Paulson Dumping Sino-Forest May Cost Clients $720 Million

Paulson & Co. President John Paulson
John Paulson, president of Paulson & Co. Inc. Photographer: Jin Lee/Bloomberg

John Paulson’s $37 billion hedge fund sold its entire stake in Sino-Forest Corp., the Chinese tree-plantation owner accused of overstating timber holdings, dealing investors a paper loss of C$705 million ($720 million).

Paulson & Co., which held 34.7 million shares of Sino-Forest as of April 29, said in a filing yesterday that it had disposed of the stake as of June 17. The New York-based firm’s holding was worth C$815.80 million when it was disclosed. Its value had dropped to C$110.69 million by the end of last week. The actual loss may vary depending on when Paulson bought and sold the shares.

The investment is a public misstep for Paulson, 55, who’s betting on an economic recovery after making $15 billion for his backers in 2007 wagering against subprime mortgages. His largest fund lost about 13 percent in the first half of June, bringing declines this year to about 20 percent, as bets on Sino-Forest and U.S. bank stocks soured, two investors said last week.

“Paulson is under the limelight on this investment,” said Steven Persky of Dalton Investments LLC, a Los Angeles-based fund with $1.3 billion in assets. Still, “any money manager is going to have some losing trades, it’s part of life.”

Sino-Forest has slumped 89 percent in Toronto trading since June 1, the day before Muddy Waters LLC, an investment firm run by Carson Block that’s betting against the stock, said the forestry company overstated its timber holdings. Sino-Forest has said Block’s statements are false.

Ratings Cut

The “complexities” of Sino-Forest’s corporate structure prompted Fitch Ratings to downgrade its long-term foreign-currency issuer default rating and senior unsecured debt rating to BB- from BB+, Fitch said yesterday in a statement. Ratings may be cut further if the “issues” aren’t resolved, it said.

Sino-Forest shares fell 74 cents, or 27 percent, to C$1.99 at 5 p.m. in Toronto trading.

Paulson, the biggest shareholder in Hong Kong-based Sino-Forest until the selloff, probably reduced losses by paring the stake before the Muddy Waters report. The hedge fund told clients in a June 3 letter that its total investment in Sino-Forest represented about 2 percent of the Advantage and Advantage Plus funds as of June 2. The funds have $18 billion in assets, a person with knowledge of the firm said at the time. The letter suggests the firm had cut its stake by about 30 percent by June 2, when Sino-Forest shares lost 64 percent.

A spokesman for Paulson declined to comment.

Uncertainty Over Disclosures

“Due to the uncertainty over Sino-Forest’s public disclosures and financial statements, we have sold our stock and await the results of the independent committee’s investigation,” Paulson said in an e-mailed statement.

Paulson owned Sino-Forest shares since at least March 2008, when the firm reported holding a 10 percent stake in the company, enough to trigger Canadian reporting requirements. By June 2009, Paulson owned 40.7 million Sino-Forest shares, a 19 percent stake, according to filings with regulators.

Paulson disclosed the sale of his stake less than a week after Sino-Forest Chief Financial Officer David Horsley said the hedge-fund manager had been “very supportive, giving us suggestions” on dealing with Block’s allegations. Sino-Forest shares have lost C$3.8 billion in value since Block’s report.

Allen Chan, Sino-Forest’s chairman and chief executive officer, has denied the allegations from Muddy Waters. He established an independent committee to investigate and appointed PricewaterhouseCoopers LLP to assist.

April Emspak, an external communications adviser to Sino-Forest, said company executives weren’t immediately available to comment on Paulson’s sale.

Orient Paper

Orient Paper Inc., target of a critical Muddy Waters report last year, urged overseas-listed Chinese companies to increase transparency to combat short sellers. Orient Paper’s shares are languishing 60 percent below their price before Block’s allegations, even after a four-month probe by Loeb & Loeb LLP, Deloitte & Touche Financial Advisory Services and TransAsia Lawyers found no evidence to support the claims.

Chinese companies “should conduct the third-party independent investigation like we did, they should do it even better than us in order to shut others’ mouths,” Liu Zhenyong, chairman and CEO of Baoding, Hebei-based Orient Paper, said yesterday in a telephone interview.

Paulson Fund Rebound

Paulson rebounded from similar losses last year, when the Advantage Plus fund gained as much as 18 percent, depending on the share class, after falling 11 percent in the first eight months.

“Over the past five years Paulson has been considered the top hedge-fund manager in the industry,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors. “This mistake in his portfolio will show he is not infallible, but he will still maintain the reputation of being one of the top players.”

Paulson has been betting on an economic recovery by 2012, which is why he’s been bullish on U.S. banking stocks. Citigroup Inc., Paulson’s third-largest stockholding according to a regulatory filing, has dropped 19 percent this year, and Bank of America Corp., the firm’s fifth-largest stake, is down 21 percent.

Paulson told investors in a letter in late 2009 that Bank of America may almost double over the next two years. The stock has lost about a third of its value since then.

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