UPDATE 2-Canada regulator accuses Silvercorp short seller of fraud

Thu Dec 19, 2013 4:41pm EST

VANCOUVER Dec 19 (Reuters) - A Canadian securities regulator has accused a short seller who ran a high-profile campaign against miner Silvercorp Metals Inc two years ago of fraud.

The British Columbia Securities Commission said in a statement on Thursday that Jon Richard Carnes "wrote a false negative report" about Silvercorp and published it anonymously on a financial blog he controlled.

Silvercorp is a China-focused miner headquartered in Vancouver and listed on the Toronto and New York stock exchanges.

It was one of several North American companies with operations in China that were hurt in 2011 by allegations of fraud from short sellers, investors who borrow stocks and then sell them in the hope they will decline in price so they can buy them back more cheaply and pocket the difference. The most high-profile of these companies was Toronto-listed Chinese forestry company Sino-Forest Corp, whose shares have since been delisted.

Dates for a hearing will be set in February.

Carnes could not be reached for comment immediately. A call to the New York office of EOS Holdings LLC, a hedge fund that the BCSC said that Carnes ran, went directly to an answering machine.

The commission said that Carnes began building a short position in Silvercorp's shares by purchasing put options that expired on Sept. 17, 2011. Put options enable the holder to profit from a stock's decline.

After Carnes published his report on the AlfredLittle.com website on Sept. 13, 2011, Silvercorp's share price closed down 20 percent, the commission said. It said Carnes closed his short position the next day, earning a gross profit of nearly US$2.8 million.

The U.S. Securities and Exchange Commission helped the Canadian agency with its investigation.

In January 2012, Silvercorp added Carnes, EOS and three other defendants to a lawsuit it filed in New York that claimed a series of short-seller reports had falsely accused the miner of a massive fraud to drive down the stock.

The suit was later dismissed, with the judge ruling that the reports were expressions of opinion and protected by the U.S. Constitution's provisions for freedom of expression.

Silvercorp's stock is down 52 percent this year, in line with its peers.