Short selling Silvercorp: revealing scandal, or is it a scam? « Mining Blog

Short selling Silvercorp: revealing scandal, or is it a scam?

20. September 2011,

The practice of “short selling” shares and stock, in order to make a profit when the share price falls, is par for the course among hedge funds, especially those who gamble at the riskier end of investment – notably in mining companies. (For a summary of the practice, see “Special Situations” in the From Money to Metal glossary:
http://moneytometal.org/index.php/Glossary)

There’s clearly a difference between merely “betting on a loser” – which is common practice among gamblers at large – and using the tactic to compel governance or other changes in a company’s management (which some people might regard as admissable, so long as it’s transparent). But what about conspiring to bring about the downfall of a commercial enterprise because you find its behaviour unacceptable?

That’s what a group of “short sellers” have apparently been doing over the past few weeks, using their investment in a Canadian company called Silvercorp, which they accuse of committing fraud in its Chinese-focussed activities.

Last Monday, this anonymous group added to its accusations one that Silvercorp had illegally inflated its earnings and the group provided further details on some earlier allegations. [Reuters, 20 September 2011].

Silvercorp has vociferously dismissed all the allegations, presenting information it claims refutes the claims. It’s accused the short-sellers of trying to run a “short and distort” scheme, designed to drive down its share price.

And, indeed, the company’s shares were down 4.6 % on 19 September on the Toronto Stock Exchange, while its U.S. listed shares fell byn 5.4 percent.

Personally speaking, I’ve no idea which side in this vicious dispute can claim the moral high ground. Sooner or later, the truth will probably be out.

Meanwhile, the rest of us – and presumably, some other investors in Silvercorp (as of September 2010, BlackRock Asset Management Canada held 3%, and UBS Securities held 1% in the company’s equity) – are no wiser as to exactly what Silvercorp is supposed to have been up to in China.

Let alone what impact its operations may be having on the people or areas where it operates.

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