Chan Exits Sino-Forest 22 Years After Tiananmen ‘Nightmare’

Allen Chan’s resignation as chief executive officer of Sino-Forest Corp., which is accused of exaggerating timber holdings, marks the second time in 22 years the Chinese entrepreneur has lost control of a company he founded.

Chan stepped down Aug. 28 as chief executive officer, two days after Canada’s main securities regulator suspended trading in the shares. His previous business raising funds for infrastructure projects in China collapsed after the government’s crackdown on pro-democracy demonstrators in Beijing’s Tiananmen Square spurred foreign investors to flee.

That failure 22 years ago when he was 37, making him about 59 today, led to a breakdown that left Chan physically incapacitated, before he recovered and transformed himself as a forestry mogul capitalizing on land reforms in the world’s most populous country. Another comeback may be unrealistic.

“For the rest of his career he’s going to be tainted,” said Eric M. Jackson, president and founder of Ironfire Capital, a Naples, Florida-based hedge fund that specializes in Chinese stocks.

The Ontario Securities Commission said Aug. 26 that Sino-Forest officers and directors may have engaged in acts “related to its securities” that they “knew or should have known” perpetuated a fraud. Sino-Forest has fallen 67 percent in Toronto since short seller Carson Block’s Muddy Waters LLC research firm said in a June 2 report that the company was overstating its assets. Investors including hedge fund firm Paulson & Co. have lost C$3.3 billion ($3.4 billion).

‘Convoluted Story’

Sino-Forest has rejected Muddy Waters’ allegations and has assigned an independent committee to investigate the claims, hiring PricewaterhouseCoopers LLP to assist. Chan was named chairman emeritus of Sino-Forest and will remain available to assist the probe, the company said. Chan also resigned as chairman of Greenheart Group Ltd., Sino-Forest’s Hong Kong-listed unit.

Stan Neve, a New York-based Sino-Forest spokesman, declined to comment or make Chan and other executives available.

“It’s pretty clear that this is at best a convoluted story that defies easy explanation, and at its worst it’s a massive fraud,” said John Stephenson, a Toronto-based money manager who helps oversee C$2.7 billion at First Asset Management Inc.

Chan studied sociology at Hong Kong Baptist University and graduated in 1979. He joined a Hong Kong restaurant operator owned by billionaire casino owner Stanley Ho, as corporate secretary, according to a 2004 interview with World Executive Group’s CEO magazine.

‘Totally Paralyzed’

Chan started his project-finance business in 1984. His first project raised $39 million for a hotel in Shenzhen, earning him a $200,000 fee, he said in the interview. Success evaporated after the Chinese crackdown.

“It was like a nightmare that you plunged into darkness with little to hold on to, with no voice to scream and totally paralyzed,” he told CEO magazine in an article published in Chinese. “I regretted and doubted myself. I couldn’t communicate with others. I couldn’t read in the first year. I could only sunbathe and listen to music.”

The failure cost Chan HK$10 million ($1.3 million), which took him six years to repay, he told the South China Morning Post in August 2003. Chan considered leaving Hong Kong to study sociology in the U.S., he told Canada’s Financial Post magazine in 2007. Instead he stayed and began writing a column for the Hong Kong Economic Journal.

“My rationale was that you should stand up where you fall down,” Chan told the Financial Post.

Canadian Listing

Chan founded Sino-Forest in 1992 to exploit an increasing domestic shortage of wood by tapping foreign capital to acquire timberland. His business partner Kai Kit Poon, a former employee of the Guangdong Forest Bureau, brought industry experience, said Yajie Song, a research scholar at the Yale School of Forestry & Environmental Studies.

“Allen is a very picky person,’” Song, who worked with Sino-Forest to train some of its workers, said in an interview. “He gets what he wants when he jumps to another area to do something.”

Sino-Forest stepped up the acquisition of forest rights, benefiting from rule changes allowing the buying and selling of leases controlled by rural communes and municipalities. The Hong Kong- and Mississauga, Ontario-based company listed in Canada in 1994 through the reverse takeover of a dormant company on the Alberta Stock Exchange. It has raised C$2.99 billion from investors since 2003, according to the OSC.

‘No Hucksterism’

The shares, which traded as high as C$26.15 in October 2007 in Toronto, closed at C$4.81 on Aug. 25. Stock traded over the counter in the U.S. fell 72 percent to $1.38 on Aug. 26 before being suspended.

Chan comes across in person as “very mild-mannered, no hucksterism at all,” said First Asset’s Stephenson, who said he sold his Sino-Forest shares before the Muddy Waters report because he heard hedge funds were short-selling the stock.

“You weren’t buying the story for management,” Stephenson said. “You bought it because you believed it was a growth story. It was a way to play China in North America.”

In May, the month before the Muddy Waters report was released, Sino-Forest slid 18 percent. Robert McWhirter, a Toronto-based money manager at Selective Asset Management Inc., questioned Chan at a May 30 dinner for investors at Canoe restaurant of the 54th floor of the TD Bank Tower in Toronto’s financial district.

Reforestation Concerns

While Chan wasn’t evasive, McWhirter said he came away from the dinner feeling uneasy about the apparent slow pace of the company’s reforestation efforts.

“Based on the sheer number of acres they are alleged to have owned, the amount that they were replanting wasn’t” sufficient, McWhirter said. Understanding the company “is kind of trying to nail jello or grab a greased pig.”

Muddy Waters raised concerns about Sino-Forest’s complex structure, including its sales via so-called “authorized intermediaries,” which Block says were a means to avoid taxes. Sino-Forest has declined to name the intermediaries.

“I personally stand by and guarantee that the audited financial statements and the reports filed are accurate,” Chan said in a June 14 conference call.

Sino-Forest said Aug. 16 it will take until the end of the year to complete an independent probe. Chan may have to wait till then to find out what comes next.

“It will be difficult for public stockholders to ever buy into one of his future vehicles,” Ironfire’s Jackson said.

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