I am disgusted by the BCSC

On December 19, the British Columbia Securities Commission issued a press release titled “Securities regulator alleges fraud against Silvercorp short-seller” that links to a notice of hearing.  In my opinion, the notice of hearing unfairly smears Jon Richard Carnes of Alfred Little.  Secondly, I believe that the claims against him are extremely weak.

Ad hominem attacks

The notice of hearing makes numerous smears attacking Carnes’ credibility:

He has no formal training or specialized designations relating to analyzing or issuing reports about the merits of an issuer or its securities.

[…]

Carnes has no formal education or accreditation in the area of geoscience or engineering relating to mineral exploration or mining. He has never been a qualified person under National Instrument 43-101 Standards of Disclosure For Mineral Projects(NI 43-101).

In my opinion, the BCSC should stick to relevant facts.  What does Carnes’ credibility have to do with fraud?  I don’t see the connection.  If he had a formal certification as an analyst and was a qualified person under NI 43-101, would his actions be less fraudulent?  I don’t think so.

Secondly, the BCSC is selectively stating facts to suggest that Carnes does not know what he is doing.  This is a little bizarre because his work is pretty damn good.  It certainly moved the market.

Jon Carnes and his partners tried to keep their identities a secret

I would too.  Carnes has been threatened due to his investigative work.  One of the people working for him has been thrown into a Chinese jail.

The BSCS notice, weirdly enough, attacks Carnes and his associates for trying to hide their identities:

6. Carnes authored the negative reports under the fake name of “Alfred Little” and the fake biography of:
• Having 35 years of investing experience.
• Being a former accountant at Deloitte.
• Having represented Coca-Cola, Proctor & Gamble, and Budweiser on their investments in China.

[…]

7. To make his negative reports appear more credible, Carnes created a fake research organization called International Financial Research & Analysis Group (IFRA) and claimed IFRA researchers contributed to several of his negative reports. In fact, all IFRA researchers were simply EOS Holdings’ staff using fake names and titles working under Carnes’ instructions to help him profit from his negative reports.

8.    Carnes then began to operate his financial blog as “Alfredlittle.com” (Alfredlittle.com) and published his negative reports anonymously.

[…]

15. Carnes instructed his staff to retain a mining expert (first mining expert) under false pretenses, which they did:
• His staff used fake names when dealing with the first mining expert and claimed to be employed by another fake company, GEMS Capital, Inc. (GEMS).
• His staff sent the first mining expert a link to the website for a real company with a similar name to GEMS to trick him into believing GEMS was a real company.
• The first mining expert was required to sign consulting and confidentiality agreements with GEMS, even though Carnes knew the agreements wouldn’t bind Carnes or his staff. A staff member signed the agreements on behalf of GEMS using a fake name.

Like the attacks on his credibility, I do not see how the secrecy behind Carnes’ work is relevant to the BCSC’s allegations of fraud.  If Carnes and his associates used their real identities, would their behaviour be any less “fraudulent”?  I don’t think so.

The meat of BCSC’s argument

Second mining expert does not support Carnes’ thesis
23. Carnes’ staff shared the Chinese filings with the hedge fund so that the second mining expert could provide an opinion about the differences between the Chinese filings and the North American filings.

24. In his report dated September 1, 2011 (first report), the second mining expert did not note any “blatant obvious errors” or misleading information and explained that the differences between the Chinese filings and the North American filings were due to different reporting standards and different legislated cut-off grades. Upon reading the first report, Carnes’ lead researcher on Silvercorp claimed the tone of the report was “too soft” and the conclusion was “too vague and not damaging enough”.

25. The second mining expert prepared an updated report dated September 8, 2011 (updated report) and addendum dated September 9, 2011 (addendum) that reiterated the Chinese filings and the North American filings were different due to variations in cut off grades and different reporting standards. The updated report and addendum were shared with Carnes and his staff.

[…]

27. Carnes falsely claimed that the Chinese filings contradicted the North American filings because the Chinese filings had lower production, quality and resource estimates, and that the second mining expert supported this claim.

28. Carnes also falsely claimed that the second mining expert:
• Was an “international geological consulting firm”.
• Carried out a “thorough review” of the Chinese filings and the North American filings.
• Had “serious concerns” about the reliability of Silvercorp’s NI 43-101 reports.
• Found Silvercorp’s investor presentation to be misleading.
• Was of the opinion that the geology of the SGX mine required “expensive tunneling” and large amounts of labour.

The BCSC makes many subjective claims that seem like they would be extremely difficult to prove in court.  I’ve highlighted all of the subjective words in #28 in their notice of hearing:

28. Carnes also falsely claimed that the second mining expert:
• Was an “international geological consulting firm”.
• Carried out a “thorough review” of the Chinese filings and the North American filings.
• Had “serious concerns” about the reliability of Silvercorp’s NI 43-101 reports.
• Found Silvercorp’s investor presentation to be misleading.
• Was of the opinion that the geology of the SGX mine required “expensive tunneling” and large amounts of labour.

Whether or not a firm is international is subjective.  Whether or not a review is thorough is subjective.  And so on and so forth.  The BCSC has made few arguments that could be proved with objective criteria.  The notice of hearing makes the following claim that is more objective:

The second mining expert prepared an updated report dated September 8, 2011 (updated report) and addendum dated September 9, 2011 (addendum) that reiterated the Chinese filings and the North American filings were different due to variations in cut off grades and different reporting standards

In a courtroom, I predict the BCSC would fail in proving fraud.  Mining is subjective.  If there are differences between the reporting standards between NI 43-101 and those used for the Chinese filings, it is because resource estimation is subjective.  This stuff is really, really hard to prove.  This could explain why Canadian regulators have a very, very poor track record when it comes to mining-related fraud and why John Felderhof is a free man.

What the BCSC should be doing

  1. Investigating Silvercorp.  The Alfred Little reports contain some bombshell allegations that can be proven.  For example, the reports argue that Silvercorp may be overstating production figures.
  2. Looking at the practice of foreign companies listing on Canadian exchanges.  This is a major fraud magnet whenever it is difficult to extradite the foreigners.  If international laws make extradition difficult, fraud will be extremely high whenever fraudsters face few or no consequences.  Canadian regulators could prevent the next Sino-Forest by taking such a step.
  3. Trying to stamp down on all of the overly aggressive NI 43-101 technical reports out there.  This is a big, big problem in my opinion.
  4. Not allowing juniors to issue press releases about a technical report before it is filed on SEDAR.  The Barkerville Gold debacle is an example of how this practice is problematic.  Investors were hurt before the BCSC decided to halt the stock.

The bottom line

I believe that the BCSC’s pursuit of Jon Carnes is damaging to the integrity of Canada’s capital markets.  It is discouraging market participants from performing due diligence on questionable companies and discouraging market participants from exposing fraud.  This is obviously total fucking bullshit.

*Disclosure:  No position in SVM.  I may take a position in SVM in the future.  I wish I could short the BCSC.

Links

BCSC is fucked in the head, charges Silvercorp analyst with fraud. – Blog post by My Own Market Narrative.

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7 thoughts on “I am disgusted by the BCSC

  1. Pingback: I will no longer say what I truly think about potentially fraudulent companies | Glenn Chan's Random Notes on Investing

  2. That’s non-sense about the add hominem attacks… The BCSC says what it does because there are legal administrative considerations that have to do with the personal status information. I cannot disagree with your article more. I am assuming you have some vested interest in Jon Carnes’ case. i predict that by November 2014 the whole world will know what a exaggerating and deceptive crook that he is….

  3. Jon Carnes is guilty as sin. He’s falsified documents, lied about his credentials, lied about geologists reports, and basically stollen money from hard working people. He’s done all this for himself, his gain, without any thought of anyone else. I say ban all short sellers like him.

  4. Lol, no, the BCSC has it right, read the report. Hes even claimed he worked for coca cola, they said no he hasn’t. He’s lied about the geoligists reports and everything else. I’ve read the BCSC report. All he’s done is help himself to get rich and screw over the small investor. I hope BCSC does the right thing and lay charges on him. If they don’t, they’ve been bought off. It’s clearly spelled out how he fraud ex everyone and made SVM stock prices plumage with his lies.

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