Sino-Forest’s final report into fraud allegations turned out to be a non-event yesterday. The independent committee charged with investigating its complicated structure and murky relationships admitted that it has made very little progress since its previous report in November.
The company had trumpeted the earlier findings, claiming that they proved Sino-Forest was not a Ponzi scheme. In truth, that report found much the same as this one: very little. Even so, the investigation is now over, leaving more questions than answers and putting the company on a collision course with shareholders and creditors.
The size of Sino-Forest’s timber assets, their value and the revenue they generate are all still up in the air, and the question of its relationships to suppliers and other third parties remains ambiguous.
“These issues have proved to be very difficult to definitively resolve,” the committee noted in the introduction to its report, going on to add: “The IC believes that, notwithstanding there remain issues, which have not been fully answered, the work of the IC is now at the point of diminishing returns because much of the information which it is seeking lies with non-compellable third parties, may not exist or is apparently not retrievable from the records of the company.”
In essence, the final report tells the story of an impenetrable corporate structure, informal business agreements, lax or absent regulation, a culture of secrecy in China’s forestry industry and obstructive behaviour by the company itself.
However, one of the committee’s few successes was to establish that two of Sino-Forest’s plantation acquisitions do at least appear to involve genuine plantations, though it took considerable effort just to establish that slim fact.
Indeed, the report gives several small but interesting glimpses into the Kafkaesque nature of the investigation. For example, the committee is still not clear if it’s even legal to own forestry maps in China — a doubt that raised its head when Sino-Forest’s management provided copies of newspaper articles detailing the arrests of several foreigners accused of similar offences.
“The [committee] has reviewed these responses from management and was unable to verify all of management’s assertions regarding forestry maps or that forestry mapping information would be regarded as subject to such sanctions, but recognises that this is an area of the law in China where a conservative approach may be prudent,” it said in the report, without elaborating on how it avoided running afoul of the map police.
At this point, the value of Sino-Forest’s trees is little more than an item of curiosity. It is burning through cash and, lacking any good answers to the allegations against it, has no access to funding. To make matters worse, US shareholders filed a class-action lawsuit yesterday against the company (as well as auditor Ernst & Young and underwriters Bank of America and Credit Suisse).
Meanwhile, Sino-Forest’s bondholders are in a tough spot, having waived their right to force the company into bankruptcy in December in the hope that the final report would draw a line under the matter and help the company get back to growing trees. That is not going to happen.
In return for granting the waiver, bondholders gained some influence on decision making at Sino-Forest and one of their demands was that the company produce a strategic plan by the end of next month — an idea based on the assumption that the final report would form the basis for such a plan. If there is any strategy left, it is hard to tell what it is.
The bankruptcy waiver expires at the end of April, meaning that bondholders will have to decide then whether to force the winding up of the Toronto-listed company. They have resisted taking that step so far because, well, it remains unclear what the company has to sell and doubtful whether foreign creditors would be able to get their hands on any assets within China anyway.
The outlook is bleak for everyone except the various law firms trying to sue the company and its advisers. They have a good case, to be sure. Reading the report, it is hard to fathom how the company’s impenetrable accounts and incredibly complex network of British Virgin Islands entities was ever signed off by an international accounting firm — and the whole affair once again casts that industry in a very poor light.
If anything positive has come from this, it is that few doubts now remain about whether Sino-Forest can recover from this. It is clear now that it's heading for the wall.