On Saturday, Barron’s published a feature story on SVM’s corruption of the Luoyang Police, titled “The High Price of Digging Up Dirt in China.” The article was written by Bill Alpert and Leslie P. Norton, who together won a Society of American Business Editors and Writers award for their 2010 investigation of “reverse-merger” Chinese stocks.
The article introduces Michael Wei, a Chinese research analyst who the Luoyang Police forced to sign a false confession statement implicating Kun Huang, a Canadian research analyst detained in a Chinese jail for over a year. The Luoyang Police threatened that Michael must testify against Kun or else face a long imprisonment.
Rather than falsely testifying against Kun, Michael left China and offered his full cooperation to the RCMP as they continue to conduct a criminal investigation of the bribes paid by SVM’s management to the Luoyang Police.
The key evidence that Michael provided to the RCMP are video and audio recordings of his meetings with the Luoyang Police, in which he catches the police red-handed accepting bribes from SVM and discussing how they will “fabricate” charges against Kun.
According to the Globe & Mail today:
“The U.S. Securities and Exchange Commission is investigating Silvercorp Metals Inc. and has issued a subpoena to the mining firm requesting all documentation relating to the Vancouver company’s long-running battle with short sellers.”
In 2011, journalists Andy Hoffman and Mark MacKinnon won a National Newspaper Award (“NNA”) for their investigative reporting on the multi-billion dollar Sino-Forest fraud. Yesterday, Andy and Mark were nominated for a 2012 NNA for their special report calling into question illegal payments Silvercorp Metals Inc. (NYSE: SVM) made to bribe Chinese police to investigate and arrest a Canadian research analyst, Kun Huang, in retaliation for negative reports I published on Silvercorp. The Globe and Mail report found that Silvercorp had reimbursed police hotel expenses and had provided luxury cars and drivers for the police to use as needed during the course of their investigation. Not charged with any crime, Mr. Huang has been illegally imprisoned since 7/22/12 in the town of Luoyang adjacent to Silvercorp’s Ying mining district.
On Monday, March 11th, 2013 Silvercorp Metals Inc. (NYSE: SVM) quietly conceded defeat in its two defamation lawsuits as well as its appeal of A*L’s New York Supreme Court victory. Copies of the discontinuance notices Silvercorp filed with the Court can be found here and here. Like most bad news events, Silvercorp has not yet bothered to notify its investors of its court losses, despite pledging in a press release to “provide progress updates” on these matters. Silvercorp acknowledged spending millions pursuing the claims.
According to recent reports, the new Chinese administration and media are becoming much more aggressive on fraud and corruption in China. As such, I believe that Silvercorp management will soon be held accountable for funding Chinese police retaliation against my researchers, one of whom is still being held, effectively as a hostage, in a Chinese prison. His story, and the truth about Silvercorp, has only just begun to be told.
Disclosure: Short SVM.
I am blowing the whistle today on Silvercorp Metals Inc. (NYSE: SVM) for misleading investors by publishing and repeatedly promoting a patently false fiscal 2013 operating cash flow forecast of $160 million, an increase of 42% over 2012. SVM management published and touted this forecast despite only generating $43 million in operating cash flow in the first half of fiscal 2013, a decrease of 38% from 2012. Furthermore, I will show that SVM management selectively disclosed lower operating cash flow guidance in presentations to one group of investors, while continuing to show the higher cash flow forecast to all other investors. Then in early 2013 SVM management staged a series of positive announcements to boost the stock price while delaying disclosure of negative developments including a write-down, project delay and sharply reduced production guidance.
Following its fiscal 2nd quarter earnings release, on 11/14/12 Silvercorp Metals Inc. (NYSE: SVM) hosted a conference call with investors that ended abruptly after SVM Chairman and CEO Rui Feng chose to not accept questions from any investors in the queue.
The Q&A session began and ended with two questions from Brad Humphrey, a research analyst from Raymond James who has an “outperform” rating on SVM and whose employer seeks investment-banking fees from SVM. Then following a 15 second pause Rui Feng said “Ok, Jon[athan], so no questions [inaudible]” and Jonathan Hackshaw, Silvercorp’s IR Director replied “Yep” and the operator affirmed “there are no questions registered at this time.”
However, there were definitely more questions to be asked. I know at least four investors who entered the queue by pressing “*1” as instructed by the operator. Barring some bizarre system malfunction, in which case the call should have been rescheduled, SVM management simply did not allow any investors to ask questions on the call. Thus Rui Feng lied to investors by ending the call claiming there were no questions. I learned over my years of exposing Chinese stock frauds that legitimate public companies never engage in this type of deception.
The following is a list of questions that investors, including myself, deserve to have answered:
- What was the average head grade produced from the SGX mine this quarter? Why did you decide to stop reporting this key metric just as the grade went sharply lower last quarter?
- When and why did Lorne Waldman resign? Why did he stop signing SEC filings just prior to the exposure of lower grades and resources of the Ying (SGX) mine?
- What steps have you taken to confirm whether or not SVM management reimbursed the Luoyang police expenses, as verified by The Globe and Mail 9/8/12 special report?
- How do you explain the precise match, including misspellings and typos, between the contacts the Luoyang police took from Kun Huang’s laptop and the contacts your lawyers submitted in the New York Supreme Court filing?
- Why did you refuse to comment to The New York Times regarding the existence of the RCMP criminal investigation into SVM’s illegal payments to Chinese police?
SVM certainly has the right to refuse to answer questions from investors on its conference calls. However, lying to investors by claiming there are “no questions” is fraud. Rui Feng should have simply told the truth and announced “We are not taking questions from investors today.”
Disclosure: I am short SVM.
Since 2007, Lorne Waldman was a key member of the Silvercorp Metals Inc. (SVM) management team, responsible for the regulatory and compliance affairs of the company, and managed investor relations. For over 4 years Lorne signed off on SVM’s SEC filings, appeared as a contact point on SVM’s press releases and made impassioned investor presentations such as this one defending SVM from short seller criticism. SVM disclosed it paid Lorne total compensation of $545,399 for his services in the year ending 3/31/12.
Then suddenly with no explanation in May 2012 Lorne stopped signing his name on SVM’s SEC filings. Beginning with SVM’s 5/28/12 disclosure of a disruption of production at its key Ying (“SGX”) mine, CFO Maria Tang began signing off on SEC filings. The very next week, Ms. Tang signed off on SVM’s 6/5/12 6-K filing disclosing dramatically lower “Inferred” and total silver resources for its key SGX mine, validating my key concerns regarding SVM.
By the beginning of July 2012, SVM went one step further and stopped listing Lorne as the investor contact on its press releases. When questioned by phone at the time, SVM’s receptionist replied that Lorne was on vacation. When questioned again, the receptionist replied that the vacation was a “sabbatical” that would last through year-end. Since late July, SVM listed Jonathan Hackshaw, a new hire, as the company’s investor relations director on all press releases.
On 11/8/12, SVM announced the “management appointments” of Shaoyang Shen, Jonathan Hackshaw, and Peter Torn, each of whom already worked for SVM. The highly material news of Lorne’s resignation “to pursue other interests” was only briefly mentioned at the end of the 3rd paragraph of the press release. SVM did not mention whether Lorne’s departure resulted from any dispute. SVM did not attach a copy of Lorne’s resignation letter.
What really happened to Lorne? Why did one of SVM’s most ardent defenders quietly depart amidst major negative material developments for SVM?
The events since SVM lost its multi-million dollar New York Supreme Court defamation lawsuit to silence its critics portend a very limited future for SVM as a publicly traded company:
- On 8/24/12, I showed how SVM management intentionally tried to mask dramatically lower grades and resources for its key SGX mine.
- On 9/8/12 The Globe & Mail published a special report that independently confirmed evidence that SVM’s Chinese subsidiary, Henan Found, paid for the costs of a corrupt local police investigation leading to the unlawful detention of my research analyst Kun Huang, a Canadian citizen. The Chinese police have never charged Kun with a crime. Kun has been jailed in utterly inhumane conditions in the town nearest SVM’s key Ying (SGX) mine since 7/21/12.
- Subsequent to Kun’s arrest, the Royal Canadian Mounted Police commenced a criminal investigation of SVM’s payments to Chinese police. SVM has failed to disclose and declined to comment on the existence of this criminal investigation.
For all these reasons, I strongly suspect that Lorne Waldman resigned because he is an honest, well-intentioned individual who could no longer tolerate Rui Feng’s completely unjustifiable quest for revenge. No longer willing to serve as Rui Feng’s mouthpiece and right-hand man, Lorne Waldman has wisely abandoned a sinking ship.
Disclosure: I am short SVM stock.
My analysis of NASDAQ’s strongly worded determination to delist DEER was published today as a Seeking Alpha exclusive AVAILABLE HERE.
With DEER and SCEI safely resting in perdition, going forward all my effort is focused on bringing Silvercorp management to justice. Stay tuned.