May 22, 2012 / 6:28 PM / in 5 years

UPDATE 2-Canadian regulator charges Sino-Forest with fraud

* Ontario Securities Commission also names ex-officials

* OSC alleges “deceitful and dishonest action by Sino”

* Formal allegations come a year after short-seller report

* OSC says also examining “role of the gatekeepers”

By Euan Rocha and Jennifer Kwan

TORONTO, May 22 (Reuters) - The Ontario Securities Commission charged Sino-Forest Corp and some of the Chinese forestry company’s former executives with fraud on Tuesday, nearly a year after the allegations surfaced and its stock imploded.

The OSC, Canada’s most powerful securities regulator, said Sino-Forest and former members of its overseas management engaged in numerous “deceitful and dishonest” actions connected with its purported purchase and sale of timber in China.

It also said some former company executives attempted to mislead its investigation into Sino-Forest, whose shares were delisted from the Toronto Stock Exchange earlier this month.

Sino was the most prominent of a series of North American-listed companies with Chinese operations whose accounting or disclosure practices came under suspicion over the past year. The scandals have hurt investor confidence and led to sharp declines in the equity valuations of many Chinese companies listed in the United States and Canada.

The OSC on Tuesday charged Sino-Forest’s founder, Allen Chan, along with former executives Albert Ip, Alfred Hung, George Ho and Simon Yeung, with fraud. It also said Sino’s former chief financial officer, David Horsley, failed to comply with Ontario securities law and acted contrary to the public interest.

Spokespersons for Sino and Allen Chan were not immediately available for comment. A lawyer representing Horsley declined to comment.

In its statement of allegations, the regulator said: “Sino-Forest falsified the evidence of ownership for the vast majority of its timber holdings by engaging in a deceitful documentation process.”

It also accused the company of hiding weaknesses in its internal controls and of dishonestly concealing its control over suppliers and intermediaries that it had stated it had no control over.

“This is an important first step and our investigation is continuing into this matter, including an examination of the role of the gatekeepers,” Tom Atkinson, the OSC’s director of enforcement, said in a statement.

The OSC did not provide details on which gatekeepers it is investigating. In a recent report, the regulator said that underwriters, auditors and exchanges were not adequately reviewing emerging-market companies that were listing in Canada.

The OSC initiated the review last year after short-seller Carson Block and his firm Muddy Waters accused Sino-Forest of exaggerating its assets. Short-sellers like Block borrow stocks and then sell them in the hope they can buy them back later at a lower price and pocket the difference.

Allegations in the report issued by Muddy Waters last June, triggered a collapse of Sino-Forest’s share price, along with a rash of lawsuits and probes, including one that is being pursued by the Royal Canadian Mounted Police.

Sino initiated its own internal investigation but said it was unable to address of all of the allegations. The company has been granted creditor protection in Canada and it is currently exploring a sale of assets to repay its debtholders.

The OSC alleges that Sino founder Chan committed fraud by concealing the large interest he held in Greenheart Group , which owns forest concessions in Suriname in South America, before Sino bought a controlling interest in it. Sino bought its controlling interest in Greenheart in 2010 for about $120 million.

“Chan knew that he was engaging in deceitful or dishonest conduct in relation to the Greenheart transaction and knew that he was making deceitful or dishonest statements to (Sino‘s) investors,” the OSC said.

The regulator accused Chan and former Sino-Forest employees Ip, Hung, Ho and Yeung of misleading OSC staff, who were probing the matter.

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