June 14, 2011 / 11:30 AM / 7 years ago

UPDATE 8-Sino-Forest review will take months, shares dive

* Muddy Waters report triggered plunge in Sino shares

* Sino-Forest continues to deny allegations of fraud

* Posts Q1 loss $0.08/shr vs yr-earlier $0.07/shr profit

* Shares fall more than 30 percent on TSX on Tuesday (Adds investor comments, bond data; In U.S. dollars unless noted)

By Euan Rocha

TORONTO, June 14 (Reuters) - Sino-Forest TRE.TO said on Tuesday it will take up to three months to debunk fraud allegations leveled by short-seller Muddy Waters, rattling investors and sending its shares down more than 30 percent.

Hong Kong-based Muddy Waters earlier this month accused Sino-Forest of exaggerating the size of its forestry assets within its highly complex business structure.

Though both analysts and the company have slammed the research firm’s report, the company’s shares have fallen more than 80 percent since the beginning of June, pulling down its market value by about C$4 billion.

At least some of the decline reflects the Sino’s inability to give a straightforward rebuttal that disproves the fraud allegations.

Shares of the company, which also reported a quarterly loss on Tuesday due to a change in accounting standards, closed down C$1.62 at C$3.36 on Tuesday on the Toronto Stock Exchange.

“The market hates uncertainty,” said Barry Schwartz, a portfolio manager at Baskin Financial. “To have to wait two to three months to get clarity from the company is in my view reprehensible and inconceivable and that is why the stock is down.”

“It’s been very, very poor handling of the situation,” said Schwartz, who believes Sino should have tackled the allegations head-on, rather than leaving investors hanging.

In a conference call earlier on Tuesday, Sino’s management publicly addressed investors for the first time since the Muddy Waters report surfaced nearly two weeks ago.

Sino-Forest, which counts billionaire hedge fund manager John Paulson as one of its biggest shareholders, has appointed a committee of its independent board members to review the allegations. The panel said it would take two or three months for PwC, its auditor, to gather the necessary information to address the allegations.

Muddy Waters was quick to respond to Sino-Forest’s remarks, saying the company left several queries unanswered.

“It will apparently take PwC two to three months to complete its investigation,” Muddy Waters founder Carson Block said in a statement.

“In our experience with much smaller frauds/companies, this is an aggressive timeline,” he said, suggesting the audit could take much longer because of the complexity of Sino’s business structure.

The Toronto-listed Chinese forestry company, which owns timber plantations across China, said it would slow the pace of its tree acquisitions until the audit is complete.

“It is simply prudent for at least the next three months to slow down, until the situation is clear. Later we can always speed-up our expansion plans,” Chief Executive Allen Chan told Reuters.

Sino-Forest has strenuously denied that its accounts and business structure are suspect, as alleged by Block. As a short-seller, Block places bets that shares of the companies in his reports will tumble.

“I am deeply disappointed by the losses and anguish that our shareholders have had to bear these past several days,” Chan told investors on a call. “I personally stand by and guarantee that the financial statements and reports filed are accurate.”

Sino-Forest investors are unconvinced, said Andrew Left, who runs Citron Research, a firm that also has published reports recommending shorts of Chinese stocks.

“I don’t care if the company has Barack Obama and the Pope together on a conference call endorsing the company. Wall Street speaks with its dollars,” he said. “Sino-Forest, they can talk, talk, talk, but it matters what the investors hear.”

In an interview with Reuters, William Ardell, the chairman of the independent committee, said the company was unlikely to proceed with any legal action against the short-seller until the review was complete.


Sino-Forest’s first-quarter loss largely reflected changes in its accounting standards. It amounted to $22.1 million, or 8 cents a share, compared with a year-earlier profit of $15.9 million, or 7 cents.

The company said auditors Ernst and Young had not signed off on the results as the firm needs to review all of the Muddy Waters’ allegations before it could verify the accounting, a process that would have delayed the filing of its quarterly report.

“Ernst and Young’s position was that in order to complete their review, they would need to run to ground all of the allegations and obviously the time just did not permit that,” Chief Financial Officer Dave Horsley told Reuters.

Canadian securities regulators had already granted the company a 30-day extension to file its first-quarter results, as this is the first time that the company is reporting results under the International Financial Reporting Standards (IFRS).

All public entities reporting in Canada have been mandated by law to transition to IFRS, from Canadian Generally Accepted Accounting Principles, this year.


The price of Sino-Forest’s debt also reflected the negative sentiment. Its 10.25 percent bond due 2014 <0#CA044090244=>, was bid at $65 on Tuesday to yield 27.72 percent according to Thomson Reuters data. The bond had been bid at $68.50 ahead of the news and was trading above par before the allegations first surfaced.

The company, which has roughly $2 billion in outstanding debt, said its cash and cash equivalents were $1.1 billion as of March 31.

Sino-Forest is rated BB-plus by Fitch Ratings, one notch below investment grade. S&P has rated it one notch lower at BB-minus. Moody’s has it rated at Ba2, same as S&P, but has put the rating on watch for possible downgrade.

$1=$0.97 Canadian Additional reporting by John McCrank, Solarina Ho, Jeffrey Hodgson and Umesh Desai; Editing by Frank McGurty

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