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Canadian citizen Huang Kun, seen here in May, is now in a jail in central China, expecting to face criminal charges.
Canadian citizen Huang Kun, seen here in May, is now in a jail in central China, expecting to face criminal charges.

SPECIAL REPORT

In China, Silvercorp critic caught in campaign by police Add to ...

‘I was freaking scared’

That day in December, police strip-searched Mr. Huang at the airport, seizing his cellphone, cash, two laptops, his eyeglasses and his passport. He was placed in a cell in the Beijing First Detention Centre with 12 other inmates.

Within days he was in Luoyang, in China’s central Henan province, being interrogated by officers from the local Public Security Bureau, or PSB. The Canadian citizen has been prevented from leaving China for more than eight months, and was made to pay $32,000 in a form of unofficial bail, before being re-arrested in July. Mr. Huang’s lawyer, Wang Yuehong, believes he will be charged any day now with “disseminating false facts to impair another person’s commercial reputation,” a criminal offence that carries a maximum punishment of two years in prison. If charged, Mr. Huang’s chances of winning his argument in court are exceedingly small: conviction rates in China are above 98 per cent.

Mr. Huang’s troubles are connected to research he helped compile for a report published in September, 2011, on a website called Alfredlittle.com. The report alleged Silvercorp had overstated its production and the amount of precious metals contained in its mines.

The company aggressively denied the allegations in a series of press releases and statements by its chairman and chief executive officer, Feng Rui. In a recent interview with The Globe and Mail, Mr. Feng attacked the credibility of Mr. Huang, his associates and his employer, Jon Carnes, whose firm EOS Funds has, through short positions, profited from a decline in Silvercorp’s share price.

“These people have a habit to lie,” Mr. Feng said, adding “These guys have a habit of fabricating things.”

Documents and evidence obtained by The Globe and Mail – including a number of receipts for police expenses, if authentic – may support allegations that Silvercorp helped fund the PSB investigation against Mr. Huang and his associates. During the investigation, Chinese police seized Mr. Huang’s laptop; it appears that personal information from it, including addresses and phone numbers, was later used in a court filing by the company in the United States.

Mr. Feng strongly denies these allegations and asserts the documents obtained by The Globe have been falsified. He also said that information in the court filing was obtained from publicly available documents, or from the company’s own private investigators.

The company and its share value have, so far, fared much better than other Chinese companies that became the target of short-sellers. In 2011, the company hired KPMG Forensics to probe its financial results. Silvercorp said the firm produced a report that, although it was not made public, cleared it of any financial fraud allegations.

Its stock rebounded sharply after it announced the findings of the KPMG report in response to the Alfrelittle.com allegations.

Silvercorp’s offensive appears to be part of a co-ordinated counterattack by Chinese companies and government authorities – who are often closely linked – against North American short-sellers. Mr. Huang’s lawyer, Ms. Wang, said the officers handling the case made it clear to her that the only way her client could expect lenient treatment was if he gave them information related to other recent short-seller reports that caused sharp drops in the share prices of U.S.-listed Chinese companies.

She said the Luoyang PSB specifically sought information about negative reports on China’s No. 2 property developer, China Evergrande, and on New Oriental Education & Technology Group Inc. Ms. Wang said Mr. Huang has no knowledge of either case.

Others individuals who, like Mr. Huang, have made money investigating whether Chinese firms are accurately representing themselves to foreign investors, admit they have been temporarily chased out of the mini-industry. “There was something about the way [Silvercorp] defended itself – the obvious government connections it had – that made it obvious to me that I should leave it alone for a while,” said one investigator who had played a role in uncovering Sino-Forest’s flaws and now says he no longer takes on such jobs in China. He spoke on condition of anonymity.

Mr. Huang’s experience is instructive. Three days after his arrest at Beijing airport, he was transferred into the custody of PSB agents, who put him in the back seat of a rental car and drove 900 kilometres southwest of Beijing to Luoyang. It was 11 p.m. on Dec. 31 when they reached Luoyang, a gritty industrial city of 1.5 million residents, and Mr. Huang was taken straight to the office of the local PSB’s economic crimes unit and interrogated. He said the PSB wanted to know who had hired him to investigate Silvercorp, how the investigation had been done, and who made money off it.

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