(Updates with analyst’s comment in third paragraph.)
June 7 (Bloomberg) -- Muddy Waters Research, the firm founded by short seller Carson Block, “pre-marketed” its June 2 report on Sino-Forest Corp. to hedge funds for the past five weeks, said an analyst at Dundee Securities Ltd.
Shares of Sino-Forest have tumbled 78 percent in Toronto since June 1, the day before Muddy Waters said in its report the Hong Kong and Mississauga, Ontario-based forestry company misled investors about its land holdings and production. Block stands to make money from declines in Sino-Forest’s shares.
“Muddy Waters pre-marketed this smoking-gun report on Sino-Forest to hedge funds over the last five weeks,” Richard Kelertas, an analyst at Dundee in Montreal, said today in a conference call with investors and reporters.
Kelertas changed his recommendation on Sino-Forest to “under review” from “buy” on June 3 following the Muddy Waters report. He said the report was inaccurate and there’s nothing fraudulent about Sino-Forest “to the best of our knowledge.”
Dundee was among institutions that helped Sino-Forest sell shares in December 2009 and also in May 2009.
“These hedge funds got involved with Sino-Forest in a big way,” he said. Kelertas declined to name the funds or say how he obtained the information.
“The short position almost doubled in two to three weeks,” he said.
Short selling, or selling borrowed shares with the hope of profiting when they fall, more than doubled to a record 35 percent of Sino-Forest’s outstanding stock as of June 3, up from 17 percent at the beginning of May and 13 percent at the end of 2010, according to Data Explorers, a New York-based research firm. Sino-Forest is the most-shorted stock in the Standard & Poor’s TSX Composite Index, which has an average short interest of 4.8 percent.
Sino-Forest dropped $2.15, or 35 percent, to C$4.01 as of 4 p.m. on the Toronto Stock Exchange.
The shares will recover “much faster than people suspect,” Kelertas said.
No one immediately responded to telephone and e-mail messages for Block seeking comment.
--With assistance from Nikolaj Gammeltoft in New York. Editors: Simon Casey, Steven Frank
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