UPDATE 6-Canada clampdown vindicates Sino-Forest detractor

* Sino appears to have defrauded investors, OSC says

* Regulator orders trade in Sino stock to cease

* OSC orders CEO, 4 others to resign - then rescinds order

* Allegations first raised by short-seller Carson Block

* Sino-Forest stock down 75 pct since June

(Adds lawyer comment on Canadian regulatory oversight)

By John McCrank and Allison Martell

TORONTO, Aug 26 (Reuters) - Sino-Forest TRE.TO appears to have defrauded investors by exaggerating its assets, Canadian regulators said on Friday in a vindication of a short seller's damning allegations against the Chinese forestry company.

The Ontario Securities Commission said Sino Chief Executive Allen Chan and other officers are apparently responsible for misrepresenting revenue in public filings and keeping bogus accounts.

The tough new stance by the OSC, long criticized as toothless, comes three months after Hong Kong short-seller Carson Block made the initial accusations against Sino.

His report triggered a stampede out of the stock and other Chinese companies listed in North America.

Sino's value has plunged to around C$700 million from C$4.7 billion since Block's report. The scandal eventually forced many of Sino's staunchest supporters, including hedge fund manager John Paulson, to abandon the company. Paulson alone took a $500 million loss.

"The OSC's actions appear to give credence to the accusations being made that there has been misrepresentation of revenue," said Gavin Graham, president at Graham Investment Strategy in Toronto.

The OSC, Canada's main securities regulator, ordered all trading in the Toronto-listed stock to cease for at least 15 days while its investigation continues. Sino, which could not be reached on Friday, has denied all allegations and is conducting its own probe.

The regulator also demanded that Chan and four other officers resign immediately. But in a surprising about-face, it later rescinded that order, saying it lacked the power to force them to step down until after a hearing, expected within 15 days.

"The fact that they can't make them resign because it is a temporary order really doesn't detract a great deal, if at all, from the negative impact of the reasons they gave," Graham said.

BLOCK APPLAUDS OSC

Canada is no stranger to scandals in its resource industries, one of the reasons that the country's regulators have a reputation for being soft.

In 1997, shares of Bre-X collapsed after it emerged that samples from its Busang gold deposit in Indonesia had been salted to create the impression of a massive gold strike.

The Sino-Forest scandal has raised fresh calls for tighter securities regulations and more stringent penalties for violators. The spotlight has focused on foreign companies that have stock market listings in Canada, especially those based in China.

"This again brings into question the need for additional oversight of foreign issuers and the requirement of an enhanced layer of continuous verification by professional advisers," said Darryl Levitt, a lawyer with Macleod Dixon.

Block welcomed the OSC's action, saying he was impressed by the progress made by investigators. By suspending the highly volatile stock, regulators were protecting investors, he said.

"It seems the OSC has some information investors do not that it believes is material to investment decisions," Block told Reuters. "We're encouraged that it looks like the wheels of justice are turning."

INTERNAL PROBE

The company's shares were trading at C$4.81 in Toronto before the cease-trade order was issued, almost 75 percent below their value on June 1, the day before Block's report.

Still, the Mandolin Fund, run by New Zealand-born billionaire Richard Chandler, has gradually boosted its stake in Sino, and it now owns 18 percent of the company. Chandler's firm had no comment on Friday.

Chandler and a few other big investors have stood by Sino-Forest even as rating agency Standard & Poor's cut its credit rating on the Chinese forestry company's debt twice.

The second time came last week after Sino-Forest said its internal audit would not wrap up until the end of the year, rather than in September as it said earlier.

But the OSC's move on Friday may have been the biggest blow to the embattled company, lending credence to Block's allegations.

"Do we feel vindication? When you do what we do, you know that you're going to get a lot of arrows shot at you," said the short-seller, who aims to profit when shares of the companies he profiles plunge.

"We did take a lot of arrows on this one, but at the end of the day, people who lost money in this are hurting a lot more from it than we are," he said.

(Additional reporting by Pav Jordan and Cameron French in Toronto, and Ryan Vlastelica in New York; Editing by Frank McGurty)