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A Sino-Panel factory is seen in Gaoyao, Southern China on June 28, 2011. (Adam Dean For The Globe and Mail)
A Sino-Panel factory is seen in Gaoyao, Southern China on June 28, 2011. (Adam Dean For The Globe and Mail)

Sino-Forest may not defend itself in OSC case Add to ...

Sino-Forest Corp. may not defend itself against Ontario Securities Commission allegations of fraud because it is in the process of winding up and may not want to spend money on a legal defence.

Lawyers representing the Chinese forestry company and six of its executives appeared Thursday at an OSC hearing – the first since the commission unveiled fraud allegations in May. But lawyer Robert Staley, representing Sino-Forest, said it is premature for him to discuss plans for a hearing into the allegations.

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“It isn’t entirely clear that [Sino-Forest] will be responding to the hearing on the merits,” Mr. Staley told OSC vice-chair Mary Condon.

He said the company may have “little appetite to pay lawyers to defend these issues” when it is operating under bankruptcy protection and expects to soon sell off all its assets and wind up its operations.

However, the six individuals named in the case – including company founder Allen Chan – are expected to contest the allegations.

Sino-Forest, once valued at more than $6-billion, is accused of conducting one of the largest frauds in Canadian stock market history. The OSC alleges the company and its officials falsely inflated Sino-Forest’s assets and revenues, moving money between various corporate entities in a series of complex related-party deals and falsifying evidence of ownership of the majority of its timber holdings.

Five of the former executives are accused of fraud and misleading OSC staff. Canadian-based chief financial officer David Horsley is not accused of participating in the fraud, but is accused of not complying with securities laws and acting contrary to the public interest.

OSC lawyer Hugh Craig told the hearing Thursday the commission has already given defence lawyers more than 416,000 documents, most of them in Chinese, that were seized from Sino-Forest’s offices. A further 131,000 documents were to be sent to lawyers by the end of the day on Thursday, he said.

Mr. Craig said the OSC still has another 500,000 to 600,000 documents that it anticipates disclosing to lawyers in coming months.

The voluminous disclosure is expected to slow the process of completing a hearing in the case. Lawyers have agreed to a next hearing on Oct. 10, but said Thursday they do not anticipate they will be in a position by then to set a date for a full hearing on the merits of the case.

Lawyer Markus Koehnen, who is representing four of the China-based executives named in the case, said he is concerned that the OSC has so far promised to provide translations of only 500 key documents, and said the issue may lead to a future motion seeking further disclosure of translations.

While the OSC has extended personal cease-trading orders against the six individuals until the case is fully completed, Sino-Forest itself has not agreed to an indefinite cease-trade order of the company’s shares.

Mr. Staley said the company is in the midst of winding up its operations and does not want to agree to a cease-trade order past the middle of October in case it gets in the way of transferring assets to creditors.

“We are obviously concerned that nothing that may arise from a cease-trade order will interfere with the restructuring process,” he said.

Earlier this week, Sino-Forest revealed it has been unable to find a buyer for its assets after opening a bidding process in March, and has moved on to Plan B – transferring the assets directly to its creditors.

The company plans to submit a new restructuring plan to the court by Aug. 7. Mr. Staley said the transaction should be “coming to a head” by October.

Follow on Twitter: @JMcFarlandGlobe

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