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Carson Block Calls Sino-Forest ‘Near Total Fraud’ (Transcript)

Carson Block, research director and founder of Muddy Waters Research, talks about suspension of trading on Sino-Forest Corp. by Canada’s main securities regulator amid an investigation that the company has been inflating its China timberland holdings and the resignation of Chief Executive Officer Allen Chan. (Source: Bloomberg)

(This is not a legal transcript of the interview. Bloomberg LP cannot guarantee its accuracy.)

MATT MILLER, BLOOMBERG NEWS: The bad news keeps piling up for Chinese timber firm, Sino-Forest. Moody’s cut the company’s rating to C, double A1 (ph) this morning which means that there is a substantial risk. S&P went further cutting Sino-Forest to triple C minus and then withdrawing the rating altogether.

Yesterday, the company’s CEO quit. Short-seller, Carson Block, was the one who started this all in June. He wrote a scathing report that Sino-Forest is a fraud. He joins us now by Skype at Sao Paulo.

And Carson, thanks so much for joining us. I guess, Sino-Forest really is the one who started this all, right, because they have the issues of which you accuse them. Why don’t you just draw those out for those who are new to this story?

CARSON BLOCK, FOUNDER, MUDDY WATERS RESEARCH: Sure. Well, this company actually went public over 16 years ago in Canada by reverse merger. And it just kind of grew to be a multibillion dollar market cap company during a time when people were not really aware of the potential issues that you have with these Chinese companies.

So when we happened (ph) upon it, it had $2 billion in debt, $5 billion market cap, and it’s a near-total fraud. They have been overstating their timber holdings and timber sales since inception. So we were able to prove it.

We published a 40-page report with another 40 pages or so of appendices. And the company, in response to that report, the independent director set up their own committee to investigate our conclusions.

And that committee has largely worked in silence. But they seemed to have muzzled (ph) the management since our report came out early in June. So we haven’t heard much from the company until this surprise order from the Ontario Securities Commission on Friday.

MILLER: So you’re saying the overstated value in the land they have where their trees are and they overstated their revenue. I mean, how do they refute those claims?

BLOCK: Well, I mean, initially, of course, Allen Chan, the person who just initially resigned after telling investors that he personally guarantees that all financial statements are accurate. And he personally guarantees that the company is not engaged in any undisclosed related party transactions.

They’ve imminently denied our allegations and said that we’re short sellers, you know, we’re lying, et cetera. So it’s actually pretty standard playbook for these companies that are accused of fraud by short sellers such as ourselves.

MILLER: Although this company had some pretty famous long investors, right? I mean, John Paulsen (ph) and Chris Davis (ph) - two really big names here in New York, indeed around the world, or holding huge amounts of the company’s stocks.

So those two, I’m guessing, have defected (ph) and are gone. Are there any other long investors left?

BLOCK: Well, they were recently - when I say recently, I mean, the past six to eight weeks, Wellington Management took a large long position and also Mandolin Fund owned by billionaire, Robert Chandler.

So these two investors took large positions. And unfortunately, that encouraged some investors to jump into the stocks (ph). So the price of the stock was bid up at one point close to $8 a share largely just on the back of these funds taking their stakes, you know.

I don’t know whether, you know, Chimp Mersfine (ph) is for his activist shareholder policies so I don’t know whether he was expecting to try to effect (ph) change in the company or not and this is in, you know, in accordance with his plan. It’s an interesting question.

MILLER: But you have to be happy when more long investors buy the stock because it gives you more action on the short side, right?

BLOCK: Well, I mean, look, you know, when we put out these reports, we’re doing it, in large part, because we want to see these frauds that were (ph) raised.

Everybody who is part of Muddy Waters is someone (ph) who has a personal crusade for us, particularly because we’ve done business in China, most of us are entrepreneurs. And we’ve dealt with these people who think that the rules don’t apply to them.

So from our perspective, you know, it’s great that we’ve found a way to make a living exposing these frauds and protecting investors from them. So we actually weren’t happy to see the stock bounce up and more investors pile in but runs contrary to what our goals are.

MILLER: Got it. Well, I’m sure there’s a lot more to that where it came from. So Carson, thanks very much. Carson Block there, Founder of Muddy Waters Research…

BLOCK: Thanks (ph)…

MILLER: …coming to us from Sao Paulo.


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