When hedge fund owner Jon Carnes anonymously published a report questioning Silvercorp Metals Inc. (TSX:SVM) technical reports for its mines in China and then short-sold shares – a strategy that worked to his benefit and Silvercorp’s detriment – it was “unsavory,” but it wasn’t fraud, a BC Securities Commission (BCSC) panel has ruled.
The panel has dismissed both the allegations of fraud and an application by the BCSC staff for a public interest order against Carnes.
“While we may find Carnes’ conduct unsavory, we do not find it was clearly abusive to the capital markets and therefore it is not necessary to make an order in the public interest,” the panel ruled May 14.
“I’m relieved to see they found me not guilty of violating these securities laws,” Carnes told Business in Vancouver. “At the same time, I don’t agree with any of their findings that I acted in any way improper.”
In 2013, the BCSC levied fraud allegations against Carnes, after he successfully participated in a strategy that the BCSC said was designed to drive Silvercorp’s share prices down in order to profit from short selling them.
Carnes insists that his research and publications are in the interest of investors because it provides important information to the investing public about companies that are publicly listed in both China and North America because he said there is a problem with the way resource estimates are reported in the two jurisdictions.
His hedge fund, www.eosfunds.com, uses its research into companies operating in China to invest in the good ones, and short-sell the ones deemed to be overvalued or fraudulent. Carnes said that, as a result of his probes and reporting, he has exposed outright fraud which has resulted seven companies being delisted from the Nasdaq and New York Stock Exchange.
Silvercorp, a Vancouver headquartered company, has silver mines in China. Carnes, who lives in B.C., had developed expertise in analyzing Chinese mines, and wrote about them on his blog, www.alfredlittle.com. He did so anonymously using a fake identity.
Carnes said the reason for that was that he and his tam of researchers lived in China at the time and feared reprisals there. Despite publishing anonymously, he said Chinese officials, in fact, did figure out who he was.
"Just like I feared, they sent someone to our office who threatened us," Carnes said.
Carnes said some North American companies with mines in China were exaggerating their earnings and resources. By taking a short position (profiting when share prices go down), Carnes was able to profit from the fact some of these companies were overvalued. One of his targets was Silvercorp.
On his Alfred Little blog and on other publicly available blogs, the BCSC said Carnes wrote an analysis on Silvercorp that pointed out disparities between what was reported in China and what was reported in North America in terms of production, quality and resource estimates.
Carnes posted his analysis of Silvercorp on alfredlittle.com on September 13, 2011, the same day Silvercorp was making a presentation at an investment conference.
“The release was timed to create the most possible damage for Silvercorp,” the BCSC states.
His report was also reposted by another short seller. Silvercorp’s shares dropped 20% that day, eroding the company’s market capitalization by $288 million, according to the BCSC. Carnes netted $2.8 million the next day when he closed his short position.
Carnes said the problem with publicly listed companies publishing resource estimates in China that do not match what is reported in North America continues.
