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Muddy Waters ‘Pre-Marketed’ Report to Funds, Dundee Says

Muddy Waters Research Director Carson Block
Carson Block, director at Muddy Waters Research. Source: Bloomberg Televison via Bloomberg

Muddy Waters Research, the firm founded by short seller Carson Block, “pre-marketed” its June 2 report on Sino-Forest Corp. to hedge funds for the past five weeks, said an analyst at Dundee Securities Ltd.

Sino-Forest tumbled 34 percent in Canadian trading yesterday, taking its decline to 78 percent since June 1, the day before Muddy Waters publicly released the report that said Hong Kong- and Mississauga, Ontario-based Sino-Forest’s disclosures of land holdings don’t match Chinese city records and that its stated production figures may not be accurate. Block, who said June 6 he will keep betting against Sino-Forest until its shares reach “zero,” stands to make money from declines in its stock.

“Muddy Waters pre-marketed this smoking-gun report on Sino-Forest to hedge funds over the last five weeks,” said Richard Kelertas, a Montreal-based analyst at Dundee, which helped sell shares in Sino-Forest as recently as December 2009.

“These hedge funds got involved with Sino-Forest in a big way,” Kelertas said yesterday on a conference call with investors and reporters, declining to name the funds or say how he obtained the information. “The short position almost doubled in two to three weeks.”

Kelertas, who said he had visited Sino-Forest’s holdings in China annually for seven years, said the Muddy Waters report was inaccurate and there’s nothing fraudulent about Sino-Forest “to the best of our knowledge.” He recommended buying Sino-Forest shares from September 2007 until June 3, when he put his rating on the company under review.

Share Sale

Block declined to comment on Kelertas’s assertions when he was contacted by e-mail.

Dundee was among institutions that helped Sino-Forest sell shares in December 2009 and also in May 2009.

Short selling, or selling borrowed shares with the hope of profiting when they fall, more than doubled to a record 35 percent of Sino-Forest’s outstanding stock as of June 3, up from 17 percent at the beginning of May and 13 percent at the end of 2010, according to Data Explorers, a New York-based research firm. Sino-Forest was the most-shorted stock in the Standard & Poor’s TSX Composite Index, which has an average short interest of 4.8 percent.

Sino-Forest dropped C$2.11 to C$4.05 at 4:27 p.m. yesterday in Toronto Stock Exchange trading. The shares have declined 83 percent this year.

Greenheart Plunge

Greenheart Group Ltd., the Hong Kong-based company 64 percent-owned by Sino-Forest, plunged as much as 82 percent today when it resumed trading after being suspended since June 2. The company, which has forestry operations in Suriname and New Zealand, closed 63 percent lower at HK$1.03, the lowest since June 2009.

“Greenheart’s major operations are independent of our parent company and we are not subject to the allegations,” David Wu, director of corporate development and investor relations at Greenheart, said today by phone. “If we are subject to any such allegations, we will investigate and take action accordingly.”

New Zealand in February approved Greenheart’s acquisition of the Mangakahia forest plantation in the north of the nation’s North Island for $77 million, according to the Overseas Investment Office, which assesses applications from foreign buyers seeking to invest in sensitive New Zealand assets.

Block, who doesn’t like to give his exact address because he said he’s received death threats, said this week he plans to release more research on Sino-Forest and will address its stake in Greenheart. Sino Forest said the statements are false and it’s studying its legal options.

Not Illegal

Offering a report to hedge funds before making it public is not illegal, said James Fanto, who teaches classes on international financial regulation and securities laws at Brooklyn Law School in New York.

“Muddy Waters can profit from this information itself, or allow others to profit from their insights as well,” Fanto said in an e-mail message. “The only problems emerge when research is in fact based on insider tips. But that doesn’t seem to be the case here.”

The shares will recover “much faster than people suspect,” as the company releases documents that prove Block’s statements false over the next seven to 10 days, Kelertas said.

Common Practice

Sino-Forest’s use of so-called authorized intermediaries, which Block says were a means to avoid taxes, is actually a common and legal practice in China, Kelertas said.

The State Administration for Industry & Commerce documents Block cites in his report are private and not legally obtainable by third parties, the analyst said.

Sino-Forest isn’t similar to China Forestry Holding Co., which has had its shares halted since January after KPMG International identified what China Forestry called “possible irregularities.” China Forestry had its initial public offering in 2009 and is based only in Hong Kong. Sino-Forest went public in 1994.

“The stories are not comparable in any manner,” Kelertas said on the call, referring to Sino-Forest and China Forestry.

Kelertas said Dundee has spoken to Sino-Forest management 20 times since Block released his report.

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