Sino-Forest Corp.’s Chief Executive Officer and Chairman Allen Chan resigned two days after a Canadian securities regulator said the company may have exaggerated timber holdings, the same charge made by short seller Carson Block in June.
Chan “voluntarily resigned” both positions, the Hong Kong- and Mississauga, Ontario-based company said in a statement yesterday. Chan was replaced by Executive Director Judson Martin as CEO and William Ardell as chairman. Ardell is leading Sino-Forest’s internal investigation of Block’s allegations.
The Ontario Securities Commission halted trading in Sino-Forest’s shares on Aug. 26 and said the company may have misrepresented revenue. Sino-Forest has plunged 67 percent in Toronto since Block’s Muddy Waters LLC published a report June 2 alleging that the company was a “fraud.”
“The allegations made in the OSC’s temporary order, while unproven, are of a serious nature,” Sino-Forest said in the statement. “The company’s business is complex, the scope of the review is significant and there are enormous amounts of data that have been marshaled and are under review.”
Sino-Forest’s U.S.-traded shares tumbled 72 percent to $1.38 on Aug. 26 in over-the-counter trading. They closed on the Toronto Stock Exchange at C$4.81 on Aug. 25.
Sino-Forest’s U.S. shares were halted after the close on Aug. 26, George Smaragdis, a spokesman for the Financial Industry Regulatory Authority, said in an e-mailed response to questions. Trading wasn’t stopped until the authority confirmed that the Canadian halt wasn’t routine, he said.
Standard & Poor’s Ratings Services said today it cut Sino-Forest to CCC- from B and then withdrew its ratings. Moody’s Investors Service downgraded it to Caa1 from B1.
Billionaire Richard Chandler, the biggest single investor in Sino-Forest, didn’t immediately respond to an e-mail seeking comment. Richard Barton, a Hong Kong-based external spokesman for Chandler, declined to comment. Chandler said Aug. 4 he increased his stake to 18 percent.
“Why we put these reports out is we want to see these frauds erased,” Block said today in an interview with Matt Miller on Bloomberg Television’s “Inside Track.”
Chan also resigned as chairman of Sino-Forest’s Hong Kong unit Greenheart Group Ltd., according to a regulatory filing. Greenheart, halted from trading ahead of the announcement, remained suspended at the close.
Shares in Greenheart have plunged 69 percent since Block made his allegations even as the company has said it operates independently of Sino-Forest. Greenheart dropped 3.4 percent to 86 Hong Kong cents on Aug. 26.
Sino-Forest has denied Muddy Waters’ allegations and established an independent committee of directors to respond to the accusations. The company said Aug. 16 the probe would take until the end of the year, later than the two to three months it estimated on June 14.
The company said yesterday three other employees had taken leave after “certain information” was uncovered by the committee.
Sino-Forest officers and directors “appear to have misrepresented some of its revenue and/or exaggerated some of its timber holdings,” the OSC said Aug. 26. The company did this by providing information that “may have been false or misleading in a material respect,” the regulator said.
The OSC sanctions follow a warning from the U.S. Securities and Exchange Commission in June about buying stakes in companies that gain listings on its exchanges through so-called reverse takeovers. Sino-Forest listed in Canada in 1994 through the reverse takeover of a dormant company on the Alberta Stock Exchange. Sino-Forest eventually shifted to the Toronto exchange.
Between March 1994 and the end of last year, Sino-Forest soared 30-fold to C$23.29, as the company stepped up its strategy of putting foreign capital to work by acquiring, trading, harvesting and replanting China’s timberlands.
Chan’s business model appealed to investors and to the Chinese government, keen to improve the productivity of its forests and to increase employment in the countryside, Jimmy Huang, president of Toronto-based T.I.P. Wealth Manager Inc. in Toronto, said last month in an interview.
“His story was rather than just cutting virgin forest and leaving it for moose pasture, he would replant with fast-growing tree species” such as eucalyptus, using the latest advances in tree genetics and cultivation techniques, said Huang.
Since 2003, Sino-Forest has raised almost C$3 billion from public capital markets, the OSC said in its Aug. 26 statement.
Ontario’s securities watchdog on Aug. 26 initially ordered Chan and four other Sino-Forest group executives to resign and later rescinded the order.
The suspension of trading in Sino-Forest’s shares didn’t cause a default under the company’s guaranteed senior notes or its convertible senior notes, according to the statement.