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Silvercorp files lawsuit against short sellers

Employees and guests of Silvercorp Metals attend the opening bell at the New York Stock Exchange, Monday, March 8, 2010.

Mark Lennihan/The Associated Press

Silvercorp Metals Inc. has filed a lawsuit in New York against two websites and several individuals for allegedly spreading false information about the miner to drive down its stock price – accusations that one of the defendants has dismissed as "frivolous."

Among the list of allegations from Vancouver-based Silvercorp are defamation and "deceptive acts and practices" on the part of the websites and their operators, both of which have said their backers are short selling the stock. (A short sale occurs when the seller borrows stock from a brokerage, and sells it, expecting the price to fall. if it does, the seller will buy stock at the lower price to replace the stock that was borrowed.)

"This is the first step on our journey to hold participants of this scheme, or those who otherwise defamed the company, harmed its shareholders and manipulated the capital markets accountable" said Rui Feng, Silvercorp's chairman and chief executive officer.

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Silvercorp wants the court to order the defendants to remove their allegations, including that the miner overstated its financials and production, and to pay millions in damages.

Two separate sets of short-seller allegations surfaced earlier this month – the first in an anonymous letter that was later updated on chinastockwatch.com, and the second in a series of reports on the website AlfredLittle.com, which looks at companies operating in China.

Silvercorp denies all of the allegations, saying they are "false, defamatory and fraudulent" and that they have distracted the company from its normal business operations.

"It's too bad that me, as CEO of this company, over the past three weeks I cannot spend my energy and my brain on the operation of business. I have to deal with all of this bullshit," Mr. Feng told shareholders at the company's annual meeting in Vancouver on Friday.

Mr. Feng called the first anonymous letter, alleging a "potential $1.3-billion accounting fraud" at Silvercorp, "scary."

"I almost fainted. I thought 'Who took that money? I didn't take it.'"

Simon Moore, managing editor of Alfred Little's website, who is also named in the Silvercorp lawsuit, called Friday's legal action "frivolous."

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The allegations in Alfred Little's report are "complete fact," Mr. Moore said in an interview.

"We know that the truth has and will prevail. The truth is our biggest weapon," he said.

Saying that the work of the Alfred Little website is credible, Mr. Moore pointed to the fallout from a report it published on improprieties at Chinese oil fields firm SinoTech Energy Ltd., which led to the resignation on Friday of its chief financial officer, the chair of the board's audit committee, as well as the company's auditor, Ernst & Young. SinoTech said reasons for the resignations include potential unauthorized transfers by the company chairman, which have "caused them to lose confidence in the accuracy and reliability" of SinoTech's financial statements.

"It shows the strength of our reports," he said.

Silvercorp shares, which trade in both Toronto and New York, are down 16 per cent since the allegations were first made public on Sept 2. The stock has bounced back and forth over the past three weeks, and have been dragged down over the past two days alongside the slumping price of silver.

"There is a lot of emotion with this story," said Gint Austrins, an analyst at Vancouver-based Global Securities Corp. "When the news first broke, people were afraid that this is the next Sino-Forest. They pulled the trigger and waited to ask questions later."

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Contributor

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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