June 21, 2011 / 1:58 PM / 7 years ago

UPDATE 4-Sino-Forest plunges further as bad news multiplies

* Shares fall more than 50 percent, partly recover

* Paulson dumps entire 14.1 pct stake in Sino-Forest

* Fitch cuts its debt rating on the company to junk

* RBC suspends Sino-Forest coverage, pending review (Recasts, adds background; updates share price move)

By Euan Rocha

TORONTO, June 21 (Reuters) - Sino-Forest’s meltdown on a battering ram of dismal news made it Canada’s most dramatic corporate collapse for years on Tuesday as investors ditched its stock and bonds on fears of a massive accounting fraud.

The Toronto-listed Chinese forestry company, whose stock market capitalization has plummeted $4.3 billion inside three weeks, lost credibility with investors, analysts, and rating agencies after a June 2 short seller report alleged it had radically exaggerated the size of its timber assets.

Sino-Forest TRE.TO, which buys and sells forestry assets in China, denies the allegations and has set up a committee to investigate the claims.

But the bad news keeps piling in, with the stock now down 89 percent since June 2 — including a 27 percent drop on Tuesday.

Tuesday’s slump came after billionaire hedge fund manager John Paulson dumped his entire stake in the company [ID:nN1E75J0AK], and RBC Capital Markets become the second big brokerage to suspend coverage of the company in as many days.

“People assume they’re better informed than most investors,” Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier said of Paulson’s Paulson & Co fund. “So if they got out and took these big losses, obviously they lack confidence in the management.”

The price of Sino-Forest’s debt plunged. Its 10.25 percent bond due 2014 <0#CA044090244=> slumped $15.94 to $44.06 on Tuesday to yield 45.7 percent, Thomson Reuters data showed.

Rating agency Fitch cut its debt rating on Sino-Forest, once the biggest forestry company on the Toronto market, to junk.


The relentless pressure on Sino-Forest has prompted memories of Canada’s 1997 Bre-X mining scandal, when rock samples were salted with gold to create the impression of a massive gold strike in Indonesia.

Bre-X, which at one point had a market capitalization of over C$6 billion, saw its shares collapse in a matter of weeks after the fraud was uncovered.

Sino-Forest’s downturn started after short-seller Muddy Waters accused the company of fraudulently exaggerating the size of its forestry assets. [ID:nN15303142]

It wasn’t immediately clear how much Paulson lost on the sale of his stake, but he was the company’s largest shareholder before the Muddy Waters report, with a 14.1 percent stake.

That would have been worth about C$670 million at the end of May, but about C$95 million at Monday’s close.


Q&A about allegations against Sino: [ID:nN15276780]

Chart on Sino AI structure: link.reuters.com/qam22s

US fix sought for long Chinese stock halts [ID:nN1E75K0UN]

Special report on Chinese stock scams: [ID:nN06271838]



Until Paulson’s exit, most analysts had cautiously stood by Sino-Forest, and while RBC Capital markets analyst Paul Quinn cut his price target to C$14 from C$27 last week, he maintained an “outperform” rating until Tuesday, when he suspended coverage.

On Monday, Dundee analyst Richard Kelertas, previously one of the company’s most vocal supporters, suspended coverage due to a lack of “reliable independent information upon which to base its evaluation.” He had earlier labeled the Muddy Waters research as a “pile of crap.”

Sino-Forest faces growing legal woes as well.

On Monday, two Canadian lawfirms, Siskinds LLP and Koskie Minsky LLP, filed a $6.5 billion class action against Sino-Forest, its directors and officers, auditors Ernst & Young, and the consulting firm Poyry.

The suit, filed on behalf of the Labourers’ Pension Fund of Central and Eastern Canada, alleges that Sino-Forest management materially misstated Sino’s assets and operational results and that Ernst & Young, as Sino’s auditor since 2007, and Poyry, a forestry consultant, earned fees for work they either didn’t perform, or performed inadequately. [ID:nN1E75K1RK]

Sino-Forest has asked IIROC, which oversees Canadian trading activity, to look into Muddy Waters and its trading in the company’s shares. IIROC declined to confirm, or deny the existence of an investigation.

The Ontario Securities Commission has opened its own probe into the affair, but has declined to provide details.

Representatives for the OSC were not immediately able to comment on the scandal, or to say if they had plans to respond to trade volumes and movements that appears disorderly at best.

Sino-Forest shares fell as low as C$1.29 early on Tuesday, a drop of more than 50 percent. They ended the day down 27 percent at C$1.99. ($1=$0.97 Canadian) (Additional reporting by Solarina Ho and Alison Frankel; editing by Frank McGurty and Janet Guttsman)

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