Bloomberg News

Canada Needs to Discuss Reverse Takeovers, OSC Says

September 14, 2011

(Corrects to say regulator “varied” order in ninth paragraph.)

Sept. 14 (Bloomberg) -- The head of Canada’s largest regulator, investigating fraud allegations at Sino-Forest Corp., said the country needs to discuss whether reverse takeovers are appropriate for Toronto-listed companies that have operations overseas.

“We need to take a look at RTOs,” Ontario Securities Commission Chairman Howard Wetston said today at a Toronto Board of Trade event. “One of the issues that might flow from our examinations of the emerging-markets issues is to have a good discussion about whether the RTO as a vehicle is appropriate.”

The OSC is investigating Sino-Forest, a timber producer with holdings in China that listed in Canada through a reverse takeover. In a reverse takeover, a closely held firm becomes public by purchasing a shell company that already trades. In June, the U.S. Securities and Exchange Commission issued a warning about buying stakes in companies that gain listings on American exchanges that way.

The OSC, Canada’s main securities regulator, this week extended a trading ban on Sino-Forest shares to Jan. 25. The stock has plunged 74 percent in Toronto since June 1, the day before short seller Carson Block’s Muddy Waters LLC research firm said in a report Sino-Forest overstated timber holdings in China. Sino-Forest has denied the allegations.

Listed in Alberta

Sino-Forest listed in Canada in 1994 through the reverse takeover of a dormant company on the Alberta Stock Exchange. Sino-Forest, based in Hong Kong and Mississauga, Ontario, eventually shifted to the Toronto exchange.

Sino-Forest has established an independent committee of directors to examine and respond to the allegations in the Muddy Waters report and hired PricewaterhouseCoopers LLP to assist.

The OSC suspended trading in Sino-Forest on Aug. 26 and ordered the resignation of five executives including Chief Executive Officer Allen Chan before rescinding the order the same day. Chan “voluntarily” resigned two days later, the company said.

Wetston told reporters after a Toronto Board of Trade event in Toronto today that the OSC’s reputation hasn’t been tarnished by its decision to reverse its suspension of Sino-Forest executives and that it made the right decision.

“A decision was made, an application was brought to vary it, it was clear that the order needed to be varied and the commission did what was the responsible thing and varied the order,” he said.

“One way or another, a suspension or administrative leaves or resignations occurred” for the five Sino-Forest executives, Wetston said. “On balance I think what was achieved was what the commission believed was necessary to ensure the cease-trade was effective.”

--Editors: Steven Frank, Jessica Resnick-Ault.

To contact the reporter on this story: Hugo Miller in Toronto at

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

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