UPDATE 5-Sino-Forest shares jump, but far from full recovery

Wed Jun 8, 2011 5:08pm EDT

* Sparring between Sino-Forest, Muddy Waters continues

* Ontario regulator probes share activity

* Sino-Forest says welcomes investigation

* Sino-Forest shares closed up 23 pct (Adds comments from lawyer, updates share price move)

By Euan Rocha

TORONTO, June 8 (Reuters) - Shares of Sino-Forest TRE.TO jumped 23 percent on Wednesday, lifted by speculative buying and short-covering after a short-seller's damning report that has crushed the Chinese forest plantation company's stock.

Hong Kong-based Muddy Waters alleged last week that Sino Forest fraudulently exaggerated the size of its forestry assets. Even with Wednesday's rebound, shares of the Toronto-listed company are down more than 70 percent since the report came out.

"This is more speculative at this point than real investing," said Francis Campeau, a broker at MF Global in Montreal. He said investors ought not to read too much into Wednesday's surge, as the stock has see-sawed since its initial swoon on Thursday.

"This is like a TV drama now," he said. "We had a bit of client interest, some people sold, bought back - it's more speculation on both sides of it."

Shares of Sino-Forest rose 91 Canadian cents to C$4.92 on the Toronto Stock Exchange, still well below the C$18.21 mark where they closed a week ago.

OSC INVESTIGATION

Even as the turbulence persisted, the Ontario Securities Commission, Canada's biggest securities regulator, said it has launched a probe into activity surrounding Sino-Forest stock. It refused to say if it is looking into the allegations against Sino-Forest, or the trading activities of Muddy Waters.

"The OSC confirms that we are investigating matters related to Sino-Forest," said OSC spokeswoman Wendy Day in an email.

Sino-Forest said it welcomed the investigation, and has asked Singapore Exchange Ltd to probe trading of its bonds.

The company's annual information form indicates it had about $2 billion in outstanding short- and long-term debt as of Dec. 31, 2010. Sino-Forest said on Monday it had about $1.09 billion in cash and cash equivalents as of March 31, 2011.

The company, which owns timber plantations across China and counts billionaire hedge fund manager John Paulson as its biggest shareholder, has strongly denied Muddy Waters' allegations of problems with its accounts and structure.

"Sino-Forest has numerous subsidiary companies and its structure is somewhat complex. Whenever this occurs, there is a tendency to try and analyze operating cash flows and how they flow through the various entities. Whenever this is not readily clear, there is the potential for activist scrutiny," noted Darryl Levitt a lawyer with Macleod Dixon in Toronto.

"This is not to say that there is a prima facie case for wrongdoing, but it was inevitable that a complex structure would be analyzed especially since there have been recent cases involving Chinese-listed companies that fell short of full transparency," he added.

It was Muddy Waters' fifth successful short call on a North American-listed Chinese company. Two of its previous targets have since been de-listed from the Nasdaq.

Sino-Forest said it has asked the Toronto Stock Exchange and the Investment Industry Regulatory Organization of Canada to investigate Muddy Waters' share-trading activity prior to the issuing of its report.

There was sharp increase in short positions in Sino-Forest shares in the weeks before the release of the report. One analyst alleged that Muddy Waters' pre-shopped its report to hedge funds ahead of the report being published. [ID:nL3E7H71M3]

Sino-Forest said it is weighing defamation action against Muddy Waters. ($1=$0.98 Canadian) (Additional reporting by Allan Dowd, Claire Sibonney and Julie Gordon; editing by Frank McGurty and Janet Guttsman)

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