* Report submitted to meet Jan. 31 deadline
* Followed allegations by Muddy Waters in June
* Committee says some issues unresolved
* Sino-Forest to defend class action in United States
By Sakthi Prasad and Rachel Armstrong
Feb 1 Bankruptcy threatened plantation operator Sino-Forest Corp said an independent committee had wound up its probe into allegations the firm had exaggerated its assets, but its report is unlikely to pacify investors as it left key questions unresolved.
China-focused, Canadian-listed Sino-Forest has been reeling since last June, when short-seller Carson Block and his Muddy Waters firm alleged it had exaggerated its Chinese forestry assets in what it described as a "Ponzi scheme".
Sino-Forest shares fell more than 70 percent in the two days after the Muddy Waters remarks and have been on a trading halt since August.
The company, which remains under investigation by police and the securities regulator in Canada, said in November the investigating panel's preliminary report had found no evidence of fraud.
In its final report, the committee acknowledged it had been unable to unravel all the questions surrounding the company's business practices in China, including some related-party transactions, or the valuation of all its forestry holdings.
"I don't think the report addresses most of the issues highlighted in the last one and restores investors' confidence, it looks like it's just trying to meet the deadline," said Annisa Lee, Asia credit analyst at Nomura in Hong Kong.
"The valuation of the assets has not been done, which is one of the key things because this is crucial to determine the valuation of the company."
In a highly technical 13-page report, the panel of lawyers and auditors said it had not been able to get to the bottom of whether Sino-Forest had a proper "arm's length" relationship with all its "suppliers" and "authorised intermediaries" -- the owners of land on which it had contractual rights over the timber and businesses to whom it sold its wood.
It said that while "there remain issues which have not been fully answered", its probe was "now at the point of diminishing returns, because much of the information which it is seeking lies with non-compellable third parties, may not exist or is apparently not retrievable from the records of the company".
Nomura's Lee said the report had not "addressed the very close relationship between the company and its suppliers and customers, which was one of the key allegations from Muddy Waters.
"So without doing this, I don't think investors will have the confidence to conclude that there were no related-party transactions."
Sino-Forest was founded in the 1990s by Hong Kong entrepreneur Allen Chan and listed on the Toronto bourse through a reverse takeover of a dormant Canadian firm, a practice that has since been criticised as offering a way to circumvent the more rigorous regulatory standards of a new share offering.
It is the most prominent of the Chinese companies listed in North America whose shares were either suspended or delisted last year amid suspicions about their business practices and Chinese regulatory safeguards.
The investigation was concluded because the firm had agreed with its debt holders it would make its final report by Jan. 31.
Sino-Forest's bondholders have greater influence over the company following an agreement earlier this month under which they agreed not to force it into default following a covenant breach related to its failure to release third-quarter results.
Sino-Forest also said it intended to vigorously defend a class action commenced against it in the United States.
The class action, filed in New York state on Friday, was brought on behalf of investors who purchased Sino-Forest shares on the Over-the-Counter market and non-Canadian buyers of Sino-Forest debt securities, it said.
The company was already facing class actions in Canada.
Block's Muddy Waters report had accused Sino-Forest of running a "Ponzi scheme" that "massively exaggerates its forestry assets", allegations the firm vehemently denied.
The independent panel looked at two of Sino-Forest's Chinese forestry concessions in a sampling exercise and found the company's statements of its assets to be accurate to within 6 percent.
But it added that: "...no extrapolation of the findings to Sino-Forest's broader forestry assets is possible or is implied."
The two forest parcels surveyed together represent less than 150 hectares of the more than 800,000 hectares of timber that Sino-Forest has said it controls.
Sino-Forest said it has engaged Singapore-based consultancy Stewart Murray to assist the company in verifying and valuing its entire forestry assets.
Shares in the company, once the largest forestry stock listed on the Toronto Stock Exchange, plunged 71 percent in the two days after the Muddy Waters report was released last June, and it has been under a cease-trade order since late August.
Last week, Canada's top securities regulator extended the cease trade order to April 16.