Short-sellers Avoid Liability in New York State Court for Defamation, Trade Libel and Unjust Enrichment

by David Cosgrove

The stock of silver producer Silvercorp Metals, Inc. (“Silvercorp”) trades on the New York and Toronto stock exchanges. Silvercorp brought suit against a variety of defendants, including Anthion Management, a.k.a., alleging a scheme to drive down Silvercorp’s stock prices through the publication of defamatory internet postings and letters to journalists and securities regulators. Earlier this month the Supreme Court of New York County dismissed all of Plaintiff Silvercorp’s claims.

In dismissing the Plaintiff’s claims, the Court aptly noted that “this result could be viewed as a green light to those who could use this kind of vehicle to manipulate the market.” Silvercorp Metals, Inc. v. Anthion Management, LLC., 2012 WL 3569952 at 10 (N.Y. Sup.). The Court’s journey through the Plaintiff’s four claims includes a highly detailed and informative analysis of New York law as to defamation, trade libel, unjust enrichment, and the statutory claim of deceptive business practices (GBL 349).

A critical fact in this case was that the Anthion defendants’ letter to the regulators and journalists disclosed that the author held a short position in Silvercorp stock. The letter accused Silvercorp of accounting fraud. Another group of defendants were accused of creating anonymous internet posts that, among other things, “raised concerns” about the potential overvaluation of the Plaintiff’s shares and the quality of Silvercorp’s product. Finally, the Anthion defendants allegedly sent a letter to the British Columbia Securities Commission accusing Silvercorp of falsely representing its financial condition.

In dismissing the Plaintiff’s defamation claim, the Supreme Court concluded that the various publications were protected opinion rather than unprotected factual representations. The Court worked through New York’s four-point analytical formula in arriving at this conclusion. Notably, it pointed out that a recitation of facts is not actionable if it is set forth as the basis for the articulated opinion. A statement of opinion that implies it is based upon undisclosed facts unknown to the reader or listener, however, are actionable.

The Supreme Court dismissed the unjust enrichment on the same basis as the Court set forth forth dismissing the defamation claim. Finally, the Court rejected the New York General Business Law 349 deceptive practices claim not because the claims arose out of a securities transaction, but rather because the Plaintiff lacked standing in that it was not a consumer injured by the reliance upon the allegedly deceptive communications.

Many corporate clients are hot under their collar to have their attorneys fire off threatening letters or file suit against former employees or customers that are bashing them on the internet or to regulators. This case is an excellent example of the protections afforded those who publish utterances that offend such clients’ sensibilities. Some defamation claims are, however, meritorious. If you peruse this firm’s announcements section you will get a flavor for what my opinion is is in that regard! Food for thought.