusers and invited the public for a mine tour.

Furthermore, Silvercorp filed a lawsuit against a range of parties, including Chinastockwatch.com, AlfredLittle.com and several John Doe defendants. Jon Carnes was later identified as the man behind the scathing reports. Carnes, his company, EOS Holdings, and others were later added to lawsuit; Silvercorp has charged them with “defamation, unjust enrichment, trade libel and tortious interference, and deceptive acts and practices.”

Silvercorp’s CEO and chairman, Rui Feng, concluded an open letter to shareholders in September 2011 by stating that Silvercorp will weather through this storm and emerge as a stronger company.

Silvercorp being sued

So far it seems that it is the storm that is growing stronger.

A New York County Supreme Court judge dismissed Silvercorp’s defamation case after deeming that the reports about about the company are opinion and not statements of purported fact. Silvercorp is appealing that decision.

Meanwhile, on December 28, 2012, The Rosen Law Firm filed a lawsuit against Silvercorp on behalf of those who purchased Silvercorp shares from June 24, 2010 to September 13, 2011.

The firm alleges that Silvercorp overstated the level of silver production at its mines, as well as the quality and quantity of its ore reserves, misleading the investment public. Rosen said that the adverse “truthful disclosures” made by Alfred Little caused Silvercorp’s share price drop, thereby damaging investors.

Also cited as defendants in the case are: Feng; Jiango “Myles” Gao, president, COO and director of Silvercorp; and Meng “Maria” Tang, the company’s CFO.

In its complaint, Rosen recants arguments made by Alfred Little. For example, Silvercorp is accused of filing a 40-F form that claims production of 130 metric tons of silver, 23,995 metric tons of lead and 6,078 metric tons of zinc for the year ended March 31, 2011.

Carnes, however, claims that documents from the Henan Provincial Bureau show that for the year ended December 31, 2010, Silvercorp reported production of 32.17 metric tons of silver, 5,911 metric tons of lead and 5,163 metric tons of zinc.

Rosen alleges that Silvercorp therefore overstated its production of silver and lead by 306 percent, while zinc production was inflated by 18 percent.

The law firm also said that during the period under consideration, Silvercorp operated its only revenue-generating subsidiaries through Henan Found Mining Company and Henan Huawei Mining Company. Therefore, Silvercorp’s revenues should not be greater than the combined revenues of those two entities. Henan Found’s primary revenue-generating asset was the SGX mine.

In its rebuttal to the Alfred Little allegations, Silvercorp said Henan Found had revenues of $521 million from January 2006 to June 2011. $479 million of that was from SGX. The company said these revenues perfectly match its corresponding tax certificates. Silvercorp also noted that regulatory filings in China are not readily comparable to those abroad.

Rosen also pointed out that Silvercorp’s investigation of the once-anonymous short sellers seems to have illegally coincided with an official investigation into the matter. The company is accused of using its substantial influence in China to obtain information from the police. The Globe and Mail confirmed evidence, including payment for lodgings and the use of a company vehicle, that appears to link Silvercorp and the police efforts.

The Royal Canadian Mounted Police’s Anti-Corruption Unit is reportedly mulling whether to pursue Silvercorp for criminal violations.

Also, last week, another law firm, Bernstein Liebhard, announced that it too is lodging a class-action lawsuit against Silvercorp.

Following that announcement, the company’s stock hit a 52-week low. At last on Monday afternoon, Silvercorp’s shares were down about 1.2 percent, at $4.69. The company, which according to The Globe and Mail once had a market cap of about $2.7 billion, had a market value of approximately $800.8 million.

 

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.