VANCOUVER — The British Columbia Securities Commission has accused the hedge-fund operator and financial blogger who, in 2011, unduly cast doubt on Vancouver-based Silvercorp Metals Inc.’s mining results in China with fraud.
Commission executive director Paul Bourque, in a notice of hearing issued Thursday, alleges that Vancouver resident Jon Richard Carnes published false reports about the results Silvercorp was reporting in China versus North America using the name of a fake research organization and under the false identity of Alfred Little.
The Commission estimates Carnes earned a gross profit of $2.8 million when Silvercorp’s company value dropped by $275 million following publication of the false report as part of a short-selling campaign that he ran at the same time.
“By engaging in the conduct described in this notice of hearing, Carnes perpetrated fraud contrary to (the Securities Act),” Commission staff said in the notice.
In its allegations, Commission staff said Carnes, who controlled the hedge fund EOS Holdings LLC, began writing negative reports about Chinese companies that traded shares on North American exchanges publishing them under the false identity on the website Seeking Alpha and financial blog Little Al’s Big Emerging Picks.
Staff further allege Carnes zeroed in on Silvercorp Metals as “the next issuer he would try to profit from by issuing a negative report.”
At the beginning, according to Commission staff, a Carnes staffer said “(let’s) whack (Silvercorp) before others beat us to it,” while assembling information for the negative report.
Carnes had obtained geological reports on Slivercorp’s SGX mine in China, it’s biggest property, and he formed the thesis that the results from China contradicted the company’s North American regulatory filings because the Chinese results indicated lower production, quality and resource estimates, according to the Commission notice.
Carnes, in July, sought to back up his thesis by trying to find a mining expert to agree with the negative view, because he knew the thesis would carry more weight if it were attributed to a mining expert.
However, the two experts consulted — one hired by Carnes’ staff under a false company name, the other the expert of another firm that was short-selling Silvercorp — failed to find any “fatal flaws” or misleading information in Silvercorp’s filings. They both attributed the apparent differences to different reporting standards between China and Canada.
“By August 2011, Carnes knew he had to act quickly with a negative report after he learned there were other short sellers targeting Silvercorp,” the notice reads.
Carnes began building his short position on Aug. 15, 2011 by buying put options in Silvercorp shares that expired Sept. 17 of the same year.
Then, on Sept. 13, 2011 “with the put options about to expire and unable to find an expert to support his thesis, Carnes wrote a false negative report about Silvercorp,” Commission staff allege.
The allegations are that Carnes falsely claimed the Chinese filings contradicted North American filings, falsely claimed that second mining expert was an international geological consulting firm that carried out a “thorough review” of the filings and had “serious concerns” about the reliability of Silvercorp’s reports.
After the report was published, an American short seller tweeted a link to the Alfred Little report and Silvercorp’s share price closed down 20 per cent following the publicity.