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Silvercorp Metals Inc. , a B.C.-based company that mines silver in China, saw its stock drop almost ten per cent Friday even though it vociferously denied anonymous allegations that it is involved in an accounting fraud.

The company said its auditors received an anonymous letter that alleged a $1.3-billion accounting fraud. Among the specific allegations were that Silvercorp's significant 2010 profit reported in North American filings does not match a loss reported in China, and that the company's cash position is overstated.

To refute these allegations, Silvercorp posted links to a variety of financial reports and statements, including filings with Chinese authorities.

Silvercorp chief executive officer Rui Feng said in a statement that the letter amounts to a "manipulative scheme" that is "baseless and which depresses our share price and harms our shareholders."

The letter's author acknowledged that his firm holds a short position in Silvercorp shares, the company said.

Corporate secretary Lorne Waldman said it is clear the letter-writer was trying to take advantage of the stock market "phobia" against companies that operate in China, following the scandal at Sino-Forest Corp., which has been accused of accounting fraud. "It is unfortunate, because at the end of the day you will often have some less sophisticated investors who just sell on fear," he said.

Mr. Waldman said Silvercorp has no evidence to indicate who wrote the letter. The company has established a task force of independent directors to work with regulators and to try to uncover the person's identity.

The letter appeared to have its author's desired affect, at least in the short term. While other silver mining company shares rose by about 5 per cent Friday, Silvercorp's fell 80 cents to close at $7.43 on the Toronto Stock Exchange.

Silvercorp said the short position of its shares has risen sharply in the last two months and is now at about 13 per cent of the outstanding stock.

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