Silvercorp Metals Inc (SVM)

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Barron's: SATURDAY, SEPTEMBER 28, 2013
The High Price of Digging Up Dirt in China

Two analysts for a hedge fund were arrested in China for their research into a mining outfit with a powerful local presence. Their scary tale casts doubt on just who's guilty.

Canadian stock analyst Kun Huang has been locked in a Luoyang, China, jail for more than a year, charged with defaming a Canadian company whose shares trade on the New York and Toronto exchanges. In 2011, a report circulated by Huang's hedge-fund employer alleged that ore samples from a mine run by Silvercorp Metals tested low for silver content. Unluckily for Huang, Silvercorp's mine is a prominent enterprise in Luoyang, the city in the central province of Henan where prosecutors have charged that he not only defamed the company but used an illegal camera to shoot video of its operations. After a one-day trial on Sept. 10, the analyst, 36, now waits to hear whether a judge will find him guilty and sentence him to three more years in prison. A Canadian consul described the Luoyang jail as "atrocious." Few trials in China end in acquittal.
[image] Courtesy of Jon Carnes

Researcher Kun Huang is in a Chinese jail awaiting a trial verdict.

The researcher is one of hundreds that Chinese media say have been rounded up since May 2012 for helping foreign investors check out U.S.-listed Chinese companies, or for conducting the due diligence required of multinational corporations by their home countries' antibribery laws. Most of those arrested are Chinese nationals, but public attention tends to focus on the foreigners. Chinese television recently broadcast the handcuffed image of well-known fraud investigator Peter Humphrey, a Brit accused with his American wife of accessing state records in the course of background checks performed by their Shanghai-based firm, ChinaWhys, on dozens of Chinese businesses -- including Silvercorp (ticker: SVM).

The researchers' arrests may be a response to the plunging popularity of Chinese shares that trade on U.S. exchanges. Investigators like Huang and Humphrey helped expose unflattering evidence on companies listed here via the back-door maneuver known as a "reverse takeover" -- inspiring a wave of short-selling, delistings, and fraud charges by U.S. regulators (see "Beware This Chinese Export," Aug. 28, 2010).
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With the imminent verdict on Huang, the Silvercorp saga has gone the furthest of China's research crackdowns. It is also the best documented, due to a small mountain of written and audio-visual records surreptitiously collected by Huang and his colleagues over the course of their pursuit by Luoyang cops. Huang's hedge-fund boss Jon Carnes shared these recordings with Barron's, as well as with regulators and law-enforcement officials in Vancouver, where Carnes' investment firm and Silvercorp are based. Carnes says Canadian authorities have opened a bribery probe based on his allegations that Silvercorp directed and paid for Luoyang's prosecution of Silvercorp's critics. Among the documents Carnes shared are some that he says show police expenses paid by the Silvercorp mine, one of the biggest employers and taxpayers in the city. The company and the local police have denied any corrupt relationship.
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