June 22, 2011 / 12:06 AM / 7 years ago

WRAPUP 1-Pressure on regulators builds as Sino-Forest sinks

* Sino-Forest shares dive, worst Canada meltdown in years

* SEC looking at policy changes in wake of scandals

* Another analyst deserts Sino-Forest after Paulson sale

* Sino-Forest, Ernst & Young face lawsuits

* SIFMA studying possible solutions to trading halts

By David Gaffen

NEW YORK, June 21 (Reuters) - The spectacular collapse of Sino-Forest, a Canadian-listed Chinese company, raised pressure on North American regulators to stem the tide of accounting scandals that has engulfed investors eager to tap into Chinese growth.

U.S. Securities and Exchange Commission head Mary Schapiro said on Tuesday that it is exploring ways to address investor concerns about shoddy accounting that has caused numerous Chinese companies to restate earnings as their share prices have plummeted.

The accounting concerns have caused investors to largely shun U.S. and Canadian-listed Chinese stocks, beginning with those that came to the region’s exchanges through reverse takeovers, and later extending to well-known names that had initial public offerings, such as Internet companies Renren (RENN.N) and Baidu.com (BIDU.O).

A loss of about $4 billion in the market value of Sino-Forest TRE.TO following a short seller’s report on June 2 alleging massive accounting fraud is one of the biggest and fastest corporate meltdowns in Canada in many years.

The stock is down 89 percent in that period, including a 27 percent drop on Tuesday. The price of Sino-Forest’s debt has also plunged with its 10.25 percent bond due 2014 trading at about 44 cents on the dollar, Thomson Reuters data showed.

The Ontario Securities Commission has opened a probe into the affair, but its representatives were not immediately able to comment on the scandal, or to say if they had plans to respond to share trades and volumes that appear disorderly at best.

Sino-Forest has denied the allegations of accounting fraud and set up a committee to carry out its own investigation.

However, some of the company’s recent defenders have bailed out on the stock this week, with two securities analysts suspending coverage and ratings agency Fitch downgrading its bonds to junk status. LAWSUITS

Sino-Forest is also facing at least two lawsuits, which seek class-action certification on behalf of its investors.

In the latest, two Canadian plaintiffs’ firms, Siskinds LLP and Koskie Minsky LLP, filed a $6.5 billion lawsuit against Sino-Forest, its directors and officers, auditor Ernst & Young LLP and consulting firm Poyry Beijing. It is filed on behalf of the Labourers’ Pension Fund of Central and Eastern Canada. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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

EXCLUSIVE-Fix eyed for lengthy share halts [ID:nN1E75K0UN]

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

Paulson dumps entire Sino-Forest stake: [ID:nN1E75J0AK]

Analysis on U.S.-listed Chinese companies: [ID:nN10232390]

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


In a related development, the U.S. securities industry and its regulators are trying to fix the problems caused by lengthy trading halts of U.S.-listed Chinese companies that have been suspected of accounting fraud.

With the number of Chinese securities halted on U.S. exchanges growing, stranding investors who are unable to close out positions, a Securities Industry and Financial Markets Association (SIFMA) spokeswoman said it is “exploring this issue and studying possible solutions.”

SIFMA, U.S. securities regulators and exchanges all held various talks over the last few weeks, according to a source familiar with the situation who is unrelated to SIFMA.

One possible solution discussed included matching outstanding long and short positions in the halted securities, and reporting them as formal trades, said the source, who was familiar with the discussions but unable to speak publicly. [ID:nN1E75K0UN]

The trading halts have created a skid row of sorts of Chinese companies languishing on exchanges without trading. There are currently more than a dozen such companies at the Nasdaq Stock Market and the New York Stock Exchange. SEE NO SINO-FOREST

Sino-Forest shares have crashed since the allegations of fraud were published by Muddy Waters, a Hong Kong-based short-selling firm that has released explosive reports on a series of Chinese companies.

The company’s shares took another shellacking on Tuesday after billionaire hedge fund manager John Paulson, who as of April had the largest position in the stock, said he had sold his 14.1 percent stake. The stock closed at C$1.99 a share in Toronto on Tuesday, down 74 cents.

Many investors had remained confident in Sino-Forest as long as Paulson held his stake, said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier in Toronto.

“People assume they’re better informed than most investors. So if they got out and took these big losses, obviously they lack confidence in the management,” he said, referring to Paulson & Co, John Paulson’s firm.

Most of the targets of Muddy Waters have later disclosed problems, boosting the fledgling outfit’s credibility and raising the ire of those who defend the stocks. A fake press release was distributed early on Tuesday on BriefingWire.com saying the SEC had charged Muddy Waters with fraud; it was later removed.

One staunch defender of Sino-Forest, Dundee analyst Richard Kelertas, who had referred to the Muddy Waters report as a “pile of crap,” suspended coverage of the shares on Monday due to a lack of “reliable independent information upon which to base its evaluation.”

Credit rating agency Fitch on Tuesday cut its debt rating on the company to junk status and brokerage RBC Capital Markets—which maintained an “outperform” rating until days ago—suspended its coverage.

During a question and answer session at The Wall Street Journal’s CFO Network event in Washington, D.C., Schapiro told the audience the SEC is trying to strike a balance between investor protection and ensuring companies have access to the U.S. capital markets.

“We want... foreign private issuers to list in the United States,” she said. “But we also want to make sure that U.S. investors have access to the information that they need to make the right kinds of investing decisions.”

When asked when the SEC will produce new policies to deal with the reverse mergers question, she said: “We have a menu of ideas we are looking at,” adding: “It’s not quite ready for prime time yet.” (Writing by David Gaffen; Reporting by Jonathan Spicer, Ryan Vlastelica, Euan Rocha, and Sarah Lynch; Editing by Martin Howell)

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