* Shares of Sino close down 4.2 pct in Toronto
* Some also warn that Sino debt could fall further
* Sino's failure to dispel doubts hurting share price (Adds investor comment, background; Updates share price move)
By Euan Rocha
TORONTO, June 15 (Reuters) - Shares of Sino-Forest TRE.TO slid further on Wednesday after the Chinese forestry company's response to fraud allegations leveled by short-seller Muddy Waters failed to convince many investors.
The Toronto-listed company's shares closed down 4.2 percent at C$3.22 on Wednesday, just a day after a price drop of more than 30 percent.
The company's shares have dropped more than 80 percent since the Muddy Waters report surfaced in early June. Many blame the meltdown on Sino-Forest's inability to reassure investors and tackle allegations that it has, among other things, exaggerated the size of its forestry assets. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Q&A about allegations against Sino: [ID:nN15276780]
Chart on Sino AI structure: link.reuters.com/qam22s
Analysis on U.S.-listed Chinese companies: [ID:nN10232390]
Special report on Chinese stock scams: [ID:nN06271838]
For story on offshore yuan bond market: [ID:nL3E7HF14N]
For data on short positions in Chinese Cos:[ID:nN15302736] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
On a conference call on Tuesday, Sino's management publicly addressed investors for the first time since the Muddy Waters report went public. But many investors appear unswayed by the company's response. [ID:nN14147080]
"My personal opinion is I think there's probably some truth in Muddy Waters' report, some of these so-called accounting practices and operations that they claim to be legit might not really meet the standard," said Marcus Xu director of equity investments at Genus Capital in Vancouver.
"I think there are possible wrongdoings here, but at the same time I also don't believe the company is a complete fraud," he said.
The company, which counts billionaire hedge fund manager John Paulson as one of its biggest shareholders and Glencore (GLEN.L) Chairman Simon Murray as one of its directors, has said an internal investigation to debunk the allegations will take up to three months to complete.
"If you look at the stock market it is one of those markets that sells first and asks questions later. With a three-month investigation into something like Sino-Forest, I mean the stock could be trading at pennies by then," said John Kurgan, senior market strategist at commodity futures brokerage Lind-Waldock.
The company has already shed roughly C$4 billion in market capitalization, since the beginning of June.
The value of the company's debt has also swooned. Its 10.25 percent bond due 2014, was bid at $69 on Wednesday to yield 25.2 percent according to Thomson Reuters data. It had been trading above par before the allegations first surfaced.
"We view the company's corporate disclosure as weak, and management seemed reluctant or unable to provide concrete answers to a number of the questions on last night's call," said Nomura debt analyst Annisa Lee in a note to clients.
"Given these issues and the decision to not buy back any bonds or equity in the near term, we continue to see more downside risk to Sino-Forest bonds," Lee said.
The Sino-Forest debacle has also caused investors to steer clear of new issuances in the offshore yuan bond market, as the allegations have brought activity in the market to a screeching halt this week. [ID:nL3E7HF14N]
The scandal has also tainted other Chinese entities with North American listings. Shares of these companies have sold off recently following the allegations against Sino-Forest and a rash of recent accounting scandals. [ID:nN10232390] [ID:nLDE75902O] [ID:nN09101337] [ID:nN0997357]
"Any time a leader in the space is under these kinds of allegations - and I stress allegations - it makes the entire industry more cautious," said George Tsiolis, an investor and head of China Securities, an online community dedicated to small-cap Chinese companies.
"I think what's happening with investors right now is they are throwing the baby out with the bathwater. I still believe there are a lot of really good Chinese companies out there, but I don't blame investors for taking the position of sell first and come back later when the waters aren't so muddy," he said. (Reporting by Clare Baldwin, Claire Sibonney, Jeff Hodgson and Trish Nixon; Editing by Frank McGurty)