Sino-Forest Corp. cofounder Allen Chan helped run a “complex fraudulent scheme” that exaggerated the timber producer’s assets, secretly benefited from a 2010 acquisition and misled investigators, Canada’s main financial regulator said.
The Ontario Securities Commission detailed the charges in a statement yesterday, almost nine months after the Toronto-based watchdog said it was probing the company and some of its employees. Chan and four former senior Sino-Forest executives -- Alfred C.T. Hung, George Ho, Simon Yeung and Albert Ip -- inflated the company’s revenue and made misleading public statements, it said.
The commission is “not saying that these were mistakes,” Kirk Baert, a Toronto-based partner at law firm Koskie Minsky LLP, which is leading a class-action suit against Sino-Forest, said by telephone. “They are saying that these were deliberate attempts to deceive them and to deceive the public.”
The charges are the latest chapter in a saga that began in June when short seller Carson Block’s research firm Muddy Waters LLC published a report accusing Sino-Forest of fraud. Even as the Hong Kong- and Mississauga, Ontario-based company denied the allegations, its shares fell 74 percent in Toronto before the commission halted the stock in August. The plunge lost investors including hedge-fund firm Paulson & Co. C$3.3 billion ($3.2 billion) and focused attention on corporate governance of Chinese firms listed in North America.
Sino-Forest is reviewing the allegations and is considering how to respond, the company said in statement today. Emily Cole, a lawyer representing Chan, didn’t immediately return a call outside normal business hours.
Despite Chan’s resignation as CEO and the hiring of new management, the shares never traded again and were delisted in April. Sino-Forest, which at one time was China’s largest timber company with a market capitalization of more than C$6 billion, filed for bankruptcy protection in March as part of an accord with bondholders who are owed $1.8 billion.
A hearing into what is one of Canada’s largest alleged frauds will be held by the commission on July 12 in Toronto. Sino-Forest is also being investigated by the Royal Canadian Mounted Police. Sergeant Richard Rollings, a spokesman for the force in Ontario, didn’t respond to a request for comment outside of normal business hours.
“We applaud the Ontario Securities Commission, with help from regulators in Hong Kong, for holding the perpetrators accountable for their actions,” Block said in an e-mailed statement.
‘Gengma Fraud #1’
Sino-Forest didn’t have “sufficient proof of ownership of the majority of its standing timber assets,” the commission said in its 38-page statement.
In one of four “illustrative” examples of alleged fraudulent actions by Sino-Forest that were outlined by the commission, the company purported to buy Chinese standing timber in 2007 that it had already purchased through a subsidiary earlier that year. The so-called “Gengma Fraud #1” resulted in an overstatement of Sino-Forest’s timber holdings in the years through 2007-2009, the commission said.
Sino-Forest purportedly sold the timber in 2010 and then offered the same assets as collateral for a bank loan in 2011, the commission said. The transaction overstated the company’s revenue in the second quarter of 2010 by 52 percent, or $157.8 million, the regulator said.
Chan, who stepped down as Sino-Forest’s chairman and CEO in August and resigned from the company last month, fraudulently gained from Sino-Forest’s acquisition two years ago of a controlling stake in Hong Kong-based Greenheart Group Ltd. (94), which owns timber assets in Suriname. Chan secretly controlled companies that received more than $22 million as a result of the deal, the commission said.
David Horsley, Sino-Forest’s former chief financial officer, “authorized, permitted or acquiesced” in the release of misleading statements, the commission also said. As such, he didn’t comply with Ontario securities law and his conduct was contrary to the public interest, the commission said.
Peter Wardle, a lawyer for Horsley, didn’t return a telephone message seeking comment.
“This is a complex international investigation and we have dedicated significant resources to this file, moving swiftly to take action against these individuals,” Tom Atkinson, the commission’s director of enforcement, said yesterday in a separate statement. “This is an important first step and our investigation is continuing into this matter, including an examination of the role of the gatekeepers.”
$50 Million Review
An independent committee of Sino-Forest directors said in January that a full account of the company’s activities and business ties may never be possible. The committee, which hired PricewaterhouseCoopers LLP, examined 1.5 million documents in the course of a $50 million, eight-month investigation into the Muddy Waters allegations, Chairman William Ardell said in February.
The investigation was hindered by a lack of cooperation from some of Sino Forest’s suppliers and intermediaries involved in timber and wood-products transactions, Ardell, who led the review, said at the time.
Ardell didn’t respond to a telephone message left at his home in Oakville, Ontario.
“When you look at the fraud allegations from outsiders, who were at arm’s length, like Muddy Waters, they didn’t have any real direct access to any inside financial information,” said Brian Fox, founder and chief marketing officer of Capital Confirmation Inc., a Brentwood, Tennessee-based company that provides electronic audit confirmation services.
“Once the commission is able to go in there and actually get better access and more detailed information, it’s certainly not surprising that it would come out at this point with further allegations of fraud.”
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