Sino-Forest Corp , a Toronto-listed Chinese forestry company accused of fraud, is seeking protection from its creditors and a court's approval of an agreement with some of noteholders to put its embattled business up for sale.

Sino-Forest, whose stock fell more than 70 percent after a short-seller in June accused it of exaggerating its assets, said the agreement would allow for its sale to a third party, or if no buyer emerges, a restructuring that would let noteholders buy nearly all of its assets.

It made the request on Friday to the Ontario Superior Court of Justice under the Companies' Creditors Arrangement Act, the equivalent of U.S. Chapter 11 filing, saying the process is the best way to secure its future and normalize operations.

We believe the full value of our assets will only be achieved if we are able to continue operating the business, Judson Martin, chief executive of Sino-Forest, said in a release.

Sino-Forest also said it was taking legal action against the short-seller, Carson Block, his firm Muddy Waters and other unnamed parties. It is seeking more than $4 billion in damages.

Last June, Muddy Waters accused Sino-Forest of exaggerating its assets and Sino-Forest's stock subsequently fell more than 70 percent. Regulators stopped trading in the stock in August and trading has yet to resume.

The Sino-Forest case is the most prominent among a series of recent accounting scandals that have tainted the image of Chinese companies listed in North America. The scandals have prompted trading halts, de-listings, lawsuits and regulatory probes both in Canada and the United States.

In August, the Ontario Securities Commission issued a cease-trade order on the stock as it accused then-Chief Executive Allen Chan and other officers of misrepresenting revenue in public filings and kept bogus accounts.

The OSC - Canada's most powerful securities regulator - also said Chan and others appeared to be engaging in acts that they should have known essentially amounted to fraud. Shortly afterwards, Chan resigned.

Sino-Forest also confirmed last fall that Canada's national police force, the Royal Canadian Mounted Police, was investigating allegations of fraud. The RCMP has not announced any findings yet.

The scandal triggered a broader OSC probe of stock listings by companies with most of their operations in China and other emerging markets.

In a report of the findings earlier this month, the agency revealed weak links at every stage of the listings process, including issuers themselves, auditors, underwriters and exchanges.

Separately, a January 31 report into the fraud allegations by what Sino said was an independent panel left many questions unanswered, most crucially around the value of Sino-Forest's timber holdings or its opaque ties with suppliers.

The internal committee's report was not able to assess whether Sino had a proper arm's length relationship with the owners of land on which it had contractual rights over the timber and businesses to whom it sold its wood.


Muddy Waters said on Friday it would not comment on the lawsuit, because it had not yet seen it. The firm did release a statement on the CCAA process, however.

This is yet another indication of what we have said all along, that Sino-Forest's management has committed a massive fraud and has deceived its shareholders and creditors, Muddy Waters said.

If the company were really generating close to $2 billion in operating cash flow, it would not have had to file for a court-supervised restructuring with its creditors.

Sino-Forest said holders of about 40 percent of the aggregate principal amount of its notes have agreed to support its plan to sell or restructure.

(Reporting by Allison Martell and Jennifer Kwan in Toronto; Editing by Frank McGurty; and Peter Galloway)