Sino-Forest Fails to Resolve Fraud Allegations

Sino-Forest Fails to Resolve Fraud Allegations

David Nealis in Shandong China

 It seems others may have gotten lost in the Sino-Forest

 On Jan. 23 the OSC, Canada's main securities regulator, extended the suspension of Sino-Forest shares to at least April 16, citing a lack of disclosure by the company. After an eight-month investigation into the value of its timber holdings Sino-Forest Corp. failed to reach a conclusion as it fends off fraud allegations.

A committee of independent directors was unable to come to “definitive conclusions” on various issues the company is facing about suppliers, the total amount of assets the company has, or some of its mysterious intermediaries. They went on to say that Sino-Forest may not be able to disprove some allegations because the information may not exist or be retrievable, in a report on the company's website.

Allegations of fraud wiped off 74 percent of the company's stock value, costing investors including Paulson & Co. C$3.3 billion (US$3.3 billion). Sino- Forest, which is suspended from trading in Canada, is being investigated by the Ontario Securities Commission and Royal Canadian Mounted Police.

On Nov. 15 the committee, which was assisted by PricewaterhouseCoopers LLP, also found company records were missing. It reported difficulties in obtaining data, a lack of cooperation from some Sino-Forest executives, and the absence of an internal audit function. Sino-Forest said the committee confirmed the company's cash balance and verified purchase contracts for 77 percent of reported timber assets.

Sino-Forest's largest shareholder is Singapore based billionaire Richard Chandler; he bought shares in the company following the Muddy Waters report alleging fraud while other investors sold off their stock. One of the only ways for investors to recoup their investments might be to bring Sino-Forest private and rebuild its reputation or they might have to start liquidating assets to pay back stake holders.

This is an excellent example of the importance for investors to have a foot print in the Greater China Market if they are going to be active investors here. Muddy Waters the Hong Kong based firm that first made the fraud allegations against Sino-Forest is proof of these benefits. I am always amazed by the answer when I meet with US firms and I ask them why aren’t they in Hong Kong or someplace in China, they often cite cost reasons for not having a Greater China Market office but I feel how could they not afford to be here.