Sino-Forest, Muddy Waters trade skullduggery charges

TORONTO (Reuters) - Sino-Forest Corp TRE.TO on Monday accused short-seller Muddy Waters of defamation for alleging in a report that it had fraudulently exaggerated its Chinese forestry assets.

The strong statement from Toronto-listed Sino-Forest sent its shares up about 30 percent at C$6.75 by mid afternoon. That’s still well below Wednesday’s close price of C$18.21, before the Muddy Waters report hit investors like a brick.

The Muddy Waters’ report, which alleges that Sino-Forest made misleading statements in financial filings, is inaccurate, spurious and defamatory, Sino-Forest said, [ID:nN03131872] noting that it was weighing its legal options.

“Given the deeply damaging nature of Muddy Waters’ self-interested attack on the company and its shareholders, the company is considering its legal remedies against Muddy Waters and its principals,” Sino Forest said.

Sino-Forest, which manages forest plantations in China and divides its operational headquarters between Hong Kong and the Toronto suburb of Mississauga, said it would make documents available to prove ownership of its timber assets in China.

It said it would ask securities regulators in Canada and elsewhere to investigate Muddy Waters’ trading activities, pointing out that as a short-seller, the firm profits on bets against Sino-Forest and other subjects of its reports.

“It is important people recognize the motivations of Muddy Waters, because it is they who deliberately muddy the waters, not us,” Sino-Forest Chairman Allen Chan said in a statement.

“This is a company that has taken out a major short position in our company and then issued a report designed to make them money by the decline of our stock. By now they might be out of their short position and in the money.”


Muddy Waters’s founder and chief researcher Carson Block stood by the report, and said his firm still held a short position on Sino Forest. He also dismissed the forestry firm’s reaction.

“This is basically just another day at the office for us,” Block told Bloomberg Television. “We can close it (the short position), but the stock is close to a zero (net worth). We’ll keep it on until it is, zero.”

Block has developed a successful investment track record of attacking Chinese companies that have become darlings of investors in North America.


Sino-Forest said it intends to invite analysts to join management on a tour of its forest plantations in July, giving them GPS references and documents to prove the ownership claims disputed by Muddy Waters.

It began to post documents that support its ownership of timber assets on its web site on Monday. The company said it would focus first on it assets in the Yunnan Province, which were one of the key targets in the short-seller’s report.

Sino Forest said as of March 31 it had $1.09 billion in cash and cash equivalents on hand. It released on its website a summary schedule of its cash holdings and details of its bank statements confirming the cash held as of that date.

Some investors have encouraged Sino-Forest to buy back shares to restore investor confidence. The company said it has been advised by counsel that it and its directors and officers are precluded from buying stock in the current circumstances.

RBC Capital Markets Analyst Paul Quinn, who has visited Sino-Forest’s China operations and questions Muddy Waters allegations, said the company’s statement on Monday was better than its initial response to the allegations.

Shares will remain volatile without meaningful recovery until at least the July tour and a report by the independent committee Sino-Forest has set up to review the claims, said Quinn.

Sino Forest was not the only North American-listed company with Chinese operations to find itself at the center of a financial storm on Monday.

China Electric Motor Inc CELM.O , which makes and sells micro-motor components, said its auditor MaloneBailey resigned last week, citing discrepancies in the company's bank record it noted during its 2010 audit.

Additional reporting by Allan Dowd; Editing by Frank McGurty and Janet Guttsman