Bloomberg News

Sino-Forest Loses Paulson’s Support as Stock Plunges 89%

June 21, 2011

(Updates with short selling in 15th paragraph.)

June 21 (Bloomberg) -- Sino-Forest Corp., the Hong Kong- based tree-plantation owner that’s plunged 89 percent since being targeted by short seller Carson Block, lost the support of its biggest shareholder after Paulson & Co. sold all its stock.

John Paulson’s New York-based hedge fund, which made $15 billion in 2007 betting against U.S. mortgages, said in a regulatory filing yesterday that it sold all 34.7 million of its shares. Sino-Forest has fallen to an eight-year low in Toronto after Block, who runs Muddy Waters LLC, said June 2 that the company overstated its production.

Paulson made his disclosure less than a week after Sino- Forest Chief Financial Officer David Horsley said in an interview that the hedge-fund manager has been “very supportive, giving us suggestions” on how to deal with Block’s allegations. Sino-Forest shares have lost about C$4 billion ($4.1 billion) in value since Block released his report.

“Due to the uncertainty over Sino-Forest’s public disclosures and financial statements, we have sold our stock,” Paulson & Co. said in an e-mailed statement.

Sino-Forest dropped 74 cents, or 27 percent, to C$1.99 as of 5 p.m. in Toronto Stock Exchange trading, its lowest price since June 3, 2003.

Allen Chan, Sino-Forest’s chairman and chief executive officer, has denied the allegations from Muddy Waters. He established an independent committee to investigate and appointed PricewaterhouseCoopers LLP to assist.

‘Losing Trades’

Paulson lost about 13 percent from his largest fund in the first half of June, two investors briefed on the returns said last week. They asked not to be identified because the information is private.

“Paulson is under the limelight on this investment, but any money manager is going to have some losing trades. It’s part of life,” said Steven Persky of Dalton Investments LLC, a Los Angeles-based fund with $1.3 billion in assets. Whenever there are allegations of mismanagement, “you’ll have some very reputable firms who have been taken in because a company doesn’t get to that size without serious investors,” he said.

The “complexities” of Sino-Forest’s corporate structure, prompted Fitch Ratings to today downgrade its long-term foreign currency issuer default rating and senior unsecured debt rating to “BB-” from “BB+,” Fitch said in a statement. The rating may be cut further if the issues aren’t resolved, Fitch said.


“Inconsistencies” have been found in the valuation of Sino-Forest’s holdings in China’s Yunnan province, Canada’s Globe and Mail said June 18, citing Chinese government officials and forestry experts it didn’t identify. A plantation where Sino-Forest bought timber rights in 2007 is smaller than the 200,000 hectares (494,000 acres) it claims, the Globe said, citing Xie Hongting, chairman of Gengma Forestry, which sold trees to Sino-Forest, and a provincial forestry official the newspaper didn’t identify.

Sino-Forest stands by the figure, the newspaper reported, citing a statement from the company, which said it bought 13,300 hectares directly from Gengma, and another 180,000 hectares from other sellers, using Gengma as a broker.

The Globe’s report is an “incorrect portrayal” of the company’s business, Sino-Forest said yesterday in a statement.

Paul Quinn, a Toronto-based analyst at RBC Capital Markets, said today in a note that the bank suspended coverage of Sino- Forest pending the findings of an investigation started by an independent committee the forestry company set up, or the “release of information by other independent and credible sources.” Quinn previously had an “outperform” recommendation on the stock.

Suspended Coverage

Richard Kelertas, an analyst at Dundee Securities who had said on a June 7 conference call that there was nothing fraudulent about Sino-Forest “to the best of our knowledge,” suspended coverage of the timber company yesterday pending a review of the independent committee’s findings. Dundee helped Sino-Forest raise money in a stock offering as recently as 2009, and Kelertas recommended buying the shares from September 2007 until June 3, when he started reviewing his rating.

Short selling has retreated to 20 percent of Sino-Forest’s outstanding stock as of June 20 from a record 35 percent on June 2, according to Data Explorers, a New York-based research firm. Short sellers borrow stocks and sell them in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder.

Orient Paper

Orient Paper Inc., target of a critical Muddy Waters report last year, urged overseas-listed Chinese companies to increase transparency to combat short sellers.

Chinese companies “should conduct the third-party independent investigation like we did, they should do it even better than us in order to shut others’ mouths,” Liu Zhenyong, Chairman and Chief Executive Officer of Baoding, Hebei-based Orient Paper, said yesterday in a phone interview.

Orient Paper’s shares are languishing 60 percent below where they were before Block’s allegations, even after a four- month investigation last year by Loeb & Loeb LLP, Deloitte & Touche Financial Advisory Services and TransAsia Layers found there was no evidence to support the claims.

--With assistance from Matt Walcoff in Toronto, Christian Baumgaertel in Boston and Helen Yuan in Shanghai. Editors: Andrew Hobbs, Simon Casey

To contact the reporters on this story: Kelly Bit in New York at; Nikolaj Gammeltoft in New York at

To contact the editors responsible for this story: Christian Baumgaertel at; Nick Baker at

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