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Sino-Forest said in a press release last night that it is reviewing allegations by the Ontario Securities Commission (OSC) that it engaged in widespread fraud dating back to at least 2006.
On Tuesday, Canadian regulators accused the company and several of its former executives — Allen Chan, Albert Ip, Alfred Hung, George Ho and Simon Yeung — of conducting “a complex fraudulent scheme to inflate the assets and revenue of Sino-Forest and made materially misleading statements in Sino-Forest’s public disclosure record related to its primary business”.
The OSC is considering whether it would be in the public interest to permanently halt the trading of Sino-Forest shares, impose an administrative penalty of up to $1 million for each breach of Ontario securities law and recoup any money obtained through such non-compliance, as well as the costs of the investigation. It is also seeking sanctions against the individual respondents.
Sino-Forest said last night that it is reviewing the allegations and considering what steps, if any, are appropriate for the company to take given its “limited financial resources”.
The Chinese forestry company sought bankruptcy protection from its creditors on March 30 after struggling to defend itself against accusations of fraud since they first surfaced in a research report published in June last year by Muddy Waters, a short-seller focused on Chinese companies listed in North America.
The Canadian regulator’s allegations back up many of the claims levelled by Muddy Waters. In its statement, the commission argues that Sino-Forest engaged in “numerous deceitful and dishonest courses of conduct” to inflate the assets and revenues of its timber business.
In one example, described as the “Gengma Fraud #1”, Sino-Forest is accused of fraudulently overstating its quarterly revenue by 51.6%, bumping the figure to C$306 million from its apparent revenue of C$148 million.
The Canadian regulator says that Sino-Forest inflated its revenue by trading parcels of land, much of it imaginary, through a complex web of nominee companies registered in the British Virgin Islands (BVI) and China. In many cases, these transactions were conducted off the book with buyers and sellers that had undisclosed connections to Sino-Forest.
The land that was bought through this model accounted for 90% of Sino-Forest’s total timber holdings (“by value”, as the OSC points out).
To give an example, the Gengma fraud allegation involved the undocumented purchase of timber and land use rights by a Sino-Forest subsidiary for Rmb102 million in 2007. It then purported to buy the same assets from another supplier, which it secretly controlled, for more than Rmb600 million. In 2010, it claimed to have sold the land for Rmb1.5 billion, but also used it as collateral for a bank loan in 2011.
In all, 120 nominee companies were controlled by 10 “caretakers” on behalf of Sino-Forest. Yet the complex structure belied what was a fairly simple operation. In 2010, for example, all of the standing timber bought through its BVI model came from just six different suppliers and was sold to five buyers.
The individuals named include the most of the company’s senior management. All five are accused of taking part in the fraudulent scheme and making materially misleading statements.
Chan, the chairman and chief executive until August 28, 2011, is also accused of fraud in relation to Sino-Forest’s purchase of a controlling interest in a company known as Greenheart, in which Chan had a substantial and undisclosed interest.
Ip was a senior vice-president in charge of development and operations in north-east and south-west China, Hung was senior vice-president responsible for corporate planning and banking, and Yeung was vice-president of finance in China.
Together with Chan, all are also accused of materially misleading the regulator during its investigation.
Horsley, who was the chief financial officer, “did not comply with Ontario securities law and acted contrary to the public interest”.
