Blog dedicated primarily to randomly selected news items; comments reflecting personal perceptions

Tuesday, March 08, 2016

Will The Innocent Party Please Stand?

"I want them to be made accountable for what was done to me. What they did was wrong."
"[Police in Luoyang interrogated me] based on a list of questions provided by Silvercorp. During the actual conduct [sic] of the interrogation, PSB [Public Security Bureau] offices were in direct communication with Silvercorp, including receiving texts from Silvercorp to further focus the interrogation."
Kun Huang, Chinese-Canadian commercial researcher

"[PSB police officers acted] as Silvercorp's agent to falsely imprison him [Kun Huang] and to knowingly bring baseless criminal charges against him in China."
Partial text of a court summary of Kun Huang's allegations
Jon Carnes (right) and his researcher Kun Huang, who ended up in Chinese prison for investigating Silvercorp. Dina Goldstein for Report on Business magazine

"We spent time devising a cover plan. We created this old dude who clearly did not look like me." [Thus was born “Alfred Little,” a former Deloitte accountant with 35 years of investing experience. Carnes also created a fake research organization, the International Financial Research & Analysis Group (IFRA). In his “undercover strategy,” IFRA would prepare due diligence reports, which would then be “leaked” to Alfred Little, who posted them on his website. In reality, everything was generated by Carnes and his team.]
"The guys in China would be trying to figure out who was this old guy."
Jon Carnes, founder of Eos Holdings
When Kun Huang graduated from the University of British Columbia with his commerce degree he was offered a position as a stock market researcher by Jon Carnes the CEO of a hedge fund called Eos Holdings, in 2006. This was an opportunity to find employment straight out of university and it was an opportunity that Kun Huang took advantage of, happy to be hired. Four years later he moved to China, spending his time there in the study of companies Eos might be interested in investing in.

The focus of the company was at that time short-selling, a practice that exists on the wrong side of ethical business dealing where investors lock in shares of publicly traded companies thought to be overvalued or on the cusp of failure. Under these circumstances share price drops, and investors -- short sellers, in this scenario -- stand to make a profit. Mr. Carnes was the recipient of an anonymous tip on Silvercorp Metals Inc. in 2011.

The British Columbia mining corporation is listed on the Toronto and New York stock exchanges, and it has a majority-owned subsidiary with mineral holdings and mines in China. Mr. Carnes tasked his employee with investigating the Silvercorp subsidiary. And based on what then occurred, local authorities reached the conclusion after an investigation that Kun Huang's activities were suspect, teetering on the edge of criminal.

What this man had done was place infrared cameras in trees close to the Silvercorp subsidiary's mining operations. The purpose was to make a record of the frequency of ore-carrying trucks driving into and out of the site as a way to measure activity, and to determine whether the results matched claims of the company and its subsidiary. Ore samples were also collected, that had fallen off the trucks carrying ore, and those samples were tested for their mineral content.

Sounds like industrial espionage, doesn't it? And here's the irony, it comes fairly matched to what Chinese state-owned and private companies engage in on a regular basis; attempt to procure for themselves by underhanded means industrial and military formulae and other data for the purpose of speeding things up so they can themselves reproduce what foreign successful companies produce, without going to the time and trouble of producing research of their own.

Mr. Carnes felt that to be successful he would require more than the information his employee had gathered relating to Silvercorp's value. He had a report published in an Internet blog, attributing it to fictional sources that included negative analyses emanating from a fake research group. Then Eos moved to take a short position in Silvercorp stock. The questionable report published in September 2011 caused Silvercorp's share price to fall precipitously, taking ten percent off the company's market capitalization, amounting to roughly $275-million, a significant loss.

Out of this catastrophe for the company Eos Holdings realized a substantial $2.4-million profit, leaving Kun Huang with a cut of $500,000. While Silvercorp states it was the victim of a "short and distort" fraud, Kun Huang claims Silvercorp had contacted China's Public Security Bureau to motivate police to take action against him. He was arrested at Beijing international airport planning to leave mainland China for Hong Kong.

He ended up spending close to two years at hard labour after a panel of Chinese judges conducted a brief in-camera trial. Once his sentence was served, in 2014, he was deported to Canada, barred from re-entry to China, where he was born. His claim against Silvercorp Metals was that they were responsible for his arrest and imprisonment on the claim he was responsible for "impairing" its "business credibility and product reputation", a serious criminal offence in China.

Kun Huang will have his day in court, though Silvercorp denies his accusations, and attempted several times to put a halt to the lawsuit. Last month a British Columbia Supreme Court justice denied the motion brought by the company to strike a number of allegations from the statement of claim, and an appeal court upheld a ruling allowing the lawsuit to proceed in the province, even as Silvercorp felt the false imprisonment claim should be heard in China.

The underhanded, deliberate manipulation of facts that Kun Huang and his company engaged in for the very purpose of falsely leaving an erroneous impression of failure that had the effect of diminishing Silvercorp's reputation for the purpose of profiting themselves appears, along with the espionage and the false analyses circulated pseudononymously would actually seem to validate Silvercorp's claims and tear Kun Huang's to shreds.

It should be interesting to see what the B.C. justice system will rule, however. It would seem that there is legitimacy in the claims that Silvercorp Metals has been misrepresenting the tonnage and grade of its ore extraction. The story is a byzantine intrigue of false representation for profit on both ends.

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