Bloomberg News

Sino-Forest Faces ‘Herculean’ Task After Ponzi Scheme Denial

November 17, 2011

(Updates share, bond prices in seventh paragraph.)

Nov. 16 (Bloomberg) -- Sino-Forest Corp. Chief Executive Officer Judson Martin, a former real estate and television executive, is trying to put an end to five months of turmoil for the forestry company beset by accusations of fraud.

Martin, who replaced company founder Allen Chan as CEO in August, said yesterday that an investigation by an independent committee showed Sino-Forest isn’t a “Ponzi scheme” as alleged by Muddy Waters LLC, a research firm. Since Muddy Water’s report was published in June, Sino-Forest’s stock has plunged 74 percent and Canadian regulators and police have started their own probes.

“It’s really great to be able to talk openly, talk with strength, talk with conviction against the accusations,” Martin told reporters yesterday at a briefing in Hong Kong, the first time a Sino-Forest executive has taken questions in public since June.

While the committee’s investigation said it accounted for most of Sino-Forest’s timberland, it also reported missing records, difficulties in obtaining data, a lack of cooperation from some executives and an absence of an internal audit function. Carson Block, the short seller who founded Muddy Waters, said yesterday he rejected the report. Canada’s main securities regulator said it will continue with its probe.

Difficult to ‘Un-Ring’

“It’s a very difficult bell to un-ring when you have these kinds of allegations that later prove to have some merit,” said Robert Lawton, managing partner at Catoosa Fund LP in Los Angeles. “Once you’ve destroyed your credibility with a fund manager like myself, it’s a herculean effort to regain it and often impossible, depending on the allegations.”

The committee said in an interim report that it obtained information from Chinese forestry bureaus verifying 77 percent of Sino-Forest’s reported timber assets. It also said it confirmed the Mississauga, Ontario- and Hong Kong-based company’s cash balance.

While Sino-Forest has been suspended from trading since August, shares of its Greenheart Group Ltd. unit soared 93 percent yesterday in Hong Kong after publication of the report. The shares climbed 2.6 percent to HK$1.19 today in Hong Kong. Sino-Forest’s 10.25 percent bonds, which mature in 2014, gained 24.75 cents on the dollar to 62 cents as of 4:30 p.m. in Toronto yesterday, according to Trace, the bond price reporting system of the Financial Industry Regulatory. The 6.25 percent bonds due October 2017 fell 10 cents on the dollar to 50 cents at 8:01 a.m. today.

Independence Questioned

Some investors questioned the independence of the investigative committee that was chaired by Sino-Forest Chairman William Ardell and included James Bowland, who was a member of Sino-Forest’s board from February until November.

The committee, which organized meetings with forestry officials, said in its report that it instructed its advisers not to make direct contact with forestry bureau officials because “management cited strong concerns that such contact would negatively impact the company’s relationship with the forestry bureaus.”

“If that’s how you conduct your independent investigation, then it ain’t worth very much,” John Hempton, chief investment officer of Bronte Capital, a Sydney-based fund manager, said by phone.

The report may also not be enough to change investor perceptions about the standards of accounting at Chinese companies listed abroad.

Still Languishing

Orient Paper Inc., targeted by Muddy Waters last year, is trading 74 percent below its record, even after a four-month probe found no evidence to support the short-seller’s claims. Silvercorp Metals Inc., a Vancouver-based company mining in China, said Oct. 25 an investigation by accounting firm KPMG LLP found fraud allegations in two anonymous reports were untrue. It has fallen 8.3 percent since its report.

The Ontario Securities Commission’s preliminary review of the Sino-Forest report “has firmly suggested that our investigation, which is ongoing, should continue,” Tom Atkinson, the commission’s director of enforcement, said yesterday in an e-mailed statement.

Sino-Forest said Nov. 11 it’s cooperating with the OSC probe and investigation by the Royal Canadian Mounted Police.

Sino-Forest said it has incurred about $35 million to date in expenses by setting up the committee. It hired PricewaterhouseCoopers LLC in June to assist the investigation.

Business Bruised

“At least for now, this report proves that Sino-Forest is a real company with real assets, real revenue and in huge stark contrast to Muddy Waters’ allegations,” Martin said. “Business has been bruised, it’s not broken, it hasn’t been overtly damaged beyond repair.”

Sino-Forest investors including hedge-fund firm Paulson & Co. lost at least C$3.3 billion ($3.2 billion) as the stock tumbled following Muddy Waters’ allegations. The shares closed at C$18.21 on June 1, the day before the Muddy Waters report came out. They closed at C$4.81 on Aug. 25, the day before they were suspended by OSC. Chan stepped down as CEO and chairman on Aug. 28.

“I had the skill set more suitable to bring this independent committee process to a closure than Alan did,” Martin said at the briefing. “Alan built this company, he did something remarkable, I could never do that, but I was trained in the North American way, getting things done, being a little harsher than Allen’s capable of being.”

CSI Producer

Martin started his career with PricewaterhouseCoopers and later spent 13 years with real estate company Brookfield Asset Management Inc., formerly known as Brascan Corp., where he became CEO of its Trilon Securities Corp. unit.

He later served as chief financial officer of Canadian entertainment company Alliance Atlantis Communications Inc., which produced U.S. television show “CSI: Crime Scene Investigation.” After retiring from Alliance, he joined the Sino-Forest board in 2006. Martin moved to Hong Kong in June 2010 and became a vice-president at Sino-Forest. He was appointed CEO of the company’s Greenheart Group unit in August of that year.

Martin said yesterday that in the course of the committee’s investigation it found “internal processes, infrastructure and breadth of management” haven’t kept pace with the expansion of Sino-Forest’s operations.

In the report, the committee said it found that Sino-Forest depended on a “relatively small group” of executives and there was a lack of segregation in their duties. It also said contracts weren’t maintained in one location, some data on Chinese servers appeared to have been deleted, and there was no integrated accounts system.

Third Parties

The committee said some third parties declined to cooperate with its probe because of concerns that information they provided could be made public or fall into the hands of Chinese authorities. Title to standing timber can’t be “definitively proven” by referring to government records because of incomplete registrations, according to the report.

“We believe this release has no credibility,” Block said yesterday in an e-mailed statement. Muddy Water said in its June report that Sino-Forest had overstated Chinese timber holdings and production.

Muddy Waters showed a “basic lack of knowledge of how forestry rights work in China, what documentations is necessary, available and relevant to land use rights and standing timber rights,” Martin said. “It seems to me an analyst looking at the company should have this basic knowledge upfront.”

“We need to improve our communication with our international investor group,” Martin said. “We have to make sure they understand the operational, regulatory complexities that exist today in China.”

--With assistance from Doug Alexander and Matt Walcoff in Toronto, Michelle Yun and Debra Mao in Hong Kong and Elisabeth Behrmann in Sydney. Editors: Andrew Hobbs, Steven Frank.

To contact the reporters on this story: Simon Casey in New York at; Christopher Donville in Vancouver at

To contact the editor responsible for this story: Simon Casey at

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