The strange case of a hedge fund and a mining company « Mining Blog

The strange case of a hedge fund and a mining company

17. July 2012,

In September 2011, the New York and Toronto exchange-listed Silvercorp Metals * – China’s biggest silver miner – claimed that its stock had been drastic “shorted” (sold short) by unidentified investors.

According to the mining company, two New York-based websites – Chinastockwatch.com and Alfredlittle.com – spread “false information about [Silvercorp’s] internal accounting methods” .

The following month, Silvercorp claimed that the forensic accounting arm of KPMG, Silvercorp claimed had revealed there was “no truth to allegations of $1 billion in accounting fraud at the company”.

We said (on the HBF Mining blog) at the time that we had “no idea which side in this vicious dispute can claim the moral high ground. Sooner or later, the truth will probably be out.”

Now, ten months on, and truths which most of us would want exposed haven’t emerged.

What we do know is that, among the parties said to have engineered the attacks on Silvercorp is a hedge fund called Anthion and a New York “short seller” using the alias Alfred Little .

Silvercorp sued Anthion in the Supreme Court of New York on Sept. 22, 2011, complaining about a “short-and-distort” scheme in which Anthion and others deflated the company’s price with false accusations [Marketwire, 13 July 2012].

The suit sought damages of up to US$100-million citing a 14-page letter created by Anthion, which accused Silvercorp of reporting 2010 earnings of $66-million in North America, when government filings in China showed a $500,000 loss.

As a result of this letter, said Silvercorp, its stock dropped from $9 a share to US7. The company sought compensatory damages of over $1-million, punitive damages of at least $10-million and orders barring the defendants from future postings.

The company also asked for disgorgement of all profits from the short-selling “scheme”, claiming these could amount to $100-million, based on the artificially-induced drop in its market capitalisation.
Anthion didn’t take this lying down. In response, it filed an answer and counterclaim on 12 March this year. The hedge fund denied any wrongdoing, saying its letter had consisted of “good-faith criticisms”, and that nothing in the letter constituted a short-and-distort scheme [Marketwire 13 July 2012, ibid].

At the heart of Anthion’s case was an accusation that Silvercorp had used NewYork ‘s Supreme Court “for the purpose of harassing, intimidating, punishing or otherwise maliciously inhibiting the free exercise of speech.”

It therefore sought “protection” under New York’s anti-SLAPP laws – SLAPP being the acronym for a “strategic lawsuit against public participation” In other words, Anthion wanted to demonstrate that Silvercorp had, effectively, attempted to suppress legitimate criticism of the mining company’s activities which were in the public interest. * *

Silvercorp filed a motion to dismiss the counterclaim on May 31, 2012, arguing that anti-SLAPP laws in New York are only designed to protect those who would face a financial hardship trying to fight a defamation case. The laws were not meant to protect entities such as Anthion, which profited handsomely through a short-and-distort scheme that targeted Silvercorp.

owever, last week (12 July 2012), Anthion lost its case when a New York Judge found that New York’s anti-SLAPP laws are designed to protect “citizen activists” from well-financed developers and not applicable to a dispute between a hedge fund and a public company.

This appears to mark an end to the matter – one which can hardly be said to have rocked the markets, or riveted most peoples’ attention. Especially when many of us are pre-occupied with multi-billion dollar frauds, perpetrated by global investment banks, of which Barclays fixing of the LIBOR rates is the most recent example.

There’s not going to be much sympathy for a little-known hedge fund which may now have to cough up a few hundred thousand dollars. Just because it has failed to “get away” with implementing one of the most notorious, and widely-criticised, strategies for the accretion of private profits by just a few individuals – namely short-selling of shares.

But might this be one of those rare occasions when “a devil” has been singing a reasonably good tune?

We commented on the Mining.blog (24 September 2012), the case promised “to be an interesting [one] and raises some important questions about the statements, each day put out in their scores by promoters, brokerages and other “stock watchers” in order to boost the fortunes of their favoured investments. (Or alternatively, to advise investors that they run a risk in making such investments). “

For all we know, Anthion, “Alfred Little” and others – still unnamed – operated in a cynical and fraudlent fashion merely to line their own pockets.

Nonetheless, the hedge fund argues that those looking to run a “short and distort” scam, “do not typically disclose their short position or provide a detailed analysis to support their position” [Marketwire 13 July 2012]. Anthion also revealed its identity, thus its bona fides, early on in the proceedings.

Clearly Anthion cannot be described as a “citizen activist”. Few of us, proud to own to that description, would count a hedge fund as a member of the same contingent.

On the other hand, an enemy of our enemy may sometimes be a friend, even if their interests seem diametrically opposed to what we want to see happen.

To return to our comment last September:

“[T]he 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.”

And we’re still no wiser.

The fault-line in Anthion’s case isn’t that China’s largest silver miner was ripping off its investors.

It’s that the hedge fund apparently didn’t think to go much further – to find out what dubious things Silvercorp was doing with the funds which investors uncritically threw into its coffers.

Notes:

* Silvercorp Metals Inc. is “engaged in the acquisition, exploration, development and mining of high-grade silver-related mineral properties in China and Canada”. It is the largest primary silver producer in China through the operation of four silver-lead-zinc mines in Henan Province of China. In Canada, Silvercorp is “preparing to apply for a Small Mine Permit for the Silvertip high grade silver-lead-zinc mine project in northern British Columbia to provide a further platform for growth and geographic diversification.”
The company claims to have “achieved an enviable five-year track record of being the lowest cost producer of silver among its industry peers”.

** In 2008, Editions Écosociété and publisher of “Noir Canada” – a critique of Barrick’s global bad practices – were accused of defamation by the world’s biggest gold mining company.

When the report’s authors described the lawsuit as being an example of Barrick’s attempt to impose a SLAPP, the company issued a “notice of default”, ordering them to cease referring to the suit as a “SLAPP” (Strategic Lawsuit Against Public Participation) in any of their “campaign for solidarity or fundraising, in any media interview or on any Internet websites”.

Barrick warned the authors and publisher of “Noir Canada” that, in continuing to do so, they were exposing themselves to “additional punitive damages” and that their “behaviour could render any eventual retraction more difficult and embarrassing”. See: http://www.minesandcommunities.org/article.php?a=8939)

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