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SilverCorp Amended Shareholder Class Action Complaint

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SilverCorp Amended Shareholder Class Action Complaint, May 24th, 2013

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SilverCorp Amended Shareholder Class Action Complaint

  1. 1. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 1 of 160
  2. 2. 2 I. NATURE OF THE ACTION 1. This is a federal securities class action brought on behalf of a class consisting of all persons and entities, other than defendants and their affiliates, who purchased the publicly traded common stock of Silvercorp Metals, Inc., from May 20, 2009, to September 13, 2011, inclusive (the “Class Period”). 2. Silvercorp is a British Columbia, Canada, corporation, engaged in the business of mineral mining with operations located principally in China. Its shares trade on the New York Stock Exchange (the “NYSE”) and the Toronto Stock Exchange. 3. Throughout the Class Period, Silvercorp made a litany of materially false and misleading statements in three key areas. First, in Form 6-K and 40-F filings with the SEC, Silvercorp materially misrepresented three important metrics at its flagship Ying mine (which accounts for the vast majority of its reported revenues): (1) the mine’s silver, lead, and zinc “resource” (i.e., the amount in the mine, what had been removed, and what remained), (2) the mine’s production level (i.e., how much silver, lead, zinc, and total ore was produced in 2010), and (3) the grade (i.e., quality) of the silver, lead, and zinc taken from the mine. Second, in various filings with the SEC, Silvercorp materially misrepresented its compliance with applicable legal and regulatory requirements. Third, in its Form 6-K and 40-F filings, and in violation with applicable Canadian GAAP and International Financial Reporting Standards, Silvercorp reported its financial results without making required related party disclosures about its largest customer, which accounted for nearly 30 % of its 2010 sales. 4. The truth was exposed when an investor report raising significant concerns about these and other issues was made public on September 13, 2011 (“9/13/2011 Carnes Report”). Silvercorp’s stock price immediately dropped, damaging Co-Lead Plaintiffs and the other Class Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 2 of 160
  3. 3. 3 members, who had purchased Silvercorp stock on the New York Stock Exchange at inflated prices and were damaged by Defendants’ misconduct as alleged herein. 5. Events following these revelations have only served to buttress the already strong inference of Silvercorp’s scienter. In violation of Canadian law, Silvercorp paid Chinese police to arrest a Canadian national who had investigated the Company in support of the 9/13/2011 Carnes Report. That individual remains incarcerated in China, having not yet been charged with any crime. Amid allegations that Silvercorp’s Chinese financial reports were surreptitiously changed, it hid behind a forensic accounting report, which it refused to release publicly, that itself was based on the accountants’ review of the Company’s financial reports on file with Chinese regulators “at the time of the [forensic accountants’] visit.” It has been revealed that three of the Company’s top 14 customers in 2010 were registered in the final four months of 2009 with minimal capitalization. Two of them have since cancelled their registration. The Company now faces a Corruption of Foreign Public Officials Act investigation by the Royal Canadian Mounted Police’s Anti-Corruption Unit and a subpoena from the SEC. II. JURISDICTION AND VENUE 6. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C. § 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5). 7. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 133l. 8. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1391(b) as a substantial part of the conduct complained of herein occurred in this District. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 3 of 160
  4. 4. 4 9. In connection with the acts, conduct and other wrongs alleged herein, Defendants either directly or indirectly used the means and instrumentalities of interstate commerce, including but not limited to the United States mails, interstate telephone communications and the facilities of the national securities exchange. III. PARTIES 10. Co-Lead Plaintiff Charles A. Burnes, Jr., as set forth in his Certification and loss chart previously submitted to the Court (see Docket No. 18, Exhibits 2-3), purchased Silvercorp stock on the NYSE at artificially inflated prices during the Class Period and has been damaged thereby. 11. Co-Lead Plaintiff Dale Hachiya, as set forth in his Certification and loss chart previously submitted to the Court (see Docket No. 18, Exhibits 2-3), purchased Silvercorp stock on the NYSE at artificially inflated prices during the Class Period and has been damaged thereby. 12. Defendant Rui Feng (“Feng”) has been Silvercorp’s Chief Executive Officer and the Chairman of its Board of Directors since September 4, 2003. Defendant Feng is a citizen of Canada. 13. Defendant Meng “Maria” Tang (“Tang”) has been Silvercorp’s Chief Financial Officer since October 1, 2008. Defendant Tang is a citizen of Canada. Prior to joining the Company, Defendant Tang had five years audit experience, most recently with Ernst & Young LLP, where she focused on public company audits with China operations and was in charge of Sarbanes-Oxley audits for U.S. public companies. 14. Defendants Feng and Tang are sometimes referred to herein as the “Individual Defendants.” Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 4 of 160
  5. 5. 5 15. Defendant Silvercorp Metals, Inc. is a Canadian corporation with a head office, principal address and registered and records office of the Company is located at 1378-200 Granville Street, Vancouver, British Columbia, V6C 1S4. The Company’s shares are listed for trading on the Toronto Stock Exchange and New York Stock Exchange (the “NYSE”) under the symbol “SVM”, it is an SEC reporting company, and it is a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and New Brunswick. Substantially all of its operations take place in China. IV. BACKGROUND FACTS Silvercorp’s Business and Operations 16. As described in its annual reports, Silvercorp was formed as Spokane Resources Ltd. pursuant to an amalgamation of two entities under the Company Act (British Columbia) on October 31, 1991. On October 5, 2000, it consolidated its share capital and changed its name to SKN Resources Ltd. On October 20, 2004, its shareholders adopted new Articles of Incorporation consistent with the transition of the Business Corporations Act (British Columbia) and approved another name change. On May 2, 2005, it officially changed its name to Silvercorp Metals, Inc. 17. During the Class Period, through subsidiaries, Silvercorp engaged in mining operations based in China, in accordance with the following corporate structure: Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 5 of 160
  6. 6. 6 18. Most pertinent to the instant action is Silvercorp’s 100% stake in Victor Mining Ltd. (“Victor Mining”) and, through it, Silvercorp’s 77.5% stake in Henan Found Mining Co. Ltd. (“Henan Found”) and the Company’s primary revenue generating asset, the Yuelianggou Ab-Pb-Zn mine, a/k/a the “Ying Mine”, the “SGX Mine,” and/or the “Ying Project.” The other 22.5% stake in the Ying mine was, as of the beginning of the Class Period, owned by Silvercorp’s formal cooperative joint venture partner Henan Non-Ferrous Geological and Mineral Resources Co. Ltd. (“HNGMR”). The Ying mine is located in Lyoning County, Henan Province, China. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 6 of 160
  7. 7. 7 19. On March 30, 2006, Henan Found received a mining permit issued by the Chinese Department of Land and Resources of Henan Province. Pursuant to this permit, production from the Ying mine began on April 1, 2006. During the Class Period, the Ying mine alone accounted for approximately 90% of Henan Found’s silver production in the year ended March 31, 2010 and 80% of Henan Found’s silver production in the year ended March 31, 2011. 20. All told, Silvercorp operates four silver, lead, and zinc mines in China, and it purports to be China’s largest primary silver producer. During the Class Period, Silvercorp operated its only revenue-generating activities through its subsidiaries Henan Found and Henan Huawei Mining Co., Ltd. (“Henan Huawei”). As such, Silvercorp’s Class Period revenues should never exceed the combined revenues of Henan Found and Henan Huawei. Chinese Laws, Regulations, and Rules Governing Silvercorp’s Mining Operations 21. Under the well-developed legal and regulatory regimes established by the Chinese central government and by Henan province, which are strictly implemented, Silvercorp is required to report to the relevant governmental supervisory departments, inter alia, its true annual mine production for the entirety of the Ying mine and any newly discovered resource veins that affect original resource reserve estimates for the Ying mine as a whole. 22. In 1994, the Chinese State Council issued an administrative regulation entitled Implementary Rule of the PRC Mineral Resources Law, whose provision 31 specified that “[mining rights owners] are required to be supervised and administered by geology and mineral resources departments, prepare and file mineral resources reserve forms and mineral resources exploration and utilization statistical report.” 23. In 2005, due to then-existing problems in mineral resources mining, the Chinese State Council issued Rules on Overall Rectification and Standardization of Mineral Resources Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 7 of 160
  8. 8. 8 Mining Order [Guofa [2005]28]. It specified that “[land and resources departments] shall proactively explore effective ways to monitor reserve dynamically; strictly examine performance of mineral resources’ development and utilization plan; improve the annual reporting system; effectively improve the level of mineral resources’ development and utilization.” 24. To implement this mandate, and for protection and rational utilization of resources, the PRC Ministry of Land and Resources (“PRC L&R Ministry”) implemented a system of comprehensive supervision and management of mine reserves dynamics and, on May 10, 2006, issued the Circular of the Land and Resources Ministry on Comprehensive Dynamic Supervision and Management of Mine Reserves (No. [2006] 87 of the MLR) (“2006 L&R Ministry Circular.” See Exhibit 1 (Chinese) and 2 (English translation) hereto. 25. In China, such a “Circular” or “Measure” issued by the PRC L&R Ministry or the Henan Provincial Land and Resources Department (“Henan L&R Dept”) are considered administrative regulative documents, administrative rules, and/or administrative normative documents. They are comparable to U.S. federal administrative rules, in that they are of legal binding force on relevant parties absent any conflict with superior laws, regulations or rules. 26. The 2006 L&R Ministry Circular requires annual reports on Silvercorp’s Ying mine to provide accurate, current information on the mine as a whole, including any changes to the mine reserves. In particular, it requires, inter alia (with emphasis added) that: Mine enterprises shall conduct geological survey on mine reserves as required, shall submit the changes in mine reserves to the land and resources administration departments in accordance with laws and regulations. Those failing to conduct geological survey according to laws and regulations and to submit annual reports on mine reserves shall not pass through the annual inspection of mineral resources development and utilization. * * * Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 8 of 160
  9. 9. 9 Annual reports on mine reserves shall include: available and cumulative identified reserves, basic reserves and quantity of resources; exploited and wasted reserves of the reporting year; explored and calculated changes to resource reserves of the reporting year; reserves planned to be used in next year; other information related to the management of mineral reserves. 27. As required by the 2006 L&R Ministry Circular, on August 8, 2006, the Henan L&R Dept issued Interim Measures of Henan for the Dynamic Supervision and Management on the Mineral Reserve (Yu Guotuzifa (2006)109) (“2006 Henan L&R Dept Measure”). See Exhibit 3 (Chinese) and 4 (English translation) hereto. Article 22 mandates that annual mineral reserve dynamic reconnaissance reviews and approvals shall include, inter alia, the “annual increase and decrease of reserves caused by recalculation and exploration; degree of accuracy and reliability of reserves calculation result.” 28. This requirement mirrors that set forth in Measures of Henan Province for Implementation of the Mineral Resources Law of the People’s Republic of China (revised in 2004), Provision 42 of which also specified that “Mining right owners are required to report increased mineral reserves to land and resources bureaus for check and approval.” See Exhibit 5 (Chinese) and 6 (English translation) hereto. 29. Moreover, as confirmed by Henan L&R Dept staff, in applying the foregoing requirements, the Henan L&R Dept requires disclosure in each mine’s annual reserve dynamic reconnaissance report whenever a mine’s resource reserve is increased due to newly found veins. If a new vein is comprised of the same minerals as are currently being mined, the mine is required to conduct exploration and reserve evaluation, to pay an additional fee, and to amend both its production proposal and its mining permit. Failure to comply with these required steps would render a mine’s dynamic reports to the Henan L&R Dept legally non-compliant, would Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 9 of 160
  10. 10. 10 render any production on the new veins illegal, and would expose a mine operator to significant risks, liabilities, and penalties, including potentially the revocation of the mining permit. Chinese Oversight and Enforcement 30. All of the foregoing legal and regulatory requirements are strictly enforced. Both the Henan L&R Dept and local land and resource bureaus are required to supervise and monitor the mine reserve dynamic reporting strictly, to ensure its compliance. 31. For instance, the 2006 L&R Ministry Circular mandates enforcement as follows (with emphasis added): Land and Resources authorities shall carefully fulfill the function of supervision and management. Mineral resources reserves statistical registration, collection of mineral resources compensation fees and mining right evaluation must be based on mine reserves annual report that has been reviewed. … For mines with unclear resources and fraudulent mine reserves, land and resources authorities shall urge mine enterprises to do additional geological work to verify resource reserves and perform the filing and registration process of reserves evaluation. Mine enterprises shall conduct geological survey on mine reserves as required, shall submit the changes in mine reserves to the land and resources administration departments in accordance with law and regulations. Those failing to conduct geological survey according to regulations and to submit annual reports on mine reserves shall not pass through the annual inspection of mineral resources development and utilization. 32. Likewise, the 2006 Henan L&R Dept Measure specifies how enforcement is to proceed, stating in Article 5, “Mineral reserve dynamic reconnaissance shall be undertaken by geological survey institutions with relevant qualifications. It shall be conducted in accordance with the Technical Manual of Henan for the Dynamic Reconnaissance on the Mineral Reserves.” 33. That Manual (the “Henan Technical Manual”) sets forth survey techniques, report forms, and other information to facilitate enforcement and provides, inter alia: Annual report of mine reserves dynamic reconnaissance is the annual achievement of dynamic reconnaissance of mining resources reserves, which shall be reviewed, scrutinized and opined by technical expert team organized by the Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 10 of 160
  11. 11. 11 land and resources administration departments of province-governed municipality, city and county level. Small size and above mines’ dynamic reconnaissance reports shall be reviewed by a team consisted majorly by appraisers. See Exhibit 7 (Chinese) and 8 (English translation) hereto. 34. Similarly, in March 2008, the Henan L&R Dept issued a “Circular for Strengthening the Dynamic Supervision and Management on Mine Reserves” (the “2008 Henan L&R Dept Circular”). See Exhibit 9 (Chinese) and 10 (English translation) hereto. It contains extensive provisions requiring the implementation and enforcement of the foregoing legal requirements, to ensure, inter alia, effective enforcement by Chinese taxation authorities, assessment and collection of all applicable costs and fees, and proper registration and transfer of mining rights. It contains the following provisions, among others (with emphasis added): (a) Provision 1.1 states: Mine enterprises holding mining permits and mining … shall perform the mineral reserves dynamic supervision and management system, and shall report the annual utilization plan, conduct the reserves dynamic reconnaissance, assess the reported reserves losses, submit the annual report and etc. according to the Interim Measures of Henan for the Dynamic Supervision and Management on the Mineral Reserve. If mine enterprises fail to make dynamic supervision on the mineral reserves as per the above rules, the annual report of mine reserves dynamic reconnaissance shall be determined as unqualified, and the annual inspection of mineral resources development and utilization shall be determined to be unqualified too. (b) Provision 1.2 states that data concerning changes in the mine reserves dynamic reconnaissance annual report, as approved by authorities, is the basis for registered mineral reserves that serve as the basis for the extension, amendment and transfer of mining rights. (c) Provision 1.3 states: Reserves verification reports submitted by mine enterprises shall have a specific chapter describing in details about reserves utilization during the period between this verification and the previous one, as recorded by the reserves dynamic Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 11 of 160
  12. 12. 12 reconnaissance. Results of each year’s reserves dynamic reconnaissance is the basis for reserve changes in the reserves verification report. For the mine enterprise that failed to conduct reserves dynamic reconnaissance in accordance with laws and regulations, or whose reserves verification report lacked of relevant contents, reviewing institutions shall not accept their submitted reserves verification report, neither shall land and resources authorities permit filing of such verification report. (d) Provision 2 states, inter alia: Mine reserves dynamic reconnaissance shall be conducted according to laws and regulations. During the process of onsite reconnaissance, ledger recording and report drafting, they shall reflect the true utilization of the mine, and are prohibited from making fraud. It adds that geological survey institutions that fail to perform mine reserves dynamic reconnaissance up to these standards, they face serious sanction, including a potential bar from working on reconnaissance reports and potential revocation of their licenses. (e) Provision 3 sets forth various verification processes to be employed by land and resources authorities, including regular and irregular inspections, supervision of survey institutions’ reconnaissance work, operation of a database, and peer review. It adds, “For mine enterprises discovered of serious problems with dynamic reconnaissance, authorities shall check the problems and report to the Department of Land and Resources of Henan Province.” 35. Henan L&R Dept staff confirm that both the Henan L&R Dept and lower level land and resource bureaus began mineral resources reserve dynamic monitoring in 2007 and that, by 2009, they had ramped up such activities to cover the entirety of Henan Province, thereby fully effectuating the foregoing legal regime by that time. 36. By way of example as to such layered enforcement during the Class Period, the Luanchuan County Land and Minerals Bureau (the “LC L&M Bureau”) issued on October 18, 2010 an official announcement regarding the 2010 mineral resources reserve dynamic Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 12 of 160
  13. 13. 13 monitoring and reporting work entitled Notification of Launching Mine Reserves Dynamic Reconnaissance Work in 2010 (the “2010 LC L&M Bureau Notice”). See Exhibit 11 (Chinese) and 12 (English translation) hereto. Luanchuan is a neighbor city of Luoning, and both were under the Lyoyang City’s administration. It states, “All mining rights owners within our county shall conduct mine reserves dynamic reconnaissance, prepare the reserves dynamic reconnaissance report and accept supervision and management of geology and mining authorities.” Id., Provision A. Any entities refusing to do so “shall be refused to be accepted or deemed as disqualified for submission of mining permit’s extension, amendment, transfer and annual check.” Id., A.2. Governmental oversight bodies “shall establish and improve the working system, implement strictly the requirements in the technical specifications and technical guide, conduct carefully the mine reserves on-site reconnaissance and establish and improve the ledger for the reserves dynamic reconnaissance work.” Id., C.1. Importantly, “The survey institutions shall report truly the current production situation of mine enterprise, and, in particular, mines conducting unlawful act[s]…shall report the situation carefully, minutely, objectively and fairly….” Id., C.2. (emphasis added). 37. All Chinese dynamic reports are prepared by government-approved professional geographic institutions, based on exacting inspection standards and through independent survey, which are reviewed and approved by professional appraisals. Such dynamic reports serve a litany of important governmental functions, including ensuring that each mine is operated safely, legally, and in compliance with its permit and that each mine is assessed all applicable costs, fees, and taxes. They also serve important private interests, including accurate description and recordation of mineral resource and mining rights, which among other things, ensures effective transfer of title in the event of sales or other dispositions. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 13 of 160
  14. 14. 14 38. Silvercorp was not and is not legally entitled to any special exemption from the foregoing legal obligations or compliance duties, the totality of which required it to annually report updated and current data on the reserves and production of the entire Ying mine. For Silvercorp to have operated the Ying mine legally during the Class Period, it must have adhered to all the foregoing requirements. If it failed to do so, then Silvercorp operated the Ying mine illegally during the Class Period. Silvercorp’s Ying Mine Permit Imposed Strict Production Limits 39. Pursuant to and subject to all of the foregoing, Silvercorp operates its Ying mine pursuant to permit # C4100002009093210038549, which was amended on September 30, 2009 and which provides for an annual production capacity of 198,000 tons per year (or roughly 542.5 tons per day). See Exhibit 13 (Chinese) and 14 (English translation) hereto (information obtained from PRC L&R Ministry official website). 40. This mining production capacity limit set forth in the permit, which was in place throughout the Class Period, is a strict limit on the Ying mine’s production level. If Silvercorp desired to increase its production, it was legally obligated to apply for and obtain approval of an amendment to its permit. This requirement is set forth in applicable Chinese regulations, as well as prior statements prepared and issued on behalf of the Company itself. 41. For instance, in July 2010, the Chinese State Council issued a Circular of the State Council on Strengthening Safe Production of Enterprises (Guofa [2010] 23), which governed the Ying mine’s operations during the latter Class Period. See Exhibit 15 (Chinese) and 16 (English translation) hereto. It states, “Enterprises organizing production with overcapacity, over-intensification and over-authorized strength shall be ordered to stop Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 14 of 160
  15. 15. 15 production and shut down for rectification, and economic punishment with upper limits shall be imposed to enterprises and their principals in accordance with laws.” Id., Provision II.3. 42. Indeed, the Technical Update – 2006 – For Silvercorp Metals Inc. On The Ying Silver-Lead-Zinc Project, Henan Province, People’s Republic of China, dated April 18, 2006, which was prepared by (among others) Chris Brioli of BK Exploration Associates, Silvercorp’s purported independent qualified person, describes a similar limitation on the original permit of the Ying mine. That report, in Section 17.2, states (with emphasis added): As reported on March 30, 2006, [Henan] Found has been issued a mining permit by the Department of Land and Resources of Henan Province, covering the 9.945 square kilometres SGX area within the Ying Silver Project, where Found has focused its major exploration effort. The permit was issued on the terms applied for. It allows operation of a 600 tonne per day underground mine within the permit area to produce silver, lead and zinc ores. The production rate can be increased in the future by amending the existing mining permit once expanded resource estimates have been filed with the Department of Land and Resources of Henan. 43. Moreover, Henan L&R Dept staff independently confirm that governmental authorities do not allow production beyond the annual capacity approved in a mining permit and that, if mining capacity is changed, mines are required to apply for an amendment to their permit. 44. In light of the foregoing, Silvercorp’s production at the Ying mine during the Class Period, in order to be legally compliant, was limited to 198,000 tons per year. Official Chinese Dynamic Reports Evidence Silvercorp’s Actual Mining Activities 45. A Report of the 2010 Dynamic Reconnaissance on the Reserve of Yuelianggou Lead-Zinc-Silver Mine in Luoning County, Henan Province (the “2010 Dynamic Report”) concerning the Ying mine is attached as Exhibits 17 (Chinese) and 18 (English translation). Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 15 of 160
  16. 16. 16 46. The 2010 Dynamic Report is a report on the full reserves and production of the entire Ying mine, with updated data through 2009 and for 2010. It is not a report on only a lesser segment or portion of the mine. 47. This conclusion is supported by numerous pieces of evidence, including inter alia: (a) The entire body of Chinese laws, Circulars, Measures, and other regulations, as described in great detail supra, required the 2010 Dynamic Report to report to the relevant governmental supervisory departments, inter alia, the true annual mine production for the entirety of the Ying mine and any newly discovered resource veins that affect original resource reserve estimates for the Ying mine as a whole. If it did not do so, Silvercorp would be operating the Ying mine illegally, and thereby would risk revocation of its mining permit and effective termination of its only revenue-generating activities. (b) The text of the 2010 Dynamic Report itself evidences compliance with this legal and regulatory regime. Specifically, it states: “This report has reflected the entire geological results of the reconnaissance, and is in accordance with the relevant regulations and requirements. It contains the complete text, graphs, tables, and attachments, and has reached the aim of this reconnaissance.” (c) The layers of oversight and enforcement by Chinese governmental authorities, as described in great detail supra, ensured that the 2010 Dynamic Report set forth the Ying mine’s true production and resource reserves, based on the most current and updated information. This multi-tiered oversight and enforcement regime served to ensure, among other things, that Silvercorp would be assessed all applicable costs, fees, and taxes. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 16 of 160
  17. 17. 17 (d) Again, the text of the 2010 Dynamic Report itself illustrates that this multi- layered oversight and enforcement machinery indeed worked. The report concludes by stating, “It is therefore recommended to approve the review report. There is no dissension among the appraisers and experts at the review conference.” In addition: (a) a Review Expert signed and dated the report; (b) an official at the municipal and county level bureau signed and dated the report, signifying agreement with the Review Experts, and this signature was verified by another individual; (c) a Bureau Chief signed and dated the report to signify consent; and (d) the Luoyang City Land & Resource Bureau certified its approval with a dated and sealed signature. This is the precise process outlined in the 2006 Henan L&R Dept Measure, Article 21, and in the Henan Technical Manual, as discussed supra. (e) The 2010 Dynamic Report reports a total resource drawdown of 534,831 tons, out of a total resource reserve of 1.4639 million tons, during the period 2005-2009. Mining activities at the Ying mine first began on April 1, 2006, after which a period of time elapsed before they ramped up to full capacity. As such, the 534,831 ton figure is consistent with the mine’s full capacity production level of roughly 200,000 tons/year, assuming that the mine ramped up production during 2006-2007 and then operated at full capacity during 2008-2009. (f) The 2010 Dynamic Report also reports 207,037 tons of resource drawdown for 2010, which is corroborated by the total reported ore mined for calendar 2010 (as separately reported in the Company’s four quarterly 6-K filings made with the SEC within calendar 2010), which was 310,749 tons, inclusive of the zero grade dilution material. (g) The 207,037 tons of reported resource drawdown in the 2010 Dynamic Report is also corroborated by the reported resource drawdown rates for the entire mine during the three- year period 2009-2011, which were 639,312 tons (or just over 213,000 tons on average), as set Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 17 of 160
  18. 18. 18 forth in the Technical Report for Ying Gold-Silver-Lead-Zinc Property, Henan Province, China prepared by AMC Mining Consultants (Canada) Ltd (“AMC”) on June 13, 2012, as revised April 30, 2013 (the “2012 AMC Technical Report”). (h) The 207,037 tons of reported resource drawdown in the 2010 Dynamic Report is also consistent with (though slightly in excess of ) the Ying mine’s permitted production level under Silvercorp’s operative mining permit, which set a production limit of 198,000 tons per year during the Class Period. If Silvercorp exceeded this permitted production rate by any material degree, it would be operating the Ying mine illegally, and thereby would risk revocation of its mining permit and effective termination of its only revenue-generating activities. Silvercorp’s Substantial Stock Offering 48. On December 7, 2010, Silvercorp filed a Prospectus Supplement with the SEC to register 9,200,000 shares to be sold for $116,840,000, including underwriters’ over-allotment option, in a “bought deal” (i.e., firm-commitment) offering (the “December 2010 Offering”). The Prospectus Supplement, which was signed by Defendants Feng and Tang, incorporated by reference Management’s Discussion and Analysis from Silvercorp’s 2010 40-F (defined below). 49. The December 2010 Offering closed on December 14, 2010. 50. For purposes of its SEC filings, Silvercorp uses a fiscal year that ends on March 31st of the same calendar year. For instance, Silvercorp’s fiscal 2009 ended on March 31, 2009. V. DEFENDANTS’ MISCONDUCT 51. As discussed in greater detail infra, Defendants made false and misleading statements and omitted material facts from the following Silvercorp filings with the SEC: (a) its form 6-K for the quarter and fiscal year ended March 31, 2009, filed with the SEC on May 20, 2009 (the “3/31/2009 6-K”); Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 18 of 160
  19. 19. 19 (b) its Form 40-F for the fiscal year ended March 31, 2009 (fiscal 2009), filed with the SEC on June 8, 2009 (the “2009 40-F”), signed by Feng, which included (as exhibits) certifications signed by Feng and Tang pursuant to Sarbanes-Oxley Act §§302 and 906 certifying that the 2009 40-F did not contain materially false and misleading statements; (c) its Form 6-K for the quarter ended June 30, 2009 (Q1 of fiscal 2010), filed with the SEC on August 14, 2009 (the “6/30/2009 6-K”); (d) its Form 6-K for the quarter ended September 30, 2009 (Q2 of fiscal 2010), filed with the SEC on November 12, 2009 (the “9/30/2009 6-K”), which was accompanied by Form 52- 109F2 certifications signed by Feng and Tang (separately filed with the SEC on February 16, 2010 as an exhibit to a 6-K) certifying that the financial statements did not contain materially false and misleading statements; (e) its Form 6-K for the quarter ended December 31, 2009 (Q3 of fiscal 2010), filed with the SEC on February 16, 2010 (the “12/31/2009 6-K”), which included (as exhibits) unaudited financial statements signed by Feng, and Form 52-109F2 certifications signed by Feng and Tang certifying that the financial statements did not contain materially false and misleading statements; (f) a letter from Silvercorp to the SEC, signed by Tang, dated February 23, 2010 filed with the SEC the same day; (g) its form 6-K for the quarter and fiscal year ended March 31, 2010, filed with the SEC on May 13, 2010 (the “3/31/2010 6-K”); (h) its Form 40-F for the fiscal year ended March 31, 2010 (fiscal 2010), filed with the SEC on June 24, 2010 (the “2010 40-F”) signed by Feng, which included (as exhibits) audited financial statements signed by Feng and Tang, and certifications signed by Feng and Tang Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 19 of 160
  20. 20. 20 pursuant to Sarbanes-Oxley Act §§302 and 906 certifying that the Form 40-F did not contain materially false and misleading statements; (i) its Form 6-K for the quarter ended June 30, 2010 (Q1 of fiscal 2011), filed with the SEC on August 16, 2010 (the “6/30/2010 6-K”), which included (as exhibits) unaudited financial statements signed by Feng, and Form 52-109F2 certifications signed by Feng and Tang certifying that the financial statements did not contain materially false and misleading statements; (j) a Management Circular, signed by Feng, dated August 26, 2010, filed with the SEC as an attachment to a Form 6-K on September 1, 2010, as well as the Company’s Code of Business Conduct and Ethics which it referenced; (k) its Form 6-K for the quarter ended September 30, 2010 (Q2 of fiscal 2011), filed with the SEC on December 6, 2010 (the “9/30/2010 6-K”); (l) an Underwriting Agreement dated December 7, 2010, signed by Feng, which was filed with the SEC as an attachment to a Form 6-K on December 8, 2010; (m) its Form 6-K for the quarter ended December 31, 2010 (Q3 of fiscal 2011), filed with the SEC on February 10, 2011 (the “12/31/2010 6-K”), which included (as exhibits) unaudited financial statements signed by Feng, and Form 52-109F2 certifications signed by Feng and Tang certifying that the financial statements did not contain materially false and misleading statements; (n) its form 6-K for the quarter and fiscal year ended March 31, 2011, filed with the SEC on May 12, 2011 (the “3/31/2011 6-K”); (o) its Form 40-F for the fiscal year ended March 31, 2011 (fiscal 2011), filed with the SEC on June 3, 2011 (the “2011 40-F”) signed by Feng, which included (as exhibits) audited Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 20 of 160
  21. 21. 21 financial statements signed by Feng and Tang, and certifications signed by Feng and Tang pursuant to Sarbanes-Oxley Act §§302 and 906 certifying that the Form 40-F did not contain materially false and misleading statements; and (p) its Form 6-K for the quarter ended June 30, 2011 (Q1 of fiscal 2012), filed with the SEC on August 11, 2011 (the “6/30/2011 6-K”) which included (as exhibits) unaudited financial statements signed by Feng, and Form 52-109F2 certifications signed by Feng and Tang certifying that the financial statements did not contain materially false and misleading statements. 52. Defendants’ false and misleading statements and omissions during the Class Period predominantly concerned three key topical categories: (1) Silvercorp’s mining operations at the Ying mine regarding in particular the Ying mine’s resource, head grade and productivity; (2) Silvercorp’s legal compliance with U.S. and Chinese laws; and (3) related party transactions with Silvercorp’s largest customer. Each category is alleged in detail below. Defendants’ False And Misleading Statements About Silvercorp’s Mining Operations 53. As compared to the 2010 Dynamic Report, the data Silvercorp reported in its SEC filings dramatically and materially overstated three key metrics concerning the Company’s all- important Ying mine: (1) its silver, lead, and zinc resource (i.e., (i) the total amounts of silver, lead, and zinc in the mine, (ii) silver, lead, and zinc already removed, and (iii) silver, lead, and zinc remaining); (2) its production level (i.e., how much total ore, silver, lead and zinc was produced in 2010); and (3) its silver, lead, and zinc run-of-mine ore head grade (i.e., the measured grade of the silver, lead, and zinc actually taken from the mine, inclusive of minor stockpile adjustments). Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 21 of 160
  22. 22. 22 54. First, as regards the Ying mine’s silver, lead, and zinc resource, the Company made material misstatements in its 2010 40-F and its 2011 40F. In both, Silvercorp represented the total resource remaining to be 4,801,139 tonnes of reserve, including 3,553 tonnes of silver, 765,940 tonnes of lead, and 292,946 tonnes of zinc. In both, Silvercorp represented the resource grades to be 740 g/t (silver), 16.0 % (lead), and 6.1 % (zinc). 55. These statements were materially false and misleading when made, because the 2010 Dynamic Report, which accurately describes the resources and reserves of the entire Ying mine as discussed supra, stated that: (a) in 2005, the Ying mine had a resource reserve of 1.4639 million tons, including 324.76 tons of silver, 65,359.96 tons of lead, and 37,778.84 tons of zinc; (b) by the end of 2009, 534,831 tons had been mined from the Ying mine, leaving a resource of 929,069 tons, including 198.31 tons of silver, 41,208.30 tons of lead, and 23,111.95 tons of zinc; and (c) in 2010, 207,037 tons was mined from the Ying mine, including 32.17 tons of silver, 5,911.40 tons of lead, and 5,162.80 tons of zinc, leaving 722,032 tons in the resource, including 166.14 tons of silver, 35,296.90 tons of lead, and 17,949.15 tons of zinc. 56. The following chart summarizes the differences at issue: Source 2010 Dynamic Report 40-F filings Date 2005 2005-2009 2010 2010 and 2011 Resource reserve 1,463,900 tons 929,069 tons 722,032 tons 4,801,139 tonnes Silver reserve 324.76 tons 198.31 tons 166.14 tons 3,553 tonnes Lead reserve 65,359.96 tons 41,208.30 tons 35,296.90 tons 765,940 tonnes Zinc reserve 37,778.84 tons 23,111.95 tons 17,949.15 tons 292,946 tonnes Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 22 of 160
  23. 23. 23 57. Second, Silvercorp misrepresented the Ying mine’s production of ore, silver lead, and zinc in 2009 and 2010 (as discussed in terms of either total ore mined or run-of-mine ore, two figures that are generally track very closely to one another). 58. Silvercorp’s 6-K filings in calendar 2009 stated that the Company produced: (a) 313,421 total tonnes of ore mined (57,842 tons reported in the 3/31/2009 6-K, 86,248 tonnes reported in the 6/30/2009 6-K, 83,263 tonnes reported in the 9/30/2009 6-K, and 86,068 tonnes reported in the 12/31/2009 6-K), (b) 145 run-of-mine ore tonnes of silver in total (31 tonnes reported in the 3/31/2009 6-K, 40 tonnes reported in the 6/30/2009 6-K, 38 tonnes reported in the 9/30/2009 6-K, and 36 tonnes reported in the 12/31/2009 6-K), (c) 26,596 run-of-mine ore tonnes of lead in total (5,723 tonnes reported in the 3/31/2009 6-K, 7,380 tonnes reported in the 6/30/2009 6-K, 6,821 tonnes reported in the 9/30/2009 6-K, and 6,672 tonnes reported in the 12/31/2009 6-K), and (d) 9,288 run-of-mine ore tonnes of zinc in total (1,950 tonnes reported in the 3/31/2009 6-K, 2,514 tonnes reported in the 6/30/2009 6-K, 2,526 tonnes reported in the 9/30/2009 6-K, and 2,298 tonnes reported in the 12/31/2009 6-K). Its 2010 Form 40-F stated that the total ore mined at the Ying mine for fiscal 2010 (the last three quarters of calendar 2009 and the first quarter of calendar 2010) was 312,171 tonnes, with 145 run-of-mine ore tonnes of silver and 26,596 run-of-mine ore tonnes of lead. 59. All of these figures were materially false and misleading, because the 2010 Dynamic Report, which accurately describes production at the entire Ying mine as discussed supra, reported that Silvercorp produced only 534,831 tons of ore, including 126.45 tons of silver, 24,151.65 tons of lead, and 14,666.89 tons of zinc from the Ying mine during the entire period 2005-2009. 60. The following chart summarizes the differences at issue: Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 23 of 160
  24. 24. 24 Source 2010 Dynamic Report 6-K filings 2010 40-F Date 2005-2009 Calendar 2009 Fiscal 2010 Total Production 534,831 tons 313,421 ore mined tonnes 312,171 ore mined tonnes Silver Production 126.45 tons 145 run-of-mine ore tonnes 145 run-of-mine ore tonnes Lead Production 24,151.65 tons 26,596 run-of-mine ore tonnes 26,596 run-of-mine ore tonnes Zinc Production 14,666.89 tons 9,288 run-of-mine ore tonnes 9,674 run-of-mine ore tonnes 61. Silvercorp’s 6-K filings in calendar 2010 stated that the Company produced: (a) 310,749 total tonnes of ore mined (56,592 tonnes reported in the 3/31/2010 6-K, 83,212 tonnes reported in the 6/30/2010 6-K, 85,204 tonnes reported in the 9/30/2010 6-K, and 85,741 tonnes reported in the 12/31/2010 6-K), (b) 152 run-of-mine ore tonnes of silver in total (31 tonnes reported in the 3/31/2010 6-K, 40 tonnes reported in the 6/30/2010 6-K, 38 tonnes reported in the 9/30/2010 6-K, and 43 tonnes reported in the 12/31/2010 6-K), (c) 26,065 run-of-mine ore tonnes of lead in total (5,520 tonnes reported in the 3/31/2010 6-K, 6,904 tonnes reported in the 6/30/2010 6-K, 6,558 tonnes reported in the 9/30/2010 6-K, and 7,083 tonnes reported in the 12/31/2010 6-K), and (d) 9,220 run-of-mine ore tonnes of zinc in total (2.034 tonnes reported in the 3/31/2010 6-K, 2,387 tonnes reported in the 6/30/2010 6-K, 2,324 tonnes reported in the 9/30/2010 6-K, and 2,475 tonnes reported in the 12/31/2010 6-K). Its 2011 40-F stated that the total ore mined at the Ying mine for fiscal 2011 (Q2-Q4 of calendar 2010 and Q1 of calendar 2011) was 316,522 tonnes, with 149 run-of-mine ore tonnes of silver produced, 25,716 run-of- mine ore tonnes of lead produced, and 8,889 run-of-mine ore tonnes of zinc produced.. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 24 of 160
  25. 25. 25 62. All of these figures were materially false and misleading, because the 2010 Dynamic Report, which accurately describes production at the entire Ying mine as discussed supra, reported that Silvercorp produced just 207,037 tons of ore, containing 32.17 tons of silver, 5,911.4 tons of lead, 5,162.8 tons of zinc from the Ying mine in 2010. 63. The following chart summarizes the differences at issue: Source 2010 Dynamic Report 6-K filings 2011 40-F Date 2010 Calendar 2010 Fiscal 2011 Total Production 207,037 tons 310,749 ore mined tonnes 316,522 ore mined tonnes Silver Production 32.17 tons 152 run-of-mine ore tonnes 149 run-of-mine ore tonnes Lead Production 5,911.4 tons 26,065 run-of-mine ore tonnes 25,716 run-of-mine ore tonnes Zinc Production 5,162.8 tons 9,220 run-of-mine ore tonnes 8,889 run-of-mine ore tonnes 64. Third, the Company misstated the Ying mine’s run-of-mine ore head grade for silver, lead, and zinc. Silvercorp represented that the run-of-mine ore head grade for the silver, lead, and zinc produced at the Ying mine was as follows for each quarter of calendar 2010: (a) 429.3 g/t (silver), 7.6 % (lead), and 2.8 % (zinc) for the quarter ended March 31, 2010 (Q4 of fiscal 2010), as stated in the 3/31/2010 6-K; (b) 470.5 g/t (silver), 8.1 % (lead), and 2.8 % (zinc) for the quarter ended June 30, 2010, as stated in the 6/30/2010 6-K; (c) 461 g/t (silver), 7.9 % (lead), and 2.8 % (zinc) for the quarter ended September 30, 2010, as stated in the 9/30/2010 6- K; and (c) 499 g/t (silver), 8.3 % (lead), and 2.9 % (zinc) for the quarter ended December 31, 2010, as stated in the 12/31/2010 6-K. Silvercorp’s 2011 40-F, which spans essentially the same Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 25 of 160
  26. 26. 26 time period (save for the substitution of the quarter ended March 31, 2011 (Q4 of fiscal 2011) for the quarter ended March 31, 2010)), represented that the run-of-mine ore head grade for the silver produced at the Ying mine was 470 g/t (silver), 8.1 % (lead), and 2.8 % (zinc). 65. All of these figures are materially false and misleading, because the 2010 Dynamic Report, which accurately provides full-mine data for the Ying mine as described supra, from which its entire head grade can be calculated, reveals reported resource drawdown grades at the entire Ying mine during 2010 of roughly 155 g/t for the silver produced (as calculated based on the 207,037 tons of resource drawdown and 32.17 tons of silver produced), 2.9 % for the lead produced (as calculated taking the lead tons produced divided by the total ore produced and multiplied by 100 to get a percent figure), and 2.5 % for the zinc produced (same calculation as lead). 66. These figures are absolutely irreconcilable with the run-of-mine ore grade figures that Silvercorp set forth in its SEC filings, as discussed above. Because the run-of-mine ore would include waste rock (called dilution) that is excluded from the resource drawdown ore, the run-of-mine ore should yield a lower, not a higher, grade. In other words, for silver the run-of- mine ore figure in Silvercorp’s SEC filings should be less than, not greater than, the 155 g/t resource drawdown grade that derives from the 2010 Dynamic Report’s data. For lead, the run- of-mine ore grade figure in the Company’s SEC filings should be less than, not greater than, the 2.9% resource drawdown grade figure that derives from the 2010 Dynamic Report’s data. For zinc, the run-of-mine ore grade figure in the Company’s SEC filings should be less than, not greater than, the 2.5% resource drawdown grade figure that derives from the 2010 Dynamic Report’s data. Indeed, by using the dilution data in the AMC Technical Report, the difference between the run-of-mine ore grade figures reported by Silvercorp in 2009 and 2010 and the Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 26 of 160
  27. 27. 27 resource drawdown grade figures reported in the 2010 Dynamic Report can be calculated. Such calculations reveal that the reported run-of-mine ore grade figure should have been about 40% lower than the resource drawdown grade figures from the 2010 Dynamic Report. 67. The following chart summarizes the differences at issue: Source 2010 Dynamic Report Calendar Year 2010 6-Ks 2011 40-F Date 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Fiscal 2011 Silver ROM ore head grade * 155 g/t 429.3 g/t 470.5 g/t 461 g/t 499 g/t 470 g/t Lead ROM ore head grade * 2.9% 7.6% 8.1% 7.9% 8.3% 8.1% Zinc ROM ore head grade * 2.5% 2.8% 2.8% 2.8% 2.9% 2.8% * ROM = run-of-mine 68. As further evidence that the data set forth in Silvercorp’s SEC-filed Forms 6-K and 40-F are materially false and misleading, they also do not agree with the figures set forth in the Company’s technical reports, prepared by outside qualified persons, covering the same time periods. For instance, the 2012 AMC Technical Report (as revised) reported 2010 run-of-mine ore tonnage, produced silver tonnage, run-of-mine ore grade, and resource drawdown grade figures for the Ying mine that also differed from those set forth in the Company’s SEC filings. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 27 of 160
  28. 28. 28 Defendants’ False And Misleading Statements About Silvercorp’s Compliance With The U.S. Federal Securities Laws And Chinese Mining Laws, Regulations And Rules 69. During the Class Period, Silvercorp also made materially false and misleading statements regarding its compliance with applicable laws, rules, and regulations, including both the U.S. federal securities laws and the Chinese legal and regulatory regime regarding mining discussed supra. For instance: (a) In a letter to the SEC dated February 23, 2010, which Silvercorp filed with the SEC the same day, the Company stated: “We operate all four of our mines, i.e. the Ying, HPG, TLP and LM mines, in China. Our permitting and commissioning process are undertaken in accordance with the Chinese mining law and regulations. The process is rigorous.” (b) In a Management Information Circular dated August 26, 2010, which was filed with the SEC as an attachment to a form 6-K on September 1, 2010, the Company touted the fact that its board of directors had approved a formal “Code of Business Conduct and Ethics.” It added (with emphasis added): The Code [of Business Conduct and Ethics] is applicable to all employees, consultants, officers and directors, regardless of their position with the Company, at all times and everywhere the Company does business. The Code provides that the Company’s employees, consultants, officers and directors will uphold its commitment to a culture of honesty, integrity and accountability. The Board has not granted any waiver of the Code in favor of a director or executive officer, and no material change report has been required or filed in connection with the Code. (c) The Company’s Code of Business Conduct and Ethics, available on the Silvercorp website, in turn states as follows (with italicized emphasis added): We require high standards of professional and ethical conduct from our employees. Our reputation with our shareholders, business partners, prospective investors and other stakeholders for honesty and integrity is key to the success of our business. No employee will be permitted to achieve results through Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 28 of 160
  29. 29. 29 violations of laws or regulations, or through unscrupulous dealings. We intend that the Corporation’s business practices will be compatible with the economic and social priorities of each location in which we operate. Although customs vary by country and standards of ethics may vary in different business environments, honesty and integrity must always characterize our business activity. If a law conflicts with a policy in this Code, you must comply with the law; however, if a local custom or policy conflicts with this Code, you must comply with the Code. If you have any questions about these conflicts, you should ask your supervisor how to handle the situation. This Code reflects our commitment to a culture of honesty, integrity and accountability and outlines the basic principles and policies with which all employees are expected to comply. Please read this Code carefully and sign at the bottom to acknowledge it has been read and that you will undertake to comply with the Code at all times. * * * Those who violate the standards set forth in this Code will be subject to disciplinary action up to and including dismissal. * * * Compliance with the letter and spirit of all laws, rules and regulations applicable to our business is critical to our reputation and continued success. All employees must respect and obey the laws of the cities, provinces, states and countries in which we operate and avoid even the appearance of impropriety. (d) In connection with the Company’s December 2010 Offering, the Company filed a Form 6-K with the SEC on December 8, 2010 that attached the Underwriting Agreement dated December 7, 2010, in which it represented and warranted as follows (with emphasis added): 5.1 The Company represents and warrants to the Underwriters, and acknowledges that the Underwriters are relying upon such representations and warranties in entering into this Agreement, that: * * * (aa) other than as disclosed in the Continuous Disclosure Materials, there are no material actions, suits, judgments, investigations or proceedings of any kind whatsoever outstanding or, to the Company’s knowledge, pending, threatened against or affecting the Company or the Material Subsidiaries, or to the Company’s knowledge, their respective directors or officers at law or in equity or before or by any federal, provincial, state, municipal or other governmental department, commission, board, bureau or agency of any kind whatsoever and, to the Company’s knowledge, there is no basis therefor; Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 29 of 160
  30. 30. 30 * * * (dd) none of the Company nor the Material Subsidiaries and to the Company’s knowledge their respective directors, officers are in breach of any law, ordinance, statute, regulation, by-law, order or decree of any kind whatsoever where non-compliance would have a material adverse effect on the Company or the Material Subsidiaries; 70. These statements were materially false and misleading when made, because in actuality, the Company’s Forms 6-K and 40-F during the Class Period, as described supra, contained extensive false and misleading statements regarding Silvercorp’s mining operations and its customer sales, as set forth in detail herein, in violation of U.S. federal securities laws. 71. In addition, the Company’s 2010 production at the Ying mine – 207,037 tons as stated in the 2010 Dynamic Report – exceeded the production limit (198,000 tons) set by the Ying mine’s permit. As such, in 2010, the Company operated the Ying mine in violation of its permit, and by extension, in violation of the Chinese legal and regulatory regime described supra. This is an additional reason why the Company’s statements regarding legal compliance, as described above, were materially false and misleading. Defendants’ False And Misleading Statements About Silvercorp’s Largest Customer 72. During the Class Period, Silvercorp’s reported financial results were materially misleading due to a disclosure failure, in violation of Canadian GAAP, regarding its largest customer, Yongning Smelting Co. Ltd. (“Yongning”). In 2010 alone, Yongning accounted for at least 28.2% of Henan Found’s sales (at least 272,154,827 RMB out of 964,812,316 RMB). 73. Yongning was in a construction phase through Q2 of fiscal 2010 (the quarter ended September 30, 2009) and commenced trial production during Q3 of fiscal 2010 (the Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 30 of 160
  31. 31. 31 quarter ended December 31, 2009). Silvercorp made sales to Yongning as early as Q3 of fiscal 2010, thereby triggering the disclosure obligations discussed below. 74. During the Class Period, Silvercorp’s ownership interest in Yongning fluctuated between 11.75 % and 18 %, becoming 15 % as of Q2 of fiscal 2011 (the quarter ended September 30, 2010). 75. As such, as explained below, under Canadian GAAP and International Financial Reporting Standards (“IFRS”), Silvercorp was required to make related party disclosures regarding its sales to Yongning. 76. Canadian GAAP makes clear that “[i]nformation about related party transactions is often of more significance to a financial statement user than information about unrelated party transactions, regardless of the size of such transactions.” See Canadian Institute of Chartered Accountants Handbook (“CICA HB”) 3840 ¶ 48. 77. Under Canadian GAAP, “[r]elated parties exist when one party has the ability to exercise, directly or indirectly, control, joint control or significant influence over the other. Two or more parties are related when they are subject to common control, joint control or common significant influence.” See CICA HB 3840 ¶ 3 (g). Silvercorp’s 15 % ownership stake and its representation on Yongning’s board of directors enabled Silvercorp to exercise joint control over Yongning. Joint control of an economic activity is the contractually agreed sharing of the continuing power to determine its strategic operating, investing and financing policies. See CICA HB 3840 ¶ 3(e). Ownership interest and joint control are examples of some of the most commonly encountered related party relationships to which Canadian GAAP applies. See CICA HB 3840 ¶ 4. Thus, Yongning was a related party to Silvercorp under Canadian GAAP. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 31 of 160
  32. 32. 32 78. As such, for all periods through the end of fiscal year 2011 (year ended March 31, 2011), the Company was subject to extensive disclosure requirements under Canadian GAAP regarding its sales to Yongning. These included, among others, disclosure describing the relationship between Silvercorp and Yongning, a description of the sale transaction, and the recognized amount of the sale transaction. See CICA HB 3840 ¶ 46. 79. In violation of these Canadian GAAP standards, the Company’s 12/31/2009 6-K, its 3/31/2010 6-K, its 2010 40-F, its 6/30/2010 6-K, its 9/30/2010 6-K, its 12/31/2010 6-K, its 3/31/2011 6-K, and its 2011 40-F all made materially false and misleading statements and omissions in reporting financial results while failing to disclose related party sales to Yongning in conformance with and with the level of detail required by Canadian GAAP, including in particular CICA HB 3840 ¶ 46. 80. During fiscal 2012, Silvercorp was subject to IFRS reporting standards. Under these standards as well, Silvercorp was obligated to make related party disclosures regarding Yongning, because the related party definition was met. See International Accounting Standard No. 24 (“IAS 24”), ¶9. 81. As such, Silvercorp was required under IFRS to not only make disclosures about its sales to Yongning, but to also disclose information about its relationship with Yongning, irrespective of whether there have been any transactions with Yongning. See IAS 24 ¶ 13. In addition, the Company was required to disclose the nature of its relationship with Yongning, the amount of the sale transaction, and its terms and conditions. See IAS 24 ¶¶ 18-19. 82. In violation of these IFRS standards, the Company’s 6/30/2011 6-K made materially false and misleading statements and omissions in reporting financial results while Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 32 of 160
  33. 33. 33 failing to disclose related party sales to Yongning in conformance with and with the level of detail required by IAS 24 ¶¶ 13, 18 and 19. 83. The foregoing allegations regarding Yongning are buttressed by those regarding the problems and concerns regarding several other of Silvercorp’s customers, as discussed infra. VI. THE TRUTH CONCEALED BY DEFENDANTS’ MISCONDUCT IS REVEALED, CAUSING INVESTORS’ LOSSES 84. On September 13, 2011, investor Jon Carnes published a report on alfredlittle.com (the “9/13/2011 Carnes Report”) that revealed the truth about the matters alleged herein, by raising significant concerns regarding aspects of Silvercorp’s business and operations. It attached copies of the 2010 Dynamic Report, in both Chinese and English translation, among other documents. It questioned, inter alia, the veracity of the Company’s publicly reported resource, production, and grade data for its Ying mine and the Company’s nondisclosures regarding related party customer Yongning. 85. In the wake of the revelations in the 9/13/2011 Carnes Report, Silvercorp’s stock price fell $1.54 per share or nearly 20%, on heavy trading volume, to close at $6.30 per share on September 13, 2011. 86. In its response to the 9/13/2011 Carnes Report, set forth in a pair of Canadian and Chinese press releases dated September 14, 2011, Silvercorp told a series of falsehoods that served to temporarily mute the stock price effect of the preceding day’s revelations. Notably, the Company did not refute the accuracy of the figures set forth in the 2010 Dynamic Report. Instead, Silvercorp merely asserted that the 2010 Dynamic Report: (a) was not a full-mine report, (b) was based solely on limited pre-May 2005 exploration results, (c) was not reviewed and checked by an independent qualified person, (d) does not include production figures from veins Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 33 of 160
  34. 34. 34 discovered and explored post-May 2005, and (e) need not be updated until renewal of the mining permit for the Ying mine in September 2014. These were false exculpatory statements. Each of these contentions runs directly afoul of the extensive body of Chinese laws, Circulars, Measures, regulations, and rules described supra and, as such, lacks merit for that reason and others. The Company also asserted that neither Canadian GAAP nor IFRS standards considered the Company’s sales to Yongning to be a related party transaction. This contention runs directly afoul of the Canadian GAAP and IFRS provisions described supra, and, as such, lacks merit. VII. ADDITIONAL FACTS PROBATIVE OF SCIENTER 87. Defendants had a strong motive to inflate the price of the Company’s stock during the Class Period, in the form of the nearly $117 million December 2010 Offering. 88. In addition, events following the revelations in the 9/13/2011 Carnes Report have only served to buttress the already strong inference of Defendants’ scienter. In particular, Silvercorp’s conduct has flagrantly violated laws, common sense, and common human decency, lashing out at anyone who dares question the irreconcilable discrepancies between its reported data in China and the U.S. To quote Shakespeare, “The lady doth protest too much, methinks.” 89. Retribution. Silvercorp’s aggression has targeted the investor who authored the 9/13/2011 Carnes Report, suing him in U.S. court. As reported by The Globe and Mail (“TGM”) on September 8, 2012, the Company also targeted the report’s author through those he employed to assist in the report’s preparation. TGM stated it had obtained documents, including receipts for police expenses, showing that Silvercorp worked with local Chinese authorities and paid for an investigation that led to the arrest and long-term detention of Huang Kun (a Canadian citizen) and the arrest and interrogation of two of his associates. Mr. Huang has been interrogated, held without charge, had his personal property (phone, laptops, glasses, passport) confiscated, and has Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 34 of 160
  35. 35. 35 been forced to pay a $32,000 unofficial bail (only to be re-imprisoned). TGM reported that Mr. Huang had reason to believe that Silvercorp provided interrogation instructions and a company car (in which Mr. Huang was transported 150 km) to assist the police. Such conduct would violate both Canadian and Chinese law. Defendant Feng virtually admitted the Company’s involvement, telling TGM that “The police sometimes do contact me” and “We are big taxpayers in the Luoyang County.” Mr. Huang remains jailed and has yet to be charged. 90. Switched Chinese Financial Reports. On the heels of the 9/13/2011 Carnes Report, another investor, Anthion Management LLC, published a report on September 14, 2011, raising similar concerns about the Company. Among other things, this report stated that the investor had previously obtained financial statements filed by Silvercorp with the Chinese State Administration for Industry & Commerce (“SAIC”) for the years 2008 and 2009, which indicated a substantial conflict with the Company’s reported financial results in its SEC filings. However, a second version of Silvercorp’s SAIC financials was later delivered to the investor, unsolicited, reporting financial results that were different from, and higher than, those it had previously pulled. Later, the Company addressed concerns about discrepancies between its SAIC and its SEC filings by relying on a commissioned report by KPMG Forensic, Inc. (“KPMG”). However, Silvercorp did not release a copy of the KPMG report, instead providing only a press release summary. Moreover, its summary described KPMG’s work as being based in part on KPMG’s on-site review of the Company’s “audited financial statements filed with the SAIC at the time of the KPMG visit.” (Emphasis added.) Silvercorp sued this investor, too. 91. Knowing Complicity In A Purported Government Fraud. On September 20, 2011, yet another investor, Adam Gefvert, published an evaluation of Silvercorp. He had sought to investigate the claim that the sale, at auction, by the Company’s joint venture partner of a 5 % Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 35 of 160
  36. 36. 36 stake in Henan Found for $7 million implied a very low total value for Henan Found of $140 million. Specifically, he sought to challenge the Company’s assertion that the sale was to an affiliate of the joint venture partner, which is a Chinese government entity, such that it should not be the basis of a full-Company valuation. When the investor highlighted that the sale was the result of an auction, the Company’s investor relations staff told him that the auction was a hoax by the Chinese government, to create the appearance of a free society, but that “things are done differently in China” as compared to the West. In other words, Silvercorp’s investor relations staff asserted that the Company knowingly bore witness to a government-sanctioned fraud. 92. Shaky Customer Base. In addition to the Company’s false and misleading statements and omissions regarding the Company’s largest customer, Yongning, its roster of largest customers is replete with questionable entities. The Company’s # 5 customer in 2010 (accounting for sales of RMB 62,795,754, or roughly $9.2 million, equating to 6.5 % of 2010 sales), Jiyuan Zhongse Mining Co., Ltd. (“JZM”), was registered on September 9, 2009. In September 2011, the author of the 9/13/2011 Carnes Report raised concerns about JZM, given that he could not locate a valid phone number or registered address for it. Three months later, JZM cancelled its registration. The Company’s # 12 customer in 2010 (accounting for sales of RMB 8,229,438, or roughly $1.2 million), Luoyang Linggang Minerals Trading Co., Ltd. (“LLMT”) was registered just over a month later, on October 15, 2009. LLMT likewise cancelled its registration, on December 20, 2012. The Company’s # 14 customer in 2010 (accounting for sales of RMB 5,680,711, or roughly $839,100), Luoyang Tonggang Trading Co., Ltd. (“LTT”), was formed just a month after the similarly named LLMT. All three of these entities were created with registered capital of just RMB 500,000 (roughly $73,206). Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 36 of 160
  37. 37. 37 93. In the wake of all the foregoing, the Company now faces a Corruption of Foreign Public Officials Act investigation by the Royal Canadian Mounted Police’s Anti-Corruption Unit related to the arrest and detention of Mr. Huang and his associates and a subpoena from the SEC related to the concerns raised by various investors. VIII. CO-LEAD PLAINTIFFS’ CLASS ACTION ALLEGATIONS 94. Co-Lead Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and (b)(3) on behalf of a Class consisting of all persons who purchased the common stock of Silvercorp during the Class Period and who were damaged thereby. Excluded from the Class are Defendants, the present and former officers and directors of Silvercorp and any subsidiary thereof, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest. 95. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Silvercorp’s stock was actively traded on the NYSE. 96. While the exact number of Class members is unknown to Co-Lead Plaintiffs at this time and can only be ascertained through appropriate discovery, Co-Lead Plaintiffs believe that there are at least hundreds, if not thousands, of members in the proposed Class. Class members may be identified from records maintained by Silvercorp or its transfer agent and may be notified of the pendency of this action by mail and/or publication, using a form of notice customarily used in comparable securities class actions. 97. Co-Lead Plaintiffs’ claims are typical of the claims of Class members, as all members of the Class are similarly affected by Defendants’ wrongful conduct in violation of the federal securities laws that is complained of herein. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 37 of 160
  38. 38. 38 98. Co-Lead Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. 99. Common questions of law and fact exist as to all Class members and predominate over any questions solely affecting individual Class members. Among the questions of law and fact common to the Class are: a. whether the federal securities laws were violated by Defendants’ acts as alleged herein; b. whether statements made by Defendants to the investing public during the Class Period misrepresented material facts about the business, and financial performance of Silvercorp; and c. to what extent the Class members have sustained damages and the proper measure of damages. 100. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all Class members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for Class members to redress individually the wrongs done to them. There will be no difficulty in the management of this action as a class action. IX. NO SAFE HARBOR 101. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. Many of the specific statements pleaded herein were not identified as “forward-looking Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 38 of 160
  39. 39. 39 statements” when made. To the extent there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, Defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements were made, the particular speaker knew that the particular forward-looking statement was false, and/or that the forward-looking statement was authorized and/or approved by an executive officer of Silvercorp who knew that those statements were false when made. X. THE CLAIMS ARE TIMELY 102. The claims set forth herein are timely filed. 103. The market was not aware until September 13, 2011 that the resource, production, and grade of Silvercorp’s mineral production at its flagship Ying mine had been materially misrepresented, or that it had significant issues regarding its legal and accounting compliance. 104. It likewise was not until September 13, 2011 that Co-Lead Plaintiffs were first presented with credible evidence of the probability that Defendants had made materially false and misleading statements to investors during the Class Period. In the absence of publicly available information prior to that date suggesting that Silvercorp’s mineral production data included in its SEC filings during the Class Period were materially false and/or misleading or that it had significant problems with its legal and accounting compliance, Co-Lead Plaintiffs were not under any duty to inquire as to the truthfulness of the Company’s public statements. Therefore, Co-Lead Plaintiffs’ duty in that regard first arose on September 13, 2011. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 39 of 160
  40. 40. 40 105. Prior to September 13, 2011, Co-Lead Plaintiffs and Class Members were not on inquiry notice of possible claims under the Securities Exchange Act. Co-Lead Plaintiffs’ Securities Exchange Act claims against Defendants are brought within two years of discovery of the probability that statements made by Defendants during the Class Period contained materially false and/or misleading statements. Therefore, Co-Lead Plaintiffs have complied with the requirements of 28 U.S.C. § 1658(b). XI. LOSS CAUSATION/ECONOMIC LOSS 106. During the Class Period, as detailed herein, Defendants engaged in a scheme to deceive the market and a course of conduct that artificially inflated the prices of Silvercorp common stock and operated as a fraud or deceit on Class Period purchasers of Silvercorp common stock by misrepresenting the material facts detailed herein. When Defendants’ prior misrepresentations and fraudulent conduct were revealed to the market, the price of Silvercorp common stock fell precipitously as the prior artificial inflation came out. As a result of their purchases of Silvercorp common stock during the Class Period, Co-Lead Plaintiffs and the other Class members suffered economic loss, i.e., damages, under the federal securities laws. 107. During the Class Period, Defendants presented a misleading picture of Silvercorp’s business and prospects, financial position, and results of operations. Defendants’ false and misleading statements had the intended effect and caused Silvercorp common stock to trade at artificially inflated levels throughout the Class Period, reaching as high as $16.32 per share on April 8, 2011. 108. In response to the issuance of the investor report on September 13, 2011, the price of Silvercorp common stock dropped dramatically, declining from its closing price of $7.84 per share on September 13, 2011, to $6.30 per share on September 14, 2011 – a loss of nearly 20%, Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 40 of 160
  41. 41. 41 on heavy trading volume. This drop removed the inflation from the price of Silvercorp common stock, causing real economic loss to investors who had purchased Silvercorp common stock during the Class Period. 109. The decline was a direct result of the nature and extent of Defendants’ fraud finally being revealed to investors and the market. The timing and magnitude of the price decline in Silvercorp common stock negates any inference that the loss suffered by Co-Lead Plaintiffs and the other Class members was caused by changed market conditions, macroeconomic or industry factors or Company-specific facts unrelated to Defendants’ fraudulent conduct. The economic loss, i.e., damages, suffered by Co- Lead Plaintiffs and the other Class members was a direct result of Defendants’ fraudulent scheme to artificially inflate the prices of Silvercorp common stock and the subsequent significant decline in the value of Silvercorp common stock when Defendants’ prior misrepresentations and other fraudulent conduct were revealed. XII. RELIANCE PRESUMPTION 110. At all relevant times, the market for Silvercorp common stock was an efficient market for the following reasons, among others: a. Silvercorp stock met the requirements for listing, and was listed and actively traded on the NYSE under ticker symbol “SVM.” The NYSE is a highly efficient and automated market; b. Silvercorp had issued and outstanding approximately 162,287,528 common shares as of December 31, 2010; c. On average, over 6% of Silvercorp’s 162,287,528 outstanding shares were traded on the NYSE on a weekly basis during the Class Period. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 41 of 160
  42. 42. 42 d. As a regulated issuer Silvercorp filed with the SEC periodic public reports and was eligible to file F-3 registration statements with the SEC during the Class Period; e. Silvercorp regularly communicated with public investors via established market communication mechanisms, including regular disseminations of press releases on the national circuits of major newswire services and other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and f. Silvercorp was followed by several securities analysts employed by major brokerage firms who wrote reports that were distributed to the sales force and certain customers of their respective brokerage firms during the Class Period. 111. As a result of the foregoing, the market for Silvercorp common stock promptly digested current information regarding Silvercorp from all publicly available sources and reflected such information in the prices of the stock. Under these circumstances, all purchasers of Silvercorp common stock during the Class Period suffered similar injury through their purchase of Silvercorp common stock at artificially inflated prices and a presumption of reliance applies. FIRST CAUSE OF ACTION Violation of Section 10(b) of The Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants 112. Co-Lead Plaintiffs incorporate all paragraphs above as if fully set forth herein. 113. During the Class Period, Defendants carried out a plan, scheme and course of conduct which was intended to, and throughout the Class Period, did: (1) deceive the investing public, including Co-Lead Plaintiffs and other Class members, as alleged herein; and (2) cause Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 42 of 160
  43. 43. 43 Co-Lead Plaintiffs and other Class members to purchase and/or sell Silvercorp’s securities at artificially inflated and/or distorted prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendants, individually and as a group, took the actions set forth herein. 114. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of Silvercorp as specified herein. 115. Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Silvercorp’s value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Silvercorp and its business operations and financial condition, in light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business that operated as a fraud and deceit upon the purchasers of Silvercorp securities during the Class Period. 116. Each of the Defendants’ primary liability, and controlling person liability, arises from the following: (a) Defendants each made materially false and misleading statements during the Class Period, as set forth above; (b) Defendants were high-level executives, directors, and/or agents at the Company during the Class Period and members of the Company’s management team or had control thereof; (c) by virtue of their responsibilities and activities as senior officers and/or directors of the Company, were privy to and participated in the creation, development and Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 43 of 160
  44. 44. 44 reporting of the Company’s internal budgets, plans, projections, operations, results, and/or reports; (d) Defendants enjoyed significant personal contact and familiarity with the other members of the Company’s management team, internal reports and other data and information about the Company’s operations, and/or (e) Defendants were aware of their and the Company’s dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading. 117. Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Silvercorp’s true operations and financial condition from the investing public and supporting the artificially inflated price of its securities. As demonstrated by Defendants’ false and misleading statements during the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by failing to take steps necessary to discover whether those statements were false or misleading. 118. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price for Silvercorp’s securities was artificially inflated during the Class Period. 119. In ignorance of the fact that market prices of Silvercorp’s publicly-traded securities were artificially inflated or distorted, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the Company’s securities trade, and/or on the absence of material adverse information that was Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 44 of 160
  45. 45. 45 known to or recklessly disregarded by Defendants but not disclosed in public statements by Defendants during the Class Period, Co-Lead Plaintiffs and the other Class members acquired Silvercorp’s securities during the Class Period at artificially high prices and were damaged thereby. 120. At the time of said misrepresentations and omissions by Defendants, Co-Lead Plaintiffs and other Class members were ignorant of their falsity, and believed them to be true. Had Co-Lead Plaintiffs and the other Class members and the marketplace known the truth regarding Silvercorp’s business and operations, financial results, and condition, which were not disclosed by Defendants, Co-Lead Plaintiffs and other Class members would not have purchased or otherwise acquired Silvercorp securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices or distorted prices at which they did. 121. By virtue of the foregoing, the defendants have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. 122. As a direct and proximate result of the Defendants’ wrongful conduct, Co-Lead Plaintiffs and the other Class members suffered damages in connection with their respective purchases and sales of the Company’s securities during the Class Period. 123. This action was filed within two years of discovery of the fraud and within five years of each Co-Lead Plaintiff’s purchases of securities giving rise to the cause of action. SECOND CAUSE OF ACTION Violation of Section 20(a) of The Exchange Act Against the Individual Defendants 124. Co-Lead Plaintiffs incorporate all paragraphs above as if fully set forth herein. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 45 of 160
  46. 46. 46 125. The Individual Defendants acted as controlling persons of Silvercorp within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, agency, and their ownership and contractual rights, participation in and/or awareness of the Company’s operations and/or intimate knowledge of aspects of the Company’s revenues and earnings and dissemination of information to the investing public, the Individual Defendants had the power to influence and control, and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements that Co-Lead Plaintiffs contend are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company’s reports, press releases, public filings and other statements alleged by Co-Lead Plaintiffs to be misleading prior to and/or shortly after these statements were issued, and had the ability to prevent the issuance of the statements or to cause the statements to be corrected. 126. In particular, each of these Defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same. 127. Moreover, each of these Defendants made the material misrepresentations in the Company’s 2010 40-F and 2011 40-F, as described above. 128. As set forth above, Silvercorp violated Section 10(b) and Rule 10b-5 as alleged in this Complaint. 129. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act as they culpably participated in the fraud alleged herein. As a direct and proximate result of Defendants’ wrongful conduct, Co-Lead Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 46 of 160
  47. 47. 47 Plaintiffs and other Class members suffered damages in connection with their purchases of the Company’s common stock during the Class Period. 130. This action was filed within two years of discovery of the fraud and within five years of each Co-Lead Plaintiff’s purchases of securities giving rise to the cause of action. XIII. JURY TRIAL DEMANDED 131. Co-Lead Plaintiffs hereby demand a trial by jury. WHEREFORE, Co-Lead Plaintiffs pray for relief and judgment, as follows: a. Determining that this action is a proper class action and certifying Co-Lead Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure and their choice of counsel, Lead Counsel, as Class Counsel; b. Awarding compensatory damages in favor of Co-Lead Plaintiffs and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon; c. Awarding Co-Lead Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; d. Awarding Co-Lead Plaintiffs equitable/injunctive and further relief under Section 20A of the Exchange Act; and e. Awarding Co-Lead Plaintiff such other and further relief as the Court may deem just and proper. * * * The rest of this page is intentionally left blank * * * Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 47 of 160
  48. 48. Dated: May 24, 2013 Laurence Rosen Phillip Kim THE ROSEN LAW FIRM P.A. 275 Madison Avenue, 34th Floor New York, NY 10016 Telephone: (212) 686-1060 Facsimile: (212) 202-3827 lrosen@rosenlegal.com William B. Federman FEDERMAN & SHERWOOD 10205 North Pennsylvania Avenue Oklahoma City, Oklahoma 73120 Telephone: (405) 235-1560 Facsimile: (405) 239-2112 wbf@federmanlaw.com Other Plaintiffs' Counsel Respectfully submitted, POMERANTZ GROSSMAN HUFFORD DAHLSTROM & GROSS, LLP ~~ Marc 1. Gross Jeremy A. Lieberman Matthew L. Tuccillo 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 migross@pomlaw.com jalieberman@pomlaw.com mltuccillo@pomlaw.com Patrick V. Dahlstrom POMERANTZ GROSSMAN HUFFORD DAHLSTROM & GROSS, LLP 10 South La Salle Street, Suite 3505 Chicago, Illinois 60603 Telephone: (312) 377-1181 Facsimile: (312) 377-1184 pvdahlstrom@pomlaw.com Lead Counsel 48 Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 48 of 160
  49. 49. EXHIBIT 1 Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 49 of 160
  50. 50. 国土资源部关于全面开展矿山储量动态监督管理的通知 【发布部门】 国土资源部 【发文字号】 国土资发[2006]87 号 【发布日期】 2006.05.10 【实施日期】 2006.05.10 各省、自治区、直辖市国土资源厅(国土环境资源厅、国土资源局、国土资源和房屋管理局): 为贯彻落实《国务院关于加强地质工作的决定》(国发[2006]4 号)和《国务院关于全 面整顿和规范矿产资源开发秩序的通知》(国发[2005]28 号)精神,大力促进资源保护和 合理利用,在总结试点经验基础上,部决定全面开展矿山储量动态监督管理工作。现就有关 事项通知如下: 一、充分认识矿山储量动态监管的重要意义 矿山储量地质测量是掌握矿山地质条件和储量变化情况的一项重要基础性工作。依法培 育矿山地质测量机构,监督矿山企业开展矿山储量地质测量,综合运用法律、经济和必要的 行政手段加强矿产开发全程储量动态监督管理,对于促进矿山企业珍惜和合理开发利用资源, 推进国土资源管理职能全面到位,建设资源节约型社会,具有重要意义。 二、矿山储量动态监管总体要求 (一)明确分工,落实责任。国土资源部负责石油、天然气(煤层气)、放射性矿产的 储量动态监督管理,其中放射性矿产资源储量动态监督管理委托中国核工业总公司负责。其 他矿种储量动态监督管理,由各省(区、市)国土资源管理部门负责。 国土资源管理部门要认真履行监督管理职能,矿产资源储量登记统计、矿产资源补偿费 征收和矿业权评估等必须以经审查的矿山储量年报为依据。矿山企业办理资源储量报销、注 销及停办矿山申请,必须按照《矿产资源监督管理暂行办法》进行。对资源不清、储量不实 的矿山,国土资源管理部门要督促矿山企业补做地质工作,核实资源储量,履行储量评审备 案和登记手续。矿山企业要按要求开展矿山储量地质测量,依法向国土资源管理部门报送矿 山储量变化情况,不按规定进行地质测量、不提交矿山储量年报的,不予通过“矿产资源开 发利用年检”。矿山地质测量机构要加强自身建设,努力提高从业人员素质,采用先进技术 方法,规范服务、诚实守信,独立、客观、公正的提供测量和年报编制等服务。 (二)精心部署,扎实推进。凡已进行过试点、条件较好的省(区、市)要全面推开; 其他省(区、市)今年重点加强对煤、铁、铜、铝等重要矿产的动态监管,在此基础上,总 结经验,完善制度。到 2007 年底前,各省(区、市)要全面建立矿山储量动态监管制度。 矿山企业在每年12月31日前要完成对其动用、消耗、损失的资源储量的地质测量工作, 建立矿山技术档案和资源储量台帐。并在下一年 1 月底前,将矿山储量年报报送国土资源管 理部门。 矿山储量年报包括:保有和累计查明资源储量、基础储量、资源量;当年开采和损失资 源储量;当年勘查、计算变化的资源储量;矿石质量变化情况;下一年度开采拟动用资源储 量;与矿产资源储量管理有关的其他情况。 Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 50 of 160
  51. 51. (三)培育机构,规范服务。鼓励成立中介服务性质的矿山地质测量机构。鼓励有条件 的矿山企业自建矿山地质测量机构。对各类矿山地质测量机构,要规范行为,明确要求,严 格依法进行资质管理。 矿山企业按照平等、自愿、有偿的原则,选择矿山地质测量机构,双方签订并严格履行 地质测量工作合同。国土资源管理部门原则上不得干预和指定矿山地质测量机构。对于矿山 集中分布的地区,为将矿山地质测量成本控制在合理范围内,国土资源管理部门可以引导协 调联测工作。矿山地质测量机构要发挥技术专长,规范提供技术咨询服务,指导科学开采, 使矿山企业能够从中受益。 (四)健全制度,严格程序。各省(区、市)国土资源管理部门,要按本通知要求,结 合本地实际,制定具体实施方案,于 6 月 30 日前报部。部将适时组织调研,监督检查,总 结经验,指导全国矿山储量动态监管工作的正常开展。国土资源管理部门要采取矿山地质测 量机构自查、互查、组织专家抽查等形式对矿山储量年报进行审查。 三、保障到位务求实效 (一)提高认识,加强领导。矿山储量动态监管涉及面广、工作量大,政策性和技术性 强。各省(区、市)国土资源管理部门要加强领导,精心部署,认真组织,落实责任,建立 考核制度。要把矿山储量动态监管的各项具体工作落实到基层国土资源管理部门,充分发挥 市(地)、县(市)国土资源管理部门的作用。 (二)广泛宣传,开展培训。国土资源管理部门要加大宣传和培训力度,使国土资源储 量管理人员、矿山地质测量机构从业人员,矿山企业有关人员充分认识矿山储量动态监管的 重要意义,熟练掌握工作要求和技术要求,明确各自的责任、权利和义务。 (三)落实经费,力求实效。矿山储量动态监管是一项经常性工作,国土资源管理部门 要安排必要的经费,保证工作顺利进行,务求取得实际效果。要及时总结经验,重要情况及 时向部报告。 2006 年 5 月 10 日 国土资源部 Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 51 of 160
  52. 52. EXHIBIT 2 Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 52 of 160
  53. 53. 1 Circular of the Land and Resources Ministry on Comprehensive Dynamic Supervision and Management on Mine Reserves Issued by: Land and Resources Ministry Article No.: (No. [2006] 87 of the MLR) Date of Promulgation: May 10, 2006 Date of Implementation: May 10, 2006 Land and Resources Departments of All Provinces, Autonomous Regions and Municipalities (Land Environmental and Resources Department, Land and Resources Bureau, and Land Resources and Housing Administration Bureau): To implement the Decision of State Council on Strengthening Geological Work (No. [2006] 4 of GuoFa) and the Circular of the State Council for Comprehensive Rectification and Regulation on the Exploitation Order of Mineral Resources (No. [2005] 28 of GuoFa) and strongly promote the protection and rational utilization of resources, on the basis of summarizing the pilot experiences, the Ministry has decided to carry out the comprehensive dynamic supervision and management on mine reserves. The relevant matters are notified as follows: I. Fully Recognize the Significance of Dynamic Supervision and Management on Mine Reserves Geological survey on mine reserves is an important groundwork for mastering the changes in the geological condition and the mine reserves. Fostering mine geological survey institutions according to laws, supervising mine enterprises to carry out the geological survey on mine reserves and using a combination of legal, economic and necessary administrative means to strengthen the dynamic supervision and management of mineral reserves in the whole process of mineral exploitation is of great significance for encouraging mine enterprises to value and reasonably develop and utilize resources, promoting the role of land and resources management to be fully in place and constructing a resource-conserving society. II. General Requirements on the Dynamic Supervision and Management on Mine Reserves (1) A clear segregation of duties and implementation of responsibility. The Land and Resources Ministry shall be responsible for the dynamic supervision and management on the reserves of oil, natural gas (CBM), radioactive minerals, among which the dynamic supervision and management on the radioactive mineral reserves is entrusted to China Nuclear Industry Corporation. The Land and Resources Departments of all provinces (autonomous regions and municipalities) shall be responsible for the dynamic supervision and management on other mineral reserves. Case 1:12-cv-09456-JSR Document 35 Filed 06/11/13 Page 53 of 160

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