Bloomberg News

Sino-Forest’s Greenheart Rises After Regulator Starts Probe

June 09, 2011

(Updates with regulator’s comment in ninth paragraph.)

June 9 (Bloomberg) -- Greenheart Group Ltd., a unit of timber producer Sino-Forest Corp., rose the most in almost two years in Hong Kong trading after its parent asked Canadian regulators to probe short selling by Muddy Waters Research.

Greenheart climbed 43 percent, the biggest gain since June 24, 2009, to close at HK$1.47 today. The stock fell 63 percent yesterday after Muddy Waters, founded by short seller Carson Block, said Hong Kong- and Mississauga, Ontario-based Sino- Forest’s disclosed land holdings don’t match Chinese city records.

Sino-Forest shares are down 69 percent on the Toronto Stock Exchange since Muddy Waters published its report on June 2. The company said yesterday it asked the bourse and the Investment Industry Regulatory Organization of Canada to probe trading in its stock. The Ontario Securities Commission said the same day it was studying “matters related” to the company. Block said June 6 he plans to release more research on Sino-Forest and will address its stake in Hong Kong-listed Greenheart, which harvests and processes logs.

The regulator probe “erases some concern about the accounting issues or corporate governance issues,” said Nelson Yan, an investment manager who helps oversee $90 million at Mayfair Pacific Financial Group in Hong Kong. “It’s not a surprise to see some rebound in the stock.”

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.

Short Selling

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 welcomed the regulator inquiry and said it’s in keeping with the OSC’s responsibility and reflects the unusual trading in its shares. Block’s statements are false and Sino- Forest is studying its legal options, it said on June 6.

Wendy Dey, a spokeswoman for the OSC, reiterated yesterday’s statement from the regulator that an investigation related to Sino-Forest is under way.

The Investment Industry Regulatory Organization of Canada is working with the OSC, Connie Craddock, a spokeswoman for the market surveillance body, said in a telephone interview.

Hedge Funds

“We’re not responding to a request from anybody,” Craddock said.

“We don’t need a formal request,” she said. “If we do anything it’s because it’s the appropriate thing to do.”

Sino-Forest holds 64 percent of Greenheart.

Muddy Waters “pre-marketed” its report to hedge funds for the past five weeks, Richard Kelertas, a Montreal-based analyst at Dundee Securities Ltd., said June 7. Block declined to comment on Kelertas’s comments when contacted by e-mail.

Greenheart today provided details on its assets in Suriname, rebutting a Muddy Waters’ allegation that it doesn’t have a business registration there, according to a statement to the Hong Kong stock exchange.

--Helen Yuan with assistance from Christopher Donville in Vancouver. Editors: Simon Casey, Steven Frank

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net


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