A Sino Fudge | FT Alphaville

A Sino Fudge

Inquiry Clears Sino-Forest of Short Seller’s Fraud Charges screamed numerous headlines on Tuesday, following this statement from the embattled Chinese tree churner. An extract, quoting vice chairman and CEO Judson Martin:

“The Independent Committee report verifies the Company‟s stated cash balances, confirms registered title or contractual rights to the Company‟s stated timber assets, as well as the book value of these assets, reconciles reported total revenue and refutes the allegation that Yuda Wood is a subsidiary of the Company. We can categorically say Sino-Forest is not the “near total fraud” and “Ponzi scheme” as alleged by Muddy Waters.”

Really? Are PWC and Osler Hoskin & Harcourt, the law firm that has been running an investigation into whether Sino Forest is a $5bn fraud, really happy to see their work portrayed in this way?

How about Brunswick Group, the PR firm whose name is stuck at the end of the statement?

These are pukka firms, with reputations to protect. So when they seem to be “categorically” saying “Sino-Forest is not the near total fraud and Ponzi scheme as alleged…” that’s good for a sharp recovery in the price of Sino Forest’s distressed debt, which we also saw on Tuesday.

Having granted the company an apparently clean bill of health, the statement does go on to explain that the independent committee and its audit committee are “verifying information regarding certain of the company’s relationships with its suppliers and authorized intermediaries and addressing other issues that must be resolved” before overdue Q3 figures can be released.

There’s also some guff about the company getting a “better understanding of the way we need to communicate the operational and regulatory complexities of operating in our industry in China in order to give confidence to our international investor community.”

And, while stating casually that ‘all the timber’s there,’ Sino Forest does ‘fess up to the fact that the independent committee has not been able to check the authorisation processes and/or due diligence at various forestry bureaus across China. Neither has the company convinced the investigators on the subject of related party transactions.

No matter. The independent committee has so far run up a bill of $35m, according to Reuters, which is pretty heroic for five months work, even for PWC/Brunswick/Osler Hoskin.

The statement also includes the executive summary of this redacted report, but if you want a real flavour of this story, read this extraordinary document.

Interim report -- process report -- Sino forest

Sample illustrative extract from section #83 (apols for the length):

(xiv) At a meeting at Hunan FB #1 on September 2, 2011 to validate the authenticity of the existing confirmations, Management represented a forestry bureau official to be the Forestry Bureau First Vice Chief when in fact this individual was no longer in the position of Vice Chief, and had been paid by SF for several months prior to the visit to act as a consultant for SF. The IC Advisors understand this meeting was recorded by SF employees, but have not been provided with a copy of the tape.

(xv) The new confirmation obtained at the Hunan FB #2 was not issued by the forestry bureau; rather, it was issued by a “social institution legal person” sponsored by the Hunan FB #2. The relative degree of comfort of this confirmation as compared with the new confirmations from forestry bureaus is not clear.

(xvi) During the Hunan FB #2 visit held on October 18, 2011 the IC Advisers were informed by the former Chief of the bureau, FB Official #1, that Vice Chief FB Official #2 was assigned by the forestry bureau to work with SF since approximately 2008 to assist SF in conducting its business. The IC Advisers were informed that FB Official #2 continued to receive a basic salary from the forestry bureau while working with SF. They were also advised that this practice occurs with other companies.

(xvii) The new confirmation obtained at the Yunnan FB #7 was not issued by the forestry bureau; rather, it was issued by a division of the bureau, namely, the Yunnan Forestry Entity #1. The relative degree of comfort of this confirmation as compared with the new confirmations from forestry bureaus is not clear.

(xviii) The IC instructed the IC Advisors not to make direct contact with forestry bureau officials. The IC explained that Management cited strong concerns that such contact would negatively impact the Company’s relationship with the forestry bureaus.

And so on for 43 pages…

One more nugget, from #139:

A key concern identified by the IC Advisors was the information from SF that longitude/latitude coordinates of standing timber plantations cannot be obtained from the Company’s surveyor reports. Such reports show GPS coordinates for the village/general area rather than detailed coordinates that would facilitate specific identification and a site-walk/examination.

A property report that doesn’t identify the location of said property… Marvelous.

Related link:
Sino-Forest coverage
– FT Alphaville