Sino-Forest report

Sino-Forest gives itself a clean bill of health

Management at Sino-Forest claims its own investigation has refuted allegations of fraud made by Muddy Waters in June.

Sino-Forest yesterday confirmed its own existence after a four-month investigation by an independent committee that has cost around $35 million and claims to refute the accusations levelled by short-seller Muddy Waters in June this year.

“The Independent Committee report verifies the company’s stated cash balances, confirms registered title or contractual rights to the company’s stated timber assets, as well as the book value of these assets,” it said in a statement accompanying the report. “We can categorically say Sino-Forest is not the ‘near total fraud’ and ‘Ponzi scheme’ as alleged by Muddy Waters.”

However, such confidence is hardly supported by the materials Sino-Forest released yesterday. Indeed, much of the 100-page interim report is contradicted by a letter from the advisers to the independent committee — law firms Osler Hoskin & Harcourt, Mallesons Stephen Jaques and Jun He, as well as PricewaterhouseCoopers.

Carson Block, founder of Muddy Waters, has also cast doubt on the independence of the so-called independent committee, which comprises chairman Bill Ardell and James Hyde, a company director since 2004. The third member of the committee, director James Bowland, resigned earlier this month without explanation.

The letter from the advisers, which is itself 43 pages long, details a host of problems with the investigation into the company, including serious problems with even the most basic facts, such as the exact location of the trees Sino-Forest categorically claims to own.

“A key concern identified by the [advisers] was the information from [Sino-Forest] that longitude/latitude coordinates of standing timber plantations cannot be obtained from the company’s surveyor reports. Such reports show GPS coordinates for the village/general area rather than detailed coordinates that would facilitate specific identification and a site-walk/examination,” the letter stated.

Proving the company’s legitimate existence seems relatively simple on the face of it. To refute the Muddy Waters allegations, the independent committee needs to do two things above all: prove that it owns the trees it claims to own and clarify its relationship with various third parties and suppliers.

However, none of that is simple in practice. The company’s operations are mired in a complex web of 58 British Virgin Islands companies and 82 entities in Hong Kong and China, as well as various authorised intermediaries and suppliers — as revealed in the report.

In their letter, the advisers complain of incomplete or missing documentation, as well as obfuscation and interference on the part of management. Even in the face of the damaging Muddy Waters allegations, the advisers claim that management was reluctant to approach Chinese forestry bureaus to confirm the company’s timber holdings and failed to provide key information about its suppliers.

These latest revelations are not likely to improve Sino-Forest’s outlook, though sources yesterday noted a brief rally in the company’s bonds. Such optimism seems unwarranted given the vague and equivocal findings of the report. To make matters worse, the company is burning through cash with little prospect of being able to raise new funding any time soon — it has spent $264.7 million since June 30 this year, leaving it with a balance of $571.1 million as of November 4.

According to the Ontario Securities Commission (OSC), Sino-Forest has sold approximately C$2.99 billion ($3.05 billion) of equity and debt since the beginning of 2004, including four share offerings that have raised a combined C$1.05 billion.

Allen Chan resigned as chairman and CEO of Sino-Forest in August after the OSC suspended trading in the company and, as Sino-Forest confirmed last week, several company officers and directors are now being investigated by Canadian police trying to discover if a fraud has been committed.

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