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Jon Richard Carnes has been accused of committing fraud by the British Columbia Securities Commission, after he denounced Silvercorp on his blog and then made $2.8 million selling it short.
The executive director of the British Columbia Securities Commission issued a notice of hearing alleging that Jon Richard Carnes, who ran a hedge fund and operated the “Alfred Little” financial blog, committed fraud.
The notice alleges that beginning in 2010, Carnes began writing negative reports about issuers traded on a North American exchange with business operations in China. Carnes attempted to profit from his negative reports by shorting the issuer’s securities before publishing the negative report, and then covering his short position after the issuer’s share price dropped in response to his negative report.
BCSC staff contends that in about June 2011, Carnes targeted Silvercorp as the next issuer he would try to profit from by issuing a negative report.
Silvercorp is a mining company and reporting issuer with its head office in Vancouver, British Columbia. It has business operations in China, and its securities trade on the Toronto Stock Exchange and the New York Stock Exchange.
On 15 August 2011, Carnes began building a short position in Silvercorp’s shares by purchasing put options that expired on September 17, 2011.
In the notice, staff alleges that Carnes attempted to find a mining expert to support his theory that Silvercorp’s Chinese filings contradicted its North American regulatory filings for the company’s SGX mine, as the Chinese filings had lower production, quality and resource estimates.
When two mining experts failed to support his theory and with his put options about to expire, staff maintains that Carnes wrote a false negative report about Silvercorp and published it anonymously on 13 September 2011 on Alfredlittle.com, a financial blog controlled by Carnes.
Carnes also made what the BCSC call “numerous false claims” about the second mining expert to support his theory, including that the expert had serious concerns about the reliability of Silvercorp’s North American filings.
“In reality, the second mining expert had explained that the differences between the Chinese filings and the North American filings were due to different reporting standards and different legislated cut-off grades,” said the BCSC.
After Carnes published his report on AlfredLittle.com, Silvercorp’s share price closed down 20 percent for the day, wiping out over $275 million in shareholder value. Carnes closed his short position in Silvercorp’s shares by the next day, earning a gross profit of almost $2.8 million, said the BCSC.
During the period in question, Carnes was a resident of Vancouver and ran a hedge fund called EOS Holdings. EOS Holdings was operated through a number of corporations and entities in various jurisdictions and had a staff that reported to Carnes.
Alfredlittle has posted various blogs on Silvercorp. One of them alleged that the company mislead investors by publishing and repeatedly promoting a “patently false” fiscal 2013 operating cash flow forecast of $160 million, an increase of 42 percent over 2012.
“… 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 percent from 2012. Furthermore, I will show that 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 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,” said the blog.
The BCSC’s allegations have not been proven, but the counsel for the executive director will apply to set dates for a hearing into the allegations before a panel of commissioners on 4 February 2014.
