09/11/2012 07:52 EDT | Updated 09/11/2012 07:53 EDT

Huang Kun, Canadian Citizen, Arrested In China After Alleging Fraud Against Silvercorp Metals


A Canadian who helped write a scathing report alleging accounting irregularities at a Vancouver-based mining company has spent the last eight months languishing in Chinese jails, according to a report in the Globe and Mail.

Huang Kun was reportedly involved in writing a report in September, 2011, for, a website that works to expose alleged Chinese corporate corruption. The report claimed that Silvercorp — which is headquartered in Vancouver but has its mines in China — overstated its profit more than fivefold, and its production was 43 per cent lower than it had claimed in public statements, among other things.

Now Huang is caught in the middle of a campaign by the Chinese government and business leaders to tamp down on short-selling — the practice of “shorting” stocks to make money when they go down in value. Silvercorp says it was a victim of short-selling when allegations about its earnings began to emerge.

Huang, 35, was arrested on Dec. 28, 2011, at Beijing International Airport, and his lawyer expects him to be charged shortly with criminally defaming Silvercorp, a crime for which he can get up to two years in prison, the Globe reports.

The news comes as Canada is in the midst of a debate about how closely the country should align itself economically with China. The recent proposal by Chinese state-owned oil firm CNOOC to buy Canadian energy company Nexen has shone a spotlight on concerns about Chinese government involvement in Canada's free-market resources and energy sectors.

A report from the University of Calgary, released last week, warned Canada should be aware of endemic corruption and government involvement in the Chinese business environment when strengthening ties between the two countries, the Financial Post reported.

Based on documents it obtained, the Globe reports that “Silvercorp and its executives may have been working in concert with local authorities, and helping to pay for the investigation against Mr. Huang and his associates.”

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.

That may be illegal under both Canadian and Chinese law.

Business and political leaders in China have recently begun to attack short-sellers — investors who “short” stocks in order to make money when they go down in value. In China, Silvercorp is seen as being among those companies whose reputation has been damaged by short-sellers.

In an editorial titled "U.S. firms poison reputations of China start-ups for profit," China’s state-owned Xinhua news agency last week argued that American short-sellers are using an information gap between China and the West to spread lies about companies, in order to make money as stocks go down.

The editorial hinted China may retaliate for the practice.

"With the U.S. economy floundering for so long, the United States cannot afford to have a capital market that attracts little interest or participation from Chinese companies," Xinhua stated.

Several weeks before AlfredLittle put out the report on which Huang worked, an anonymous letter was sent to the Ontario Securities Commission, as well as media outlets, alleging a “potential $1.3 billion accounting fraud at Silvercorp.” Silvercorp saw its stock plunge 20 per cent in one day as a result.

A forensic auditor's report last fall backed the company's accounting. Silvercorp attempted to sue a number of people and organizations who made allegations about its earnings, including AlfredLittle. A New York state judge threw out the lawsuit last month.

But the criminal case against Huang, if it goes forward, will likely not disappear as quickly. The Globe notes that the Chinese justice system has a 98-per-cent conviction rate.

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