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On Sept. 13, 2011, Silvercorp Metals Inc. was set to present at an investor conference in New York. And Jon Carnes and Carson Block wanted to disrupt it.
Both men were shorting Silvercorp shares, betting the stock would slide. And Carnes, who runs a hedge fund called Eos Funds, was preparing to publish a negative report on the company using the name “Alfred Little,” one of multiple pseudonyms he used. In a series of emails, the men agreed the best time to publish it would be shortly before Silvercorp’s presentation at the annual Rodman and Renshaw Global Investment conference — forcing the company to respond to questions about the report, with little time to prepare.
“Would be fantastic to start passing around paper versions of the report during the preso (presentation). Ballsy, but would be hilarious,” Block wrote in an email unearthed by regulators.
A couple of days later, Carnes emailed back and said their plan was a success. “Great idea publishing before their Rodman presentation. It was a disaster for them,” he said.
Vancouver-based Silvercorp, which mines silver in China, responded aggressively to Carnes’ report that questioned whether the company overstated resources and production, denying any wrongdoing and vowing to uncover the true identity of “Alfred Little.” A week after the dustup, Carnes told Block it was probably a good thing that Block didn’t also issue a critical report of his own, as Silvercorp would have surely sued him. Carnes also expressed confidence that he was going to win the fight.
“I think we will finish them off before long, most likely from dealing directly with the [British Columbia Securities Commission] and auditor,” he wrote in an email.
Of course, the BCSC didn’t see it that way. Instead of targeting Silvercorp, the regulator accused Carnes himself of making false claims about the company and his own identity. Final submissions in the case were made in January, and a ruling is expected by the end of the month. None of the accusations have been proven, but it is one of the regulator’s most anticipated decisions in years.
As a result of the BCSC’s allegations, numerous documents have been unearthed, including transcripts of testimony that Carnes and Block made to the U.S. Securities and Exchange Commission in 2012. The documents provide a rare glimpse into the sometimes murky world of short sellers, a group that drives huge fluctuations in markets but is scarcely understood by most investors.
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