Fraud by Canada’s Sino-Forest?


The big story in forestry circles this week — by a large margin — is the ongoing saga of Sino-Forest Corp., a Toronto-listed company that buys and sell timber in China. The company has attracted billions of dollars in investment over the last several years and says it has acquired hundreds of thousands of hectares of forests since 2007.

But recent revelations raise an enormously loaded question: is Sino-Forest the victim of malicious or ill-informed press coverage or is the company the perpetrator of the “biggest theft in human history?

The saga started on June 2 when a short-selling firm, Muddy Waters, released a report accusing Sino-Forest of widespread fraud. The firm said that Sino-Forest “massively exaggerates its assets” in China and that its capital raising is a “multi-billion dollar ponzi scheme, and accompanied by substantial theft.”

This provocative report received a lot of attention, but it was also tempered by the fact that Muddy Waters was hardly a neutral source. The company is a short seller, meaning that it bets that certain stocks are going to fail.  The company probably would make a lot of money if Sino-Forest fails.

Then on June 18, Toronto’s Globe and Mail newspaper published a story backing up many of Muddy Water’s assertions and describing how Sino-Forest didn’t actually buy 200,000 hectares of timber in China’s Yunnan province as it claimed, but more like 13,000 hectares.

Suddenly, all bets were off. Sino-Forest’s biggest shareholder, world-renowned hedge fund manager John Paulson, sold all his stock. Paulson’s involvement and subsequent divestment in Sino-Forest has hurt his reputation so much in recent days that he was forced to defend himself today. Sino-Forest has become so toxic that it’s rubbing off on even the most esteemed investors.

Sino-Forest’s stock is down 80 percent since the allegations first came to light, meaning a paper loss of several billion dollars to investors. To make matters worse, the company’s defense has not been very convincing.

Much of the company’s retort centers around the assertion that the Chinese timber market is exceedingly complex, with all manner of deeds, leases and intermediaries to deal with, and that Muddy Waters and the Globe and Mail just don’t understand how it all works.

But the company’s defense can also verge on the bizarre. Here is one example:

(The Globe and Mail article) refers to “Gengma Forestry”, with its “litter-strewn” office “up a dusty cement staircase”; and its office manager Zhang Ling. Very poetic, but completely irrelevant, because based on the information that The Globe and Mail provided to the Company, the Company believes that this is the address of a business known as Gengma Dai and Wa Autonomous County Forestry Industrial Co., Ltd. It is a different organization from Gengma Dai and Wa Tribes Autonomous County Forestry Limited, with whom Sino-Forest has its Master Agreement, which is based at an entirely different address.

Short of a full accounting, Sino-Forest’s future appears dire, to say the least.