* 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
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
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
"So without doing this, I don't think investors will have
the confidence to conclude that there were no related-party
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
But it added that: "...no extrapolation of the findings to
Sino-Forest's broader forestry assets is possible or is
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.