China Forestry Liquidators Sue IPO Arrangers, Other Advisers

China Forestry Holdings Co.’s liquidators sued the investment banks and other advisers on the timber producer’s 2009 Hong Kong initial public offering for alleged offenses including breach of contract and misrepresentation.

Units of Standard Chartered Plc and UBS Group AG, which were joint sponsors and joint global coordinators of the share sale, and audit firm KPMG LLP were among more than half a dozen companies named in lawsuits filed April 25 in Hong Kong’s High Court by China Forestry. The company, which is under the control of liquidators Cosimo Borrelli and Christopher Kennedy, also sued more than a dozen current and former executives and board members, as well as law firms and consultants involved in the offering, the court documents show.

Xiao Feng, a Beijing-based senior adviser to Carlyle who was a director of China Forestry when it listed, was also named a defendant in one of the suits, according to the documents. Carlyle, which held a stake in China Forestry at the time of its IPO, isn’t listed as a defendant.

A series of accounting scandals at Chinese companies has shaken investor confidence, sent stocks tumbling and drawn scrutiny from regulators. Hong Kong, Asia’s top IPO destination, has tightened due diligence standards and said investment banks could be held criminally liable for the contents of offering documents.

China Metal Recycling Holdings Ltd. was delisted from the Hong Kong exchange in February, following a move by the stock regulator to liquidate the company after finding evidence of fabricated sales. Earlier this month, the city’s Securities and Futures Commission ordered a suspension to trading in Sound Global Ltd. as the exchange demanded forensic investigation on a cash hole in its accounts.

Financial Irregularities

China Forestry, which raised HK$1.68 billion ($217 million) from the IPO, has been suspended from trading in Hong Kong since January 2011 and is now in the process of delisting after financial irregularities were discovered. Liquidators were appointed for the logging company in June by a court in the Cayman Islands, where it is incorporated. 

The liquidators are seeking damages, interest and other compensation for alleged breaches of contract, misrepresentation, conspiracy and negligence, among other claims, the Hong Kong court documents show.

Representatives for KPMG, Standard Chartered and UBS declined to comment. A call to Xiao’s office in Beijing was referred to a Carlyle spokesman, who said the firm doesn’t have any comment and declined to make Xiao available for an interview. Borrelli said he couldn’t immediately comment, while Kennedy didn’t immediately respond to an e-mailed request for comment.

KPMG, which provided accountancy services to the Chinese timber company for the IPO, resigned as the firm’s auditor in 2012, citing valuation concerns. China Forestry said in January 2011 that KPMG had identified “possible irregularities” in an audit for 2010.

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