Here it is, and only a day past deadline: the Sino-Forest independent committee’s final report into the company’s assets and relationships between various poorly-understood entities.
[We looked at the independent committee a while back.]
So, what’s new now? Well, there are still many questions left unanswered, but the committee believes it’s “now at the point of diminishing returns” of trying to get blood from a stone information from Sino-Forest management. So it’s time to wrap it up.
While many answers and explanations have been obtained, the IC believes that they are not yet sufficient to allow it to fully understand the nature and scope of the relationship between SF and Yuda Wood. Accordingly, based on the information it has obtained, the IC is still unable to independently verify that the relationship of Yuda Wood is at arm’s length to SF. It is to be noted that Management is of the view that Yuda Wood is unrelated to SF for accounting purposes. The IC remains satisfied that Yuda is not a subsidiary of SF. Management continues to undertake work related to Yuda Wood, including seeking documentation from third parties and responding to e-mails where the responses are not yet complete or prepared. Management has provided certain banking records to the Audit Committee that the Audit Committee advises support Management’s position that SF did not capitalize Yuda Wood (but that review is not yet completed). The IC anticipates that Management will continue to work with the Audit Committee, Company counsel and E&Y on these issues.
That’s nice. On to the next part. Sino-Forest watchers will already know much of the Muddy Waters allegations centre on “AIs” (authorised intermediaries) and ‘suppliers’.
This report introduces yet another type of thoroughly opaque entity — the “backers”.
But first, let’s get acquainted with the ‘Kaitong Report’.
This is a document prepared by Kaitong Law Firm, an advisor to Sino-Forest, using information supplied by the company. Which you and I can’t read, and much of which Kaitong says it has not been able to verify:
Kaitong has advised that much of the information in the Kaitong Report was provided by Management and has not been independently verified by such law firm or the IC. Kaitong’s work on the information received from Management includes:
- Reconciling the annual transaction amount for each Supplier and AI with the purchase/sales detailed data, which were provided by Management;
-Checking registration documents filed with SAIC to verify the basic information (legal representative, shareholding structure and establishment date) of Suppliers and AIs; and
- Performing Internet searches on the backers including their current and past position, investment and news.
So, here are the “backers”:
The Kaitong Report explains the concept of “backers” to both Suppliers and AIs. The Kaitong Report suggests that backers are individuals with considerable influence in political, social or business circles, or all three. The Kaitong Report also states that such backers or their identified main business entities do not generally appear in SAIC filings by the Suppliers or AIs as shareholders thereof and, in most instances, in any other capacity.
It’s all very Chinese. You wouldn’t understand:
The Kaitong Report stresses the importance of “Guanxi” in Chinese business, but is not specific as to particular benefits and why these particular relationships are important. The Kaitong Report contains little information to validate the political or business connections of such backers, or the nature of the relationship between the backers and the Suppliers or AIs. There is no documentary evidence of the nature of their support for their respective Suppliers or AIs nor the consideration (if any) received by the backers for their support of the Suppliers or AIs. The Kaitong Report suggests that such backers may provide resources that are important in China such as introductions, endorsements and connections.
Apparently this law firm, Kaitong, carried out a keyword search of emails (whose?) to see if there were any links between the “backers” and Sino-Forest, but came up with zip.
Given the general lack of information on the backers or the nature and scope of the relationships between the Suppliers or AIs and their respective backers and the absence of any documentary support or independent evidence of such relationships, the IC has been unable to reach any conclusion as to the existence, nature or importance of such relationships
At this point, we begin to feel a little sorry for the independent committee. But then, they go on to say it wouldn’t matter even if the IC advisors did locate the “backers” and interview them, because “such interviews would yield very little, if any, verifiable information to such advisors”.
The reason being, apparently, that some of those identified as “backers” had already been interviewed by the IC advisors:
The IC Advisors have interviewed Backer #5, Backer #3 and Backer #2 prior to production of the Kaitong Report as former Management had identified them as associated with certain corporate entities then referred to as AI Holdcos or conglomerates. All confirmed their associations with the relevant AIs , but did not produce any documentation verifying such association.
To get a flavour of just why that is – an earlier report from the committee says the company had presented the IC advisors with a man they claimed was the Forestry Bureau First Vice Chief, but who in fact was a consultant working for Sino-Forest.
On the matter of the missing forest maps
Management said there were very good reasons for the lack of maps documenting some of the forests purchased: they sent news clippings to the effect that foreigners caught with maps deemed to be state secrets could face criminal sanctions. The IC says it was unable to verify this, “but recognizes that this is an area of the law in China where a conservative approach may be prudent”.
So, how did Sino-Forest management itself locate the forestry resources? Well, with great difficulty, it seems – it’s like, really hard to get maps:
It indicates that although certain types of stand maps and these land descriptions are available as part of PRCs, maps are not readily available for continuing possession by persons trading in standing timber without a lease as is the case of the transactions by SF’s BVI model. Management indicates that such maps usually can be borrowed from forestry bureaus (but not retained) and are used by the survey companies as part of the Company’s due diligence. Management believes the ability of a foreign company to retain such maps is unclear and has adopted a cautious approach to this issue. The advice received by the IC from independent forestry experts is that this practice is not inconsistent with the practice of other parties in China who buy and sell standing timber without leasing the underlying land.
Perhaps management also submitted a document asserting that there are no photocopiers, scanners or high-res digital cameras in China.
Which is a shame, because the next segment of the report involves an exercise where two forestry companies were given maps and asked to assess the assets contained within two specified “compartments” of forest that Sino-Forest bought. The two companies confirmed that each compartment had roughly the correct amount of assets reported by Sino-Forest.
Conclusion?
It IS possible to assess the forestry assets in a specified area. If one has the correct, geo-referenced (or geo-reference-able) maps.
However, that doesn’t tell us much about the rest of Sino-Forest’s assets, as the experts and the IC are at pains to stress.
Oh – another thing. We missed this late last week. The independent committee has apparently not responded to the Ontario Securities Commission’s requests for information, reported The Globe and Mail last Thursday:
The OSC also sent a letter to the counsel for the independent committee on Dec. 22, requesting specific information on relationships between Sino-Forest, timber suppliers and brokers in China who sell Sino-Forest’s trees, called authorized intermediaries or “AIs.” More than a month later, the OSC still hasn’t received responses to these questions, Mr. Vanderlaan said.
The IC has something to say about this:
The IC advised the OSC on January 4, 2012 that it would respond to their extensive inquiries. The IC has responded to the December 7th letter and a response to the December 22nd letter, which also requires input from the Company, is expected to be completed within a reasonable period of time after the completion of this report.
And once they do that, the committee says, their work is done — unless the Sino-Forest board want them to do anything else.
Fear not — we haven’t heard the last of this. A law firm in the US has worked out a way to try and sue Sino-Forest and its bond underwriters, Credit Suisse and Bank of America Merrill Lynch.
Related links:
A Sino-Fudge – FT Alphaville
In a dark, dark wood – FT Alphaville