The Superior Court of Justice — Ontario has denied certification of a proposed shareholder class-action lawsuit against mining firm Silvercorp Metals Inc. The shareholders had sought to sue the company alleging that its deficient disclosure caused their losses.
According to the court decision, the proposed plaintiff in the case argued that he lost money after short sellers posted negative information about Silvercorp on the Internet. The company then saw its share price drop 20%.
“The short-sellers made a huge profit; the shareholders lost millions,” the decision states. “The mining company publicly denied the allegations in the Internet postings and tried to show that no misrepresentations were made. To no avail. class actions were filed in the U.S. and Canada, including this one in Toronto.”
The anonymous postings questioned the company’s financial accounting, as well as its mineral estimates, production numbers and mineral grade levels. The company tried to publicly refute those allegations, and the B.C. Securities Commission (BCSC) launched an investigation into the company’s technical disclosures.
In response, Silvercorp retained AMC Mining Consultants, which drafted a technical report examining the firm’s ore production, and provided updated estimates of future production. Ultimately, the BCSC closed its investigation with no action.
The BCSC later brought fraud charges against one of the primary short-sellers, who made $2.8 million when the company’s share price collapsed. However, a BCSC hearing panel dismissed the allegations against him, ruling that while his conduct was “morally unsupportable”, it didn’t amount to fraud.
See: BCSC dismisses fraud allegations against hedge fund manager
The proposed shareholder class action alleged that the AMC report proved that the company’s previous disclosure was misleading. “The gist of the plaintiff’s complaint is that the AMC [report] shows that the earlier representations about mineral production and grade levels as set out in the [company’s reports] were over-stated and, in a word, untrue,” the court decision states.
As a result, the plaintiff alleged misrepresentation, a lack of timely disclosure, and negligence in producing reports that it knew, or should have known, had not been prepared in accordance with industry standards or properly audited.
However, the court ruled that even if the various “deficiencies” identified by the securities commission “could be characterized as possible negligence this alone is not enough to clear the [certification] hurdle, especially when it appears that the commission was content with the AMC retainer and no further action was taken.”
Similarly, the court found that there is no prospect of succeeding at a trial on the allegations of a lack of timely disclosure by the company, and it concluded that the misrepresentation claim should not be certified either.
The motions for leave and certification was dismissed by the court.