Hedge Fund Sues Morgan Stanley Over Sino-Forest Options Deal

Hedge fund Oasis Management LLC sued Morgan Stanley for C$9.5 million ($9.3 million) over options in Sino-Forest Corp. (TRE) bought before the Toronto-listed timber company’s stock plunged 71 percent in two days in June.

Morgan Stanley failed to settle the options contracts in an effort to “limit its liability,” Oasis said in a lawsuit filed in London in July. Hong Kong-based Oasis bought options to sell Sino-Forest at C$19 on May 12, three weeks before shares fell to C$5.22 on allegations it had overstated forestry holdings.

Shares in Sino-Forest have fallen 74 percent since June 1, the day before short-seller Carson Block’s Muddy Waters LLC research firm said the company had overstated its holdings. While investors including hedge fund manager John Paulson and billionaire Richard Chandler took losses when Sino-Forest shares sank, holders of put contracts could reap returns from selling stock at prices far above the present value.

The Oasis deal will cost Morgan Stanley (MS) C$7.5 million to settle, the hedge fund said it its court filing. The put options are valued at C$9.5 million, compared with C$2 million for the equivalent shares, it said in the lawsuit. Oasis paid Morgan Stanley a premium of C$770,000 for the options in May.

New York-based Morgan Stanley claimed the options were terminated because trading in Sino-Forest’s shares was suspended, Oasis lawyers said in the filing. The bank offered Oasis C$3.8 million to cancel the deal, the hedge fund said in the lawsuit.

Morgan Stanley spokesman Michael Wang declined to comment yesterday. Katie Bolton, a Hong Kong-based spokeswoman for Oasis, declined to comment.

The Ontario Securities Commission halted trading in Sino- Forest on Aug. 26, saying the company appeared to have misrepresented its sales and timber stocks.

Sino-forest, which last traded at C$4.81 on Aug. 25, has set up an independent committee to examine the allegations in the Muddy Waters report. The company’s chief executive officer Allen Chan resigned on Aug 28.

To contact the reporter on this story: Kit Chellel in London cchellel@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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