Sino-Forest Halted as Regulator Rescinds Order on Executives

Sino-Forest Executives Ordered to Resign
Sino-Forest Corp.'s office in Mississauga, Ontario, Canada. Photographer: Norm Betts/Bloomberg

Canada’s main securities regulator said it suspended trading in Sino-Forest Corp. because the company may have committed fraud. The Ontario Securities Commission rescinded an earlier order that five executives resign.

Some Sino-Forest officers and directors may have engaged in acts “related to its securities” that they “knew or should have known” perpetuated a fraud, the OSC said in an e-mailed statement yesterday. It also ordered the resignation of Chief Executive Officer Allen Chan and four other executives, a move the OSC later retracted pending a hearing. The stock fell as much as 78 percent in U.S. trading.

“They’re pretty much dead in the water,” Sadiq Adatia, the Toronto-based chief investment officer at Sun Life Global Investments, said in a telephone interview. The unit of Sun Life Financial Inc. oversees about C$2.3 billion ($2.3 billion) for clients. “Who’s going to be investing in them?”

Sino-Forest has plunged 67 percent in Toronto since short seller Carson Block’s research firm Muddy Waters LLC said in a June 2 report that the company overstated forestry holdings. Sino-Forest, which has denied the claims, commissioned an independent investigation into the claims and hired PricewaterhouseCoopers LLP to assist.

OSC ‘Persuaded’

Sino-Forest fell $3.49, or 72 percent, to $1.38 as of 3:59 p.m. New York time yesterday in U.S. over-the-counter trading. The shares dropped 29 cents, or 5.7 percent, to C$4.81 on Aug. 25 on the Toronto Stock Exchange.

Stan Neve, an external spokesman for the Hong Kong- and Mississauga, Ontario-based company, declined to comment.

The OSC said in its initial statement that it ordered Chan, Albert Ip, Sino-Forest’s senior vice president of development, Alfred C.T. Hung, vice president of corporate planning and banking, George Ho, vice president of finance, and Simon Yeung, a vice president of a Sino-Forest unit, to resign.

A later statement yesterday scrapped that sanction as the Ontario Securities Act doesn’t allow the OSC to force the resignation of a corporate officer in a temporary order without a hearing.

“Making decisions about who steps down and gets appointed, that’s beyond the reach of a regulator,” Dirk Matten, a professor at York University’s Schulich School of Business in Toronto, said by telephone. “To order that was outlandish and is now embarrassing to retract it. The next time they come up with some sanctions, people will question that and say, ‘OK, let’s wait a moment and see how long they stick with it.’”

Order Amended

The OSC was “persuaded” to amend its sanctions, Wendy Dey, a regulator spokeswoman, said yesterday in a telephone interview. She didn’t specify who persuaded the OSC to rescind the order.

“The important thing is here that they suspended the stock so this way investors are not going to make uninformed decisions,” Block said in an interview with Bloomberg Television’s Julie Hyman. “In terms of Allen Chan and the executives, their day will come, but for the time being investors aren’t going to be paying $6, $7 a share for this stock. And that’s the good outcome.”

Block said he’s still betting the shares will drop. “It’s a zero so we’ll stay short,” he said.

Sino-Forest officers and directors “appear to have misrepresented some of its revenue and/or exaggerated some of its timber holdings,” the OSC said in the first e-mailed statement. The company did this by providing information that “may have been false or misleading in a material respect.”

Paulson Exit

Hedge fund Paulson & Co., formerly Sino-Forest’s largest shareholder, sold its entire 12.5 percent stake in June, telling clients it had lost C$462 million since May 31 on the investment. Billionaire Richard Chandler, now the biggest single investor in Sino-Forest, said Aug. 4 he increased his stake to 18 percent.

Richard Barton, a Hong Kong-based external spokesman for Chandler, declined to comment until he had reviewed the OSC statement.

“From a capital markets perspective, I think it reflects poorly on auditors and the analysts and investors that own this company, that no one could figure this out until some hedge fund guy decides to actually go and look and put out a damning report,” Todd Johnson, a money manager at BCV Asset Management in Winnipeg, which oversees C$300 million and doesn’t hold shares of Sino-Forest, said yesterday in a telephone interview. “And then the OSC, a month and a half, two months now, finds this out after the report.”

The U.S. Securities and Exchange Commission began a probe last year into the use of reverse takeovers, in which a closely held firm goes public by purchasing a shell company that already trades. Sino-Forest used a reverse takeover to gain its Canadian listing.

John Nester, a spokesman for the SEC, declined to comment immediately on Sino-Forest.

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