09/02/2011 09:55 EDT | Updated 11/02/2011 05:12 EDT

Silvercorp Metals Downplays Allegations Of Fraud In Anonymous Letter

Silvercorp Metals Inc. (TSX:SVM) has denied allegations in an anonymous letter that accused it of a "potential $1.3-billion accounting fraud" — an accusation that comes as Toronto-listed companies with operations in China face increased scrutiny.

Shares in Silvercorp fell 10 per cent Friday as the company said the allegations centred on what the unidentified author claimed were grossly overstated financial results as well as the company's cash position.

"This type of manipulative scheme is baseless and . . . depresses our share price and harms our shareholders," Silvercorp chief executive Rui Feng said in a statement.

"While we are fighting these manipulation schemes, we will continue with our ongoing share buyback program, increase our investor relations efforts and continue to focus on growth through exploration, acquisitions and mine development."

The company said it has formed a task force of independent directors to work with regulators to investigate and discover who made the accusations.

The Ontario Securities Commission declined to comment Friday.

To back its case, the company released scores of financial documents, including statements for accounts at Bank of Montreal, Canaccord and UBS detailing Silvercorp's holdings.

The company also published copies of Chinese tax receipts and other documents supporting its case.

Companies that operate in China but list on foreign stock exchanges have been under the microscope in recent months following accusations against Chinese timber company Sino-Forest Corp. (TSX:TRE) by short-seller Muddy Waters Research.

Those allegations precipitated a steep drop in Sino-Forest stock and the company set up an independent committee to review the accusations. In August, the Ontario Securities Commission stopped trading in the Toronto-listed company and made its own allegations of fraud.

Chinese fertilizer company Migao Corp. (TSX:MGO) also came under scrutiny after it agreed to make a US$100-million payment to a Russian company for potash deliveries that were not expected to start until 2013.

Migao was later refunded the payment amid investor concerns about the ability of the Russian company to deliver on the supply deal.

Silvercorp spokeswoman Laurenn Russell said her company has little in common with Sino-Forest other than that they both operate in China.

"I think the market was spooked by anything to do with China," she said noting the fallout from the allegations against Sino-Forest earlier this summer.

Russell said that as the largest primary silver producer in China and one of the better known Chinese companies listed on the Toronto market the company has some profile.

"Maybe it makes us an easier target," she said.

Silvercorp said it has noted a dramatic increase in the short position of its shares in the last two months, roughly 13 per cent, or about 23 million of its total outstanding shares. Short selling a stock allows an investor to profit when the price of the share falls.

The anonymous author said his firm held a short position in Silvercorp shares and that he intended to further spread his concerns via the Internet.

Stock in Silvercorp closed down 82 cents at $7.41 on the Toronto Stock Exchange. The stock had traded as high as $15.60 earlier this year.

Silvercorp said the letter was also addressed to its auditors and some media outlets, though it couldn't verify whether others had actually received it.

The company, which posted more than 90 pages of accounting and other financial information on its website to disprove the allegations, said it was going ahead with an earlier plan to hold an investor tour of its Ying mine in China later this month.

"All interested investors, analysts and media wishing to visit our mine site and view the ore and operations with their own eyes are asked to contact the company to join the tour," the company said.

In addition to its operations in China, Silvercorp is developing the Silvertip project in northern British Columbia. It bought the project from Silver Standard in 2010 for $15 million in cash and shares.