The strange case of a hedge fund and the mining companyPublished by MAC on 2012-07-24
Source: Nostromo Research
Exclusive to MAC
Global hedge funds have had a notorious reputation for backing dodgy mining companies.
And, where it suited them, of "short selling" shares in order to force down their market value and thus profit from betting on the fall.
That's allegedly what happened last September, after New York's Aurion accused Silvercorp Metals of fraudulently "cooking the books".
The mining company then charged the hedge fund with operating a "short and distort" scheme, claiming millions of pounds in damages.
Now, ten months later, Silvercorp seems to have successfully cooked Aurion's own goose.
But this wasn't before a lot of questions were raised about the hedge fund's motives and the nature of the miner's financial accounting.
In the following article Nostromo Research argues that Aurion actually didn't go far enough in taking on its adversary.
If it had done, could it have performed a valuable public service?
The strange case of a hedge fund and the mining company
Nostromo Research Report
20 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 drastically "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 announced that the forensic accounting arm of global financial services firm, KPMG, confirmed there was "no truth to allegations of $1 billion in accounting fraud at the company".
A commentator on the Heinrich Boell Foundation (HBF) Mining blog said at the time that he had "no idea which side in this vicious dispute can claim the moral high ground. Sooner or later, the truth will probably be out". [http://mining.boellblog.org/]
Now, ten months on, and truths many of us would like to see exposed still haven't emerged.
However, 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" who used the alias Alfred Little.
Silvercorp sued Anthion in the New York Supreme Court on September 22nd 2011, complaining of a "short-and-distort" scheme, and accusing Anthion and others of deflating the company's price by disseminating false accusations [Marketwire, 13 July 2012].
The miner sought damages of up to US$100-million, citing a 14-page letter created by Anthion which had accused Silvercorp of reporting 2010 earnings of US$66-million in North America, whereas government filings in China actually showed a US$500,000 loss.
As a result of this letter, argued Silvercorp, its stock had dropped from $9 a share to US$7. It demanded Anthion pay compensatory damages of over $1-million, punitive damages of at least $10-million, and be debarred from making future such postings.
The company also asked for "disgorgement" of all profits from the short-selling scheme which, it judged, could amount to US$100-million, based on the artificially-induced drop in its market capitalisation.
The hedge fund didn't take this lying down.
It filed a response before the court, on 12th March this year, denying any wrongdoing, asserting that its 14-page letter consisted of "good-faith criticisms", and that nothing in it constituted a short-and-distort scheme [Marketwire 13 July 2012, ibid].
A Slapp on the wrist
At the heart of Anthion's contention was that Silvercorp had used New York‘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 tried to demonstrate that Silvercorp had wanted to suppress legitimate criticisms of the mining company's activities - ones that were in the public interest. 
Not to be outflanked, Silvercorp filed a motion to dismiss Anthion's counterclaim on May 31st 2012, arguing that anti-SLAPP laws in New York only protect those who would face a financial hardship trying to fight a defamation case.
The laws, said Silvercorp, weren't meant to aplly to entities like Anthion, which had profited handsomely through the short-and-distort scheme that targeted the company.
On 12th July 2012, Anthion lost its case. A New York judge ruled that, while the state's anti-SLAPP laws may be used to protect "citizen activists" from well-financed "developers", they aren't applicable to a dispute between a hedge fund and a public company.
This appears to mark an end to the matter.
It's not one which has rocked the markets, nor riveted many people's attention.
Certainly not at a time when many of us are pre-occupied with multi-billion dollar frauds, perpetrated by global investment banks and funds - of which Barclays' fixing of the LIBOR rates is just the latest example.
There's going to be little sympathy for the plight of a little-known hedge fund which may now have to cough up a few hundred thousand dollars of its rich clients' money.
Good riddance, we might feel, if Anthion failed to get away with implementing one of the most notorious, and widely-criticised, strategies for making quick profits - betting that a share price will fall, rather than seeking to reform the company in which it originally invested.
Yet, might this be one of those rare occasions when "a devil" has tried to sing a reasonably authentic tune?
The commentator on HBF's Mining.blog (24th September 2012) considered this case promised "to be an interesting [one]".
It "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... to advise investors that they run a risk in making such investments)".
Can a hedge fund be a "citizen activist"?
For all we know, Anthion, "Alfred Little" and others did indeed operate in a cynical and fraudulent fashion merely to line their own pockets.
Nonetheless, Anthion reasonably argued that those who operate a "short and distort" scam "do not typically disclose their short position or provide a detailed analysis to support their position" [Marketwire 13th July 2012].
Indeed, the hedge fund revealed its identity, thus its bona fides, early on in the legal proceedings.
Clearly, those at the helm of Anthion cannot be described as "citizen activists" in the meaning of anti-SLAPP laws. On the other hand, an enemy of our enemy may sometimes prove to be a friend.
To return to the comment on HBF's Mining blog last September:
"[T]he rest of us - and presumably, some... 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."
On these vital questions, we don't appear to be any wiser.
We might have been - had Anthion not merely argued that China's largest silver miner was ripping off its investors. It could have gone considerably further by deploying its investigatory tatents to discovering dubious things the mining company has been doing on the ground.
It's highly unlikely that Silvercorp, one of the most aggressive exploiters of Chinese silver-lead-zinc resources, hasn't raised the ire of local communities, or besmirched the environment in one way or another.
Simply by virtue of the company being the "lowest cost producer of silver among its industry peers", alarm bells should havesounded some time ago. You can't cut costs in mineral extraction without cutting other corners too.
Had Anthion exposed these aspects of Silvercorp's operations, it might deserve a pat on the back.
Instead, the hedge fund lost out before a court which (rightly) couldn't deem it to be a truly conscientious "citizen".
[This commentary is covered by a Creative Commons Licence. Reproduction is welcomed, provided acknowledgment is given to Nostromo Research as its sole author]
1. 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"
2. In 2008, Editions Écosociété and publisher of "Noir Canada" - a critique of Barrick's global bad practices - was accused of defamation by the world's biggest gold mining company.
When the report's authors described the lawsuit as an example of Barrick's attempt to impose a SLAPP (Strategic Lawsuit Against Public Participation), the company issued a "notice of default", ordering them to cease referring to the suit as a "SLAPP" 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: Barrick enjoys precious few "Obama moments"