The company logo of Sino-Forest is displayed at its office in Hong Kong
The company logo of Sino-Forest is displayed at the entrance of its office in Hong Kong June 8, 2011. REUTERS

Canada-listed Sino-Forest Corp said an independent committee found no evidence of fraud at the Chinese timber firm following allegations from short-seller Muddy Waters it had exaggerated its assets, although the committee also said it had been unable to verify the company owned all of its forests.

We can categorically say Sino-Forest is not the 'near total fraud' and 'Ponzi scheme' as alleged by Muddy Waters, CEO Judson Martin said in a statement on the interim report.

Accounting scandals swirling around several China-focused companies listed in North America have prompted trade halts, delistings, lawsuits and regulatory probes. Sino-Forest faces several class-action lawsuits from investors who lost money.

Sino-Forest was the largest forestry company listed on the Toronto Stock Exchange until its shares collapsed in June after the fraud allegations surfaced. The stock is down 80 percent and was suspended in August pending investigations by regulators and, last week, Canadian police.

In the latest twist to the months-long saga, research firm Muddy Waters, founded by Carson Block, said the timing of Sino-Forest's announcement makes clear that the directors and officers are responding to the criminal investigation announced last week.

It should be noted that all three directors who oversaw the investigation are defendants in shareholder lawsuits, and one resigned just prior to this release, Muddy Waters said.

We believe this release has no credibility.

In addition, the report said the committee had been unable to verify that Sino-Forest owned all its forests.


The scandal has forced staunch allies, including hedge fund manager John Paulson, to abandon Sino-Forest. Paulson alone took a $500 million loss.

In his statement, Martin, a Canadian, said the committee verified the company's cash balances, timber assets, book values and revenues. A final report by the committee should be completed by the end of the year.

He later told reporters in Hong Kong that Sino-Forest had been bruised, but not broken by claims that were either malicious or uninformed, although he acknowledged the process had highlighted shortcomings in the business.

I do see the PRC (China) business flourishing in the future, he said, adding the accusations showed a fundamental misunderstanding of how business works in China.

A senior Shanghai Stock Exchange official on Tuesday urged companies listed in the United States to return home, saying U.S. institutions had politicized accounting issues involving Chinese firms.


Sino-Forest said the committee was verifying information regarding certain of the company's relationships with its suppliers and authorized intermediaries, and addressing other issues. Muddy Waters had accused the owner of tree plantations in China of fraudulently exaggerating its assets.

Deep in the 43-page report -- which cost the company $35 million -- the committee noted it couldn't verify that Sino-Forest actually owned all its forests, and was barred from seeing databases and discouraged from visiting some of the forestry bureaus that hold registration documents.

John Hempton, whose Sydney-based Bronte Capital is a prominent short-seller of Sino-Forest stock, said he blanched at initial coverage of the report, but felt vindicated after reading the committee's disclosure on those limitations.

Every single meeting with forestry officials to confirm documents purporting to prove ownership of forests was set up by management, he told Reuters. One person who management represented as a senior forestry official was found to be an employee of Sino-Forest -- but that didn't ring alarm bells.

Short sellers borrow stocks and then sell them in the hope they will decline so they can buy them back later at a lower price, pocketing the difference.


Zhi Wei Feng, a Singapore-based credit analyst with Standard Chartered, said: The worst may be over, but ... it (Sino-Forest) has to win back market confidence and improve investor perception. Also, there are still caveats in the actual report.

This is the beginning of some very good news for us -- long overdue, Simon Murray, chairman of commodities trader Glencore International Plc and an independent Sino-Forest director, told Reuters from Switzerland.

I never doubted it, but it has been very hard work to prove it given the sort of work involved in the forestry commission, the farmers, the land owners, and everybody else, he said.

Others said the picture remained far from clear.

The report will provide some comfort to investors, but it will also confirm some of their concerns, said Paul Gillis, professor of accounting at Peking University and a former partner at PriceWaterhouseCooper.

Sino-Forest is using a primitive form of the VIE structure that has concerned investors in many other Chinese companies. They conduct much of their business through agents, he said, referring to the variable interest entity structure used by some overseas-listed Chinese companies to skirt around limits on foreign investment.

The report admits they may be doing business illegally through their BVI structure, but argue the rules are not clear, he added. BVI means a company subsidiary incorporated in the British Virgin Islands.

That's a pretty thin rope to hang your investment on.

Sino-Forest said it expected to publish its delayed third-quarter results within 30 days.

Sino-Forest bonds jumped on news of the committee's findings, with those due in 2014 rising 20 cents on the dollar to 50/60. Its bonds have lost some 70 percent of their value since April.

(Additional reporting by Swetha Gopinath in Bangalore, Rachel Armstrong, Umesh Desai, Stephen Aldred and Nishant Kumar in Hong Kong, and Mark Bendeich in Sydney; Writing by Ian Geoghegan, Editing by Dean Yates and Neil Fullick)