The OSC did not accuse Sino-Forest’s Toronto-based chief financial officer David Horsley of participating in the fraudulent activity but alleges he did not comply with securities laws and acted contrary to the public interest.
A company spokesman declined to comment Tuesday. The company’s legal counsel, Mr. Chan’s lawyer, Mr. Horsley as well as Ernst & Young did not respond to requests for comment.
Sino-Forest filed for bankruptcy protection from its creditors in March. Its shares have been delisted from the Toronto Stock Exchange.
HIGHLIGHTS OF THE OSC’S ALLEGATIONS AGAINST SINO-FOREST CORP.
Greenheart Group Ltd.
Sino-Forest concluded a deal in 2010 to purchase a controlling interest in Greenheart, a public company listed on the Hong Kong Stock Exchange, for a total of $120-million. The OSC alleges Sino-Forest never disclosed that one of the biggest beneficiaries of that deal was co-founder and then-chairman and CEO Allen Chan. According to OSC allegations, Mr. Chan secretly controlled two holding companies that had an interest in Greenheart, and he allegedly received $22-million in cash and shares from the Greenheart purchase. The OSC alleged that the Sino-Forest shares he received as part of the payment appreciated in value and were later sold for $35-million. To keep the transaction secret, Mr. Chan allegedly sold the shares using a brokerage account opened by his assistant on his instructions.
The OSC alleges Sino-Forest falsified the evidence of ownership for the vast majority of its timber holdings using false documentation, which included the “fraudulent creation of deceitful purchase contracts and sales contracts.” The OSC alleges Sino-Forest’s management in China secretly created a network of “nominee” or “peripheral” companies without disclosing Sino-Forest’s connections to the companies. The companies were controlled by various employees, friends and contacts referred to by the OSC as “caretakers.” The forestry firm allegedly did a significant amount of its sales and purchases with these companies without disclosing the links. Some of the biggest deals involved Yuda Wood, a company purported to be Sino-Forest’s largest supplier from 2007 to 2010. It was paid $650-million for its timber, but Sino-Forest never disclosed that it secretly controlled Yuda Wood, nor that Yuda Wood was registered and capitalized by members of Sino-Forest’s Hong Kong management team.
The OSC dubbed one example of the timber fraud the “Dacheng fraud,” alleging Sino-Forest purchased the Dacheng timber plantations in 2008 from a company called Guangxi Dacheng Timber Co. Sino-Forest allegedly recorded the timber assets twice on the records of two different subsidiaries, overstating assets by $30-million in 2008 as a result. In 2009, Sino-Forest “purported” that one of the subsidiaries sold the plantation assets for $48-million. The funds from the falsified sale caused revenue to be overstated by $48-million in 2009, the OSC alleged.
450,000 cubic metres
Sino-Forest bought and sold 450,000 cubic metres of standing timber in late 2009, using companies connected to management, the OSC alleged. In one e-mail, vice-president Simon Yeung allegedly described the purchase and sale of the timber as “a pure accounting arrangement.” Three subsidiaries of Sino-Forest were purported to buy the timber for $26-million in October, 2009, and the company alleged it sold the timber shortly afterward to three customers for $33-million or a profit of $7-million. The OSC alleged that the seller and the buyers were “caretaker” companies controlled on behalf of Sino-Forest. By 2010, none of the sale proceeds had been collected, so Sino-Forest devised two offsetting accounting arrangements to make “payments” and recover “payables.” The circular transfer of money was done through fake supplier and customer bank accounts set up by Sino-Forest, the OSC alleged.
A Sino-Forest subsidiary purchased land use rights and standing timber in 2007 from Gengma Forestry for $14-million. But the OSC alleges the transaction was never recorded. Instead, Sino-Forest purported the purchase of the same assets from related company Yuda Wood for $68-million in 2007, which was recorded on the books. The OSC said the false recording led to an overstatement of Sino-Forest’s timber holdings in 2007, 2008 and 2009. In 2010, the same standing timber was purportedly sold for $231-million. But the same holdings were offered as collateral for a bank loan in 2011, so the sale of the assets could not have taken place in 2010, the OSC alleged.
Sino-Forest recorded acquiring standing timber in Yunnan province from Yuda Wood in 2007 for $21.5-million. The OSC alleged that Yuda Wood did not actually own the timber assets until September, 2008, so could not have sold them in 2007. Sino-Forest later disclosed it sold the timber rights for $49-million in a series of transactions in March, 2008, and November, 2009. The commission said Sino-Forest could not have owned or sold the assets before September, 2008, and overstated its revenue by disclosing the sale in March that year.