November 17, 2011 / 8:04 PM / 6 years ago

Sino-Forest says panel found no Ponzi scheme

HONG KONG (Reuters) - Sino-Forest Corp TRE.TO claims an independent panel found no evidence it was perpetrating a massive investor fraud, but the Chinese forestry company’s chief accuser said the probe lacked credibility.

Sino said on Tuesday the panel, commissioned in June, found no basis for a short-seller’s allegations that the company was operating a Ponzi scheme, a sham investment operation that produces no real profit.

That said, it conceded the committee’s interim report left many of the questions raised by Carson Block and his Muddy Waters firm unanswered.

The panel of independent directors had yet to review all of the documents needed to exonerate Sino from charges that it was exaggerating its forestry assets, the report said.

“We believe this release has no credibility,” Block’s firm said in a statement.

John Hempton, whose Sydney-based Bronte Capital is a prominent short-seller, said he felt vindicated in his negative view of Sino-Forest after reading the limitations placed on the panel in obtaining information on the company.

Deep in its 111-page report, the committee said it had been barred from seeing databases and discouraged from visiting some Chinese forestry bureaus that hold registration documents.

“Every single meeting with forestry officials to confirm documents purporting to prove ownership of forests was set up by management,” Hempton told Reuters.

“One person who management represented as a senior forestry official was found to be an employee of Sino-Forest -- but that didn’t ring alarm bells.”

Short-sellers like Block and Hempton borrow stocks and then sell them in the hope they can buy them back later at a lower price and pocket the difference.

Sino-Forest was the largest forest plantation operator on the Toronto Stock Exchange until its shares collapsed in the wake of Block’s damning report. It is the most prominent of Chinese companies listed in North America whose shares were either suspended or delisted this year amid suspicions about their business practices and Chinese regulatory safeguards.

By order of the Ontario Securities Commission, Sino-Forest shares won’t trade until January 25. The Canadian provincial regulator is conducting its own investigation of the company. A parallel criminal investigation by Canadian law enforcement authorities is also underway.


Sino-Forest on Tuesday highlighted the report’s findings that the panel found nothing to support the most damning of the allegations leveled against the company.

“We can categorically say Sino-Forest is not the ‘near total fraud’ and ‘Ponzi scheme’ as alleged by Muddy Waters,” said Chief Executive Judson Martin, commenting on the report.

Martin, who replaced Sino-Forest’s long-time CEO Allen Chan in August, said the committee had verified the company’s cash balances, timber assets, book values and revenues. A final report by the committee is expected by year end.

He later told reporters in Hong Kong that Sino-Forest had been “bruised, but not broken” by claims that were “either malicious or uninformed.”

“This is the beginning of some very good news for us -- long overdue,” Simon Murray, chairman of commodities trader Glencore International Plc (GLEN.L) and an independent Sino-Forest director, told Reuters from Switzerland.

Even so, Martin acknowledged the process had highlighted shortcomings in the business. Martin said the accusations against Sino-Forest show a basic misunderstanding of how companies work in China.

Sino-Forest also said on Tuesday it is delaying its third-quarter results pending resolution of “outstanding issues.” The company did not elaborate on those issues.

But it said its failure to file its results on time was a breach of covenants under its senior and convertible note indentures.


“The report will provide some comfort to investors, but it will also confirm some of their concerns,” said Paul Gillis, professor of accounting at Peking University and a former partner at PriceWaterhouseCoopers.

“Sino-Forest is using a primitive form of the VIE structure that has concerned investors in many other Chinese companies. They conduct much of their business through agents,” he said, referring to the variable interest entity structure used by some overseas-listed Chinese companies to skirt around limits on foreign investment.

“The report admits they may be doing business illegally through their BVI structure, but argues the rules are not clear,” he added. BVI means a company subsidiary incorporated in the British Virgin Islands.

“That’s a pretty thin rope to hang your investment on.”

Sino-Forest bonds, which initially jumped on news of the committee’s findings, pared gains later in the day, as investors digested the details of the report.

Additional reporting by Euan Rocha in Toronto, Swetha Gopinath in Bangalore, Rachel Armstrong, Umesh Desai, Stephen Aldred and Nishant Kumar in Hong Kong, and Mark Bendeich in Sydney; Writing by Ian Geoghegan, Editing by Frank McGurty

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