Silvercorp Fights Off Short Seller Accusations

Earlier this week, Silvercorp Metals SVM announced their lawyers are now working with Deer Consumer Products DEER—another Chinese company that has recently seen its share price drop on short seller fraud allegations—to fight against (what the company characterizes as) "false" claims. Silvercorp is currently China's largest primary silver producer. Deer has started legal action against the research firm Alfred Little, which is behind one of the two sets of allegations that Silvercorp had inflated its earnings. “Our Lawyers are now working with Deer's lawyers to launch a lawsuit together to subpoena these people behind the scenes,” said Silvercorp's CEO Rui Feng, according to The Globe and Mail. Deer filed suit against bloggers and short sellers in March, and has served Alfred Little with a summons and complaint. Little has claimed that Deer failed to disclose $21 million in land use rights rebates, in a scheme to “steal money from shareholders.” According to Deer, Little has offered to issue retractions if Deer stops their subpoena and discovery actions in the Superior Court of the State of New York. Deer isn't biting. Silvercorp is also seeking to file their own suit against other anonymous short sellers who continue to post fraud allegations. An independent committee composed of KMPG Forensics—a legal group—and Silvercorp's board has been formed to look into the anonymous reports and allegations. Silvercorp has released several rebuttals, yet the allegations continue. Feng claims these anonymous short sellers are “promoting a distorted form of discrimination” against companies operating in China, and called on regulators in the United States and Canada to improve regulations to protect companies from so-called “short and distort schemes.” Sino-Forest SNOFF, a forest plantation operating in China, is another Toronto-listed company recently targeted by these “short and distort” allegations. Regulators in Ontario halted trading of Sino-Forest securities in August. Carson Block, who operates research firm Muddy Waters, alleged that Sino-Forest overstated their timber holdings. Sino-Forest securities then fell 74% until trading was halted. These tactics have been profitable for short sellers who are standing by their allegations. Alfred Little has released updates claiming that Silvercorp has not addressed their findings and has reacted in a way indicative of a guilty company. However, at a recent presentation, Feng presented a copy of an anonymous letter and addressed each allegation in order. Some of these allegations and refuting evidence were outlined over at Seeking Alpha. Silvercorp has also published additional rebuttals on their website. In an open letter to shareholders, Feng said, “we have gone above and beyond to deal with this short and distort manipulation scheme. The facts and data are available. Our books have been properly audited; our resource numbers confirmed by independent Qualified Persons, and all our transactions have been fully disclosed. There is absolutely no substance to the allegations.” Since June, Silvercorp has bought back about 4.5 million common shares at a cost of about $35 million and announced there will be more purchases because the market is undervaluing their shares. Feng has also stated that he fears the extreme decline in price may make Silvercorp vulnerable to takeover. Share prices have fallen from $13.80 in April to $6.60 at the time of writing.