Sino-Forest Corporation issued a statement on Friday in response to Thursday’s precipitous drop in its share price, which was brought on by allegations from Muddy Waters of “stratospheric fraud” in the Canadian-listed company.
It’s not too chipper about the Muddy Waters ‘report’ (quotation marks courtesy of Sino-Forest Corporation, emphasis FT Alphaville’s):
TORONTO, June 3, 2011 /CNW/ – Sino-Forest Corporation (TSX: TRE) (“Sino-Forest” or the “Company”), a leading commercial forest plantation operator in China, today commented on the share price decline on June 2, 2011 as a result of the allegations made in a ‘report’ issued on a website by a short seller operating under the name Muddy Waters, LLC. The Company was not contacted by Muddy Waters for comment ahead of publication of its report.
The Board of Directors and management of Sino-Forest wish to state clearly that there is no material change in its business or inaccuracy contained in its corporate reports and filings that needs to be brought to the attention of the market. Further we recommend shareholders take extreme caution in responding to the Muddy Waters report.
As indicated in the report, Muddy Waters has a short position in the Company’s shares and therefore stands to realize significant gains from a share price decline that it precipitated. Muddy Waters expressly admits that it makes no representation as to the accuracy, timeliness, or completeness of any information contained in its report. Further, its website discloses no address or ownership information, nor the credentials of any of the authors of the ‘report’. Neither the Ontario Securities Commission nor the Securities Exchange Commission website lists Muddy Waters or its author as being registered as an advisor.
However, it’s setting up an “independent” committee to investigate:
Nevertheless, due to the substantial impact that the report has had on the prices of the Company’s securities and the reputation of the Company, the Board has appointed an independent committee consisting of three of the Company’s independent directors, William Ardell (Chair), James Bowland and James Hyde. All three of these directors are financially qualified professionals and two of the three are recent appointees to the Board. The independent committee’s mandate is to thoroughly examine and review the allegations contained in Muddy Waters’ report, and report back to the Board. The independent committee has appointed Osler Hoskin & Harcourt LLP as independent legal counsel and will retain the services of an independent accounting firm and such other independent advisors as it deems necessary to assist with its examination.
And issues a couple of pointed barbs at the “shock jock” short sellers, focussing on those “50,000 trucks” supposedly carrying timber in Yunnan:
David Horsley, Senior Vice President and CFO of Sino-Forest commented: “I am confident that the independent committee’s examination will find these allegations to be demonstrably wrong, as for example:
(a) Muddy Waters fundamentally misunderstands and misrepresents the most basic items in our published Management’s Discussion & Analysis with respect to revenue generated from Yunnan Province, which we report as being approximately 45.5% of the Company’s standing timber revenue of approximately US$508 million. Muddy Waters alleges that it is impossible that such revenue existed because achieving such levels would greatly exceed allowable cutting quotas and it would be impossible to truck close to that volume in the period. However, that revenue was very clearly disclosed in our MD&A filed for Q1 and Q2 of 2010 as revenue resulting from the sale of the standing timber – there is no cutting or transport involved, as the trees were sold but not harvested and therefore are not considered part of the quota for the region until the harvesting is conducted by the buyers.
(b) Muddy Waters alleges that the Company overstated the assets in Yunnan Province, based on its erroneous and narrow assumption that our only purchases in Yunnan Province consisted of purchases of 20,574 ha of plantations in Gengma county in Yunnan. However, this allegation ignores the fact that in addition to the purchased plantations in Gengma county, (as disclosed in our 2010 annual MD&A of a total of approximately 193,000 ha purchased in Yunnan Province) we have purchased approximately 173,000 ha of plantations in approximately 25 other counties in Yunnan Province as of December 31, 2010.”
No response yet to the allegations Muddy Waters about “artificial intermediaries” and about Sino-Forest’s use of Poyry, a consulting company.
Trading in the stock resumed in Canada at 11:15 local time. At pixel time the statement appeared to have made little immediate impact – well, nothing positive at least:
Meanwhile, class action opportunists lawyers look to have TRE in their sights:
Siskinds LLP announces that it is Investigating Sino-Forest Corp. TORONTO AND LONDON, June 3, 2011 /CNW/ – The class actions department of Siskinds LLP today announced that it is investigating the disclosures of Sino-Forest Corp. (TSX: TRE).
Related link:
Sino-Forest responds to mega fraud allegations [Updated] – FT Tilt
The man behind the Sino-Forest takedown – Globe & Mail