* 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 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.
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.
Sino-Forest said it is weighing defamation action against
(Additional reporting by Allan Dowd, Claire Sibonney and Julie
Gordon; editing by Frank McGurty and Janet Guttsman)