Sep 12 2012
Sino-Forest: Accused of One of Canada’s Largest Frauds
Abuse of insider connections, a debt of half a billion dollars owed by companies which no longer exist, and artificial inflation of assets and revenue. These are only some of the operations this company has been accused of. If the allegations put forth by the OSC are true, then Sino-Forest Corp., a Chinese company that was once the largest publicly traded forestry firm in Canada, is guilty of extremely unethical practices.
In June 2011, Muddy Waters Research, a short seller, raised the first allegations of fraud against Sino-Forest. That was followed by a series of investigations by forces including the RCMP and Ontario Securities Commission. Since then, the accused company has filed for bankruptcy protection and its shares have been delisted from the TSX. Additionally, the co-founder Allen Chan has resigned as CEO, and the entire senior executive team was replaced since all of them had been implicated in some way.
So, what is the main ethical issue here? The false inflation of income and revenue is at the center of this issue. To boost their stock prices, Sino-Forest circulated money through companies that were owned or otherwise connected to them, with Yuda Wood being a prime example. Yuda Wood was one of Sino-Forest’s largest suppliers, yet upon closer investigation, it was revealed that the company was controlled by the senior executives of Sino-Forest. However, these insider relations were never disclosed. Lying to shareholders to create an illusion of prosperity is highly unethical, and if proven to be true, this may result in one of the largest frauds in Canada.
To deny the charges of fraud, Sino-Forest has launched a private investigation with PwC. The results are expected to be released at the end of the year, having been delayed due to “data-collection challenges.”
Related Links:
Yahoo! Finance: Securities commission accuses Sino-Forest of fraud
Bloomberg: Sino-Forest Engaged in ‘Fraudulant Scheme,’ OSC Alleges
The Wall Street Journal: Sino-Forest Investigation Extended
The Globe and Mail: Sino-Forest says it is owed millions by companies that no longer exist
The Independent Committee, established by the Board of Sino-forest immediately following the release by Muddy Waters of the MW report, disproves allegation made in the MW report that Sino-forest is a fraud, and verified the firm’s cash balances and confirmed registered title or contractual rights to timber assets. Details about the verification method have been given in the second IC interim report. Forestry Experts have physically inspected the timber in the sample purchasing contracts selected.
However, the OSC has launched its own investigation against Sino-forest. The OSC, revealed in the second IC interim report, “expressed grave concerns as to such absence and surmised in its discussions with the IC that such absence is per se evidence of fraud.”
It seems that the OSC did not know that China had a policy of not issuing the certificates to foreign invested forestry companies.
Furthermore, the OSC denies the validity of confirmations issued by the Chinese forestry bureaus, reasoning in the SOA that “certain PRC forestry bureau employees obtained gifts and cash payments from Suppliers of Sino-Forest,further undermining the value of the Confirmations as evidence of ownership.”
The OSC’s lacking of trust of or effective communication with the Chinese government has led to a situation that there is no way to prove the ownership of Sino-forest’s forestry assets in China, and thus the resignation of the auditor (E&Y), and the consequent delisting of the company’s stock from the Toronto Stock Exchange.
The OSC’s lacking of trust of or effective communication with the Chinese government also led to uncertainty and difficulty for the sale of the company and estimate of the value of Sino-forest’s forestry assets. According to the FTI Consulting, the Monitor appointed by the CCAA court, “to complete any meaningful amount of verification could take years, at a minimum.”