Sino-Forest Corp. (TRE) agreed to extend a trading ban on its shares imposed by a Canadian securities regulator that’s been criticized for being too slow to clamp down on corporate fraud.
The Ontario Securities Commission, which said last month that some officers and directors of the Chinese tree-plantation operator may have acted fraudulently, halted trading of Sino- Forest shares and temporarily banned five executives from buying and selling securities. The company’s lawyers consented to an extension of the trading bans until Jan. 25, at a hearing in Toronto today before Canada’s main securities watchdog.
The OSC is “acting very early and taking a direct hit right at the company, not screwing around,” said Richard Powers, a business law and ethics professor at the University of Toronto. “Before any hearing, before anybody’s been found guilty of a darned thing, they just said ‘we’re not waiting.’”
The OSC’s actions against Mississauga, Ontario- and Hong Kong-based Sino-Forest contrast with its handling of past cases such as Bre-X Minerals Ltd. and former Hollinger International Inc. Chairman Conrad M. Black, in which it took action only after the U.S. Securities and Exchange Commission stepped in.
The OSC has been headed since November by Howard Wetston, a former judge in the Federal Court of Canada and ex-chairman of the Ontario Energy Board. One of the regulator’s five priorities for this fiscal year is to “intensify operational, compliance and enforcement efforts,” which include reducing timelines for completing investigations and bringing regulatory proceedings forward.
“There is a new sheriff in town,” said Powers, who met Wetston in 2005 at Rotman School of Management’s directors education program at the University of Toronto. “He is exceedingly smart, he is tactful and he can be aggressive.”
Wetston, 64, didn’t return telephone calls seeking comment.
Sino-Forest shares have plunged 74 percent since June 1, the day before short seller Carson Block’s Muddy Waters LLC alleged the company overstated its timber holdings. Sino-Forest has denied the allegations. A week after the report, the OSC announced it was investigating “matters related to” Sino- Forest, and on Aug. 26, the Toronto-based regulator halted trading in the shares for 15 days.
Sino-Forest closed at C$4.81 on the Toronto Stock Exchange on Aug. 25, the last day before trading was halted. The shares plunged 72 percent to $1.38 in U.S. over-the-counter dealing on Aug. 26, before they too were halted, giving the company a market value of $338.4 million. The company was valued at as much as C$6.36 billion ($6.46 billion) in March.
In its Aug. 26 notice, the OSC initially ordered five executives, including Chief Executive Officer Allen Chan, to resign. That demand was rescinded hours later when the regulator was “persuaded” to wait for today’s hearing before issuing such an order, Wendy Dey, an OSC spokeswoman, said at the time.
“To order that was outlandish,” Dirk Matten, a professor at the York University’s Schulich School of Business in Toronto, said in a telephone interview.
Chan stepped down as chief executive officer two days later.
‘Send a Message’
“I think they did it on purpose to illustrate, to send a message to Sino-Forest that ‘we’ve had it with your delays, we’re coming after you aggressively, and we can either do it through our way or you can do it your way,” Powers said.
Stan Neve, a spokesman for Sino-Forest, didn’t return a telephone call seeking comment yesterday.
The regulator probably won’t seek to ban the executives at the hearing, a former OSC staffer said.
“We’re still in the realm of early-stage temporary orders,” Kelley McKinnon, a partner at law firm Gowling Lafleur Henderson LLP in Toronto and a former deputy director of enforcement at the OSC, said in a telephone interview yesterday. “Based on the notice of hearing the Commission has put out, they’re not seeking to ban directors and officers.”
The OSC, one of 13 Canadian provincial and territorial securities watchdogs, has more limited powers than its counterpart at the SEC. The OSC had a staff of 478 last year and expenses of C$84.8 million. For the year ended Sept. 30, 2010, the SEC had 3,748 full-time employees and a budget authority of $1.57 billion.
“A provincial body cannot afford the costs of national enforcement,” said John Coffee, a law professor at Columbia University in New York. “It would be like asking the New York State Attorney General to handle all securities fraud cases in the United States.”
Canada is the only industrialized country in the world without a single securities regulator. Finance Minister Jim Flaherty has been pushing for a single agency to improve enforcement and cut costs, although the plan has been met with opposition by provinces including Quebec.
Canada has had problems of underinvestment in securities enforcement because of the fragmented system, which has led to some failures in high-profile cases, Coffee said.
“Bre-X is a little bit of an embarrassment for Canada,” Coffee said, referring to Canada’s biggest stock-market fraud. The Calgary-based company’s claims of massive gold reserves in Indonesia proved to be a hoax and the company’s shares plummeted in early 1997. Former Bre-X geologist John Felderhof, the only official to be charged, was found innocent of all counts, including insider trading and issuing false press releases.
Black, the former chairman and chief executive officer of Toronto-based Hollinger International, was prosecuted by the SEC before Canadian regulators stepped in. Black was initially sentenced in 2007 to 6 1/2 years in a U.S. federal prison for mail fraud and obstructing justice. That term was reduced by about three years after he successfully appealed two of the four counts upon which he was found guilty.
“Conrad Black was prosecuted in the United States,” Coffee said. “There is this funny pattern of Canada -- to the extent that there is enforcement in Canada -- it often comes laterally from the United States.”
The OSC is taking a different tack on Sino-Forest, Powers said.
“The OSC has tended to take a very cautious approach,” Powers said. “It would suggest that under Mr. Wetston, the OSC is going to be much more aggressive.”
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