Silvercorp Metals on Friday became the latest China-focused resource company listed in North America to get caught up in fraud allegations reminiscent of those that have upended Sino-Forest .
Toronto-listed Silvercorp said it had obtained an anonymous letter alleging a $1.3 billion fraud at the company, which operates silver mines across China.
Aiming to seize the initiative, Silvercorp strongly denied any wrongdoing and threatened legal action to recover damages incurred by the company as a result.
A slew of accounting scandals has led to a major sell-off in Sino-Canadian stocks this year, leading to trading halts, delistings, lawsuits and regulatory probes of the companies involved.
Sino-Forest , not long ago the largest forestry-related company based in Canada, is perhaps the best-known name. The tree plantation operator has been accused of fraud by short-seller Carson Block- allegations that the Ontario Securities Commission now say appear to have merit.
Silvercorp said the central allegation in the letter was that it had reported a net profit in 2010 to North American regulators, while reporting a net loss to Chinese regulator.
The letter also states that the company's statements about the grade its ore deposits were simply too good to be true compared with those of comparable companies.
Silvercorp, which flatly denied both allegations, said it had noticed a sharp increase in short positions taken out on its shares over the last two months.
Short-sellers such as Carson Block, whose research report led to a 75 percent drop in Sino-Forest, profit by borrowing shares they believe will drop, selling them and then repaying them later at a lower price - pocketing the difference.
This type of manipulative scheme is baseless and which depresses our share price and harms our shareholders, said chief executive Rui Feng in the release, referring the letter the company said it obtained on Thursday.
Silvercorp said it would pursue all legal options, whether in Canada, the United States, or China, to recover damages incurred as a result of the allegations.
Shares of Silvercorp fell 7.6 percent to C$7.65 soon after the Toronto Stock Exchange opened, but pared losses as the session progressed. By 1030 ET the stock was down 1 percent at C$8.14.
Silvercorp said the letter, dated Aug. 29, was addressed to the Ontario Securities Commission, the company's auditors and various media outlets. The company said the letter alleged a accounting fraud at the company.
The unknown author also stated that his firm held a short position in the company's shares and it intended to publicize its concerns through Internet postings, Silvercorp said in its release.
Silvercorp said it had not confirmed whether the letter had been sent to all the addressees or posted online. Given the threat, the company said it had chosen to proactively respond to the allegations.
Silvercorp has appointed a panel of independent directors to work with regulators to discover the identity of the party behind the allegations.