Bloomberg News

Sino-Forest Tumbles as Short Seller Says Holdings Overstated

June 03, 2011

(Updates with Frankfurt shares in seventh paragraph.)

June 3 (Bloomberg) -- Sino-Forest Corp., whose biggest shareholder is hedge fund Paulson & Co., fell the most since 2008 in Toronto trading after short seller Carson C. Block said it overstated timberland holdings and production in China.

Sino-Forest, based in Hong Kong and Mississauga, Ontario, dropped as much as 25 percent and was C$3.75 lower at C$14.46 when trading was suspended on the Toronto exchange yesterday. The amount of land the company said it bought from Lincang City in China’s Yunnan province doesn’t match city records, according to a report by Block, the Hong Kong-based founder of Muddy Waters Research. Sino-Forest couldn’t have produced as much timber in the area as it claimed, said Block, who stands to make money from a decline in the company’s shares.

Sino-Forest has set up a special committee to deal with the accusations, Charlotte Cheung, assistant manager of investor relations, said today in an interview at the company’s Hong Kong office. Sino-Forest plans to release a statement before Canada’s market opens.

Chinese companies trading in North America have come under growing scrutiny from regulators and investors. The U.S. Securities and Exchange Commission began an investigation last year into the use of reverse takeovers, in which a closely held firm becomes public by purchasing a shell company that already trades. The Bloomberg Chinese Reverse Mergers Index of U.S.- listed stocks has retreated 38 percent this year.

Falsified Statements

“There can be a lack of transparency with these types of companies,” Glenn Ko, a UBS AG fixed-income analyst, said today by phone from Hong Kong, noting a probe finding falsified financial statements at China Forestry Holdings Co. “Company filings are hard to verify and you’re never sure if you’re comparing apples with oranges unless you go to the plantations and check.”

Dave Horsley, chief financial officer at Sino-Forest, didn’t return calls to his mobile phone and to the company’s Mississauga office.

Sino-Forest’s German-traded stock declined 6.8 percent to 10.16 euros as of 11:44 a.m. in Frankfurt after slumping 16 percent yesterday. That’s equivalent to C$14.39, 0.5 percent below the Toronto-traded price.

U.S. Trading

Sino-Forest also plunged by a record 61 percent yesterday to $7.33 in U.S. over-the-counter trading. The shares have fallen 38 percent this year in Toronto, valuing the company at C$3.55 billion ($3.63 billion). The cost of insuring Sino-Forest five-year bonds against default has climbed 51 percent in 2011.

Last month, shares in Chaoda Modern Agriculture Holdings Ltd., a Chinese supplier of fruit and vegetables, fell following a report in Next Magazine that it had exaggerated the amount of land it controls. The company said the report wasn’t “factually accurate.” Its shares dropped 9.8 percent in Hong Kong today.

Merdeka Resources Holding Ltd., a timber plantation operator, declined 6.8 percent in Hong Kong today. Log harvester Greenheart Group Ltd. had its shares suspended from trading in Hong Kong ahead of a price-sensitive announcement.

Block’s report is “a complete, gross exaggeration,” said John Goldsmith, a Toronto-based money manager at Montrusco Bolton Investments Inc., which manages about C$4.9 billion, including Sino-Forest shares.

Goldsmith said he has confidence in Sino-Forest’s financial reporting because it’s been audited by Ernst & Young LLP and the company’s assets have been valued by consulting firm Poyry Oyj. A one-month delay in filing its next quarterly statement is due to a switch to international accounting standards, he said.

Paulson Holding

Paulson & Co. owned 34.7 million shares as of April 29, according to data compiled by Bloomberg. The second-biggest shareholder was Davis Selected Advisers LP, the mutual-fund firm run by Chris Davis that owned 27.3 million shares.

China MediaExpress Holdings Inc. fell 33 percent on Feb. 3 after Muddy Waters said the Hong Kong-based company inflated sales and profit. Its auditor, Deloitte Touche Tohmatsu, said March 11 it resigned because it was “no longer able to rely on the representations of management.” MediaExpress’s chief financial officer resigned later the same month.

Short selling, or selling borrowed shares with the hope of profiting when they fall, accounted for a record 33 percent of Sino-Forest’s outstanding stock as of May 31, up from 18 percent at the end of April and 13 percent at the beginning of the year, according to Data Explorers, a New York-based researcher. Short sellers have borrowed 82 percent of the company’s lendable supply, meaning there’s limited equity available for short sellers to bet against.

Biggest Short

“It’s one of one biggest shorts to emerge in North America over a relatively short time,” said Will Duff Gordon, a senior research analyst at Data Explorers. “It’s gone from being a significant short to an enormous short in the last month.”

The average short interest for the Standard & Poor’s 500 Index is 2.6 percent, the data show. Sino-Forest is the most- shorted stock in the Standard & Poor’s/TSX Composite Index, which has an average short interest of 5.7 percent.

Sino-Forest’s board of directors includes Simon Murray, who in April was appointed chairman of Swiss commodity trader Glencore International Plc prior to its initial public offering. Murray didn’t return a call to his mobile phone seeking comment.

--With assistance from Christopher Donville in Vancouver, Elisabeth Behrmann in Sydney and Jasmine Wang in Hong Kong. Editors: Rebeccca Keenan, Amanda Jordan

To contact the reporters on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net.


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