Bloomberg News

Canadian Regulator Probing ‘Matters Related’ to Sino-Forest

June 08, 2011

(Updates with closing share price in eighth paragraph.)

June 8 (Bloomberg) -- The Ontario Securities Commission, Canada’s main stock market regulator, is investigating “matters related” to Sino-Forest Corp., whose shares have plunged 73 percent since a short seller said it overstated timberland production.

“The OSC confirms that we are investigating matters related to Sino-Forest,” Wendy Dey, a spokeswoman for the Toronto-based regulator, said today in an e-mailed response to questions. Carolyn Shaw-Rimmington, another spokeswoman, declined to elaborate. Sino-Forest said in a statement it welcomed the inquiry and said it’s in keeping with the OSC’s responsibility as the public regulator and reflects the unusual trading in its shares.

Muddy Waters Research, a firm founded by short seller Carson Block, said in a report published June 2 that the forestry company’s disclosures of land holdings don’t match Chinese city records. Block, who stands to make money from declines in Sino-Forest stock, said June 6 he will keep betting against the shares until they reach “zero.”

“The company believes Muddy Waters’ report to be inaccurate, spurious and defamatory,” Sino-Forest said in a June 6 statement.

Horsley didn’t immediately return a call to his mobile phone seeking comment. Louisa Wong, a company spokeswoman in Hong Kong, didn’t immediately return an e-mail message outside of regular office hours.

Investigation Confirmed

Sino-Forest also said in its statement today it asked the Toronto Stock Exchange and the Investment Industry Regulatory Organization of Canada to probe trading in Sino-Forest’s shares by Muddy Waters, Block and any associates who may have learned of the report before it was published.

Regulators and investors have increased scrutiny of Chinese companies trading in North America. The U.S. Securities and Exchange Commission began an investigation last year into the use of reverse takeovers, in which a closely held company buys a shell company whose shares already trade.

Sino-Forest rose 87 cents, or 21 percent, to C$4.92 at 4:15 p.m. in Toronto Stock Exchange trading.

Muddy Waters Research “pre-marketed” its report to hedge funds for the past five weeks, Richard Kelertas, a Montreal- based analyst at Dundee Securities Ltd., said yesterday on a conference call. Block declined to comment on Kelertas’s comments when contacted by e-mail.

Not Illegal

Dundee was among institutions that helped Sino-Forest sell shares in December 2009 and in May 2009.

Offering a report to hedge funds before making it public isn’t illegal, said James Fanto, who teaches classes on international financial regulation and securities laws at Brooklyn Law School in New York.

“Muddy Waters can profit from this information itself, or allow others to profit from their insights as well,” Fanto said in an e-mail message yesterday. “The only problems emerge when research is in fact based on insider tips. But that doesn’t seem to be the case here.”

Muddy Waters will release more research about Sino-Forest, Block said in a June 6 conference call. The research firm will address Sino-Forest’s 2010 purchase of engineered-wood products maker Homix Ltd. and its 64 percent stake in Greenheart Group Ltd., a lumber producer, Block said.

Greenheart today fell 63 percent to HK$1.03, the most on record, after resuming trading in Hong Kong following Muddy Waters’ report.

Operations ‘Independent’

“Greenheart’s major operations are independent of our parent company and we are not subject to the allegations,” David Wu, director of corporate development and investor relations at Greenheart, said today by telephone.

Sino-Forest has been “thoroughly scrutinized” by major international underwriters and law firms inside and outside of China in the course of seven public and private offerings over the past five years, the company said on June 6. It’s planning an analyst tour of its operations in China in July, Sino-Forest said. The company said the same day it appointed PricewaterhouseCoopers to assist with an investigation of Block’s report.

--With assistance from Matt Walcoff and Doug Alexander in Toronto and Jasmine Wang in Hong Kong. Editors: Steven Frank, Chris Nagi.

To contact the reporters on this story: Sean B. Pasternak in Toronto at; Christopher Donville in Vancouver at

To contact the editors responsible for this story: David Scheer at; Simon Casey at

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