It took just one report from a little-known short-seller to send the stock of one of Canada's biggest publicly traded forestry companies into a tailspin and its startled board of prominent directors scrambling for answers.
On Friday, the board of Toronto-listed Sino-Forest Corp., Sino-Forest Corp. TRE-T which includes Hong Kong magnate Simon Murray and former Southam Inc. CEO William Ardell, publicly warned investors to view with “extreme caution” a “shock jock” short-sellers report that accused the company of grossly exaggerating the value and scale of the core timber holdings it buys and sells in China.
Behind the scenes, however, one person close to the company described the directors as “rattled” by the report. The directors held an emergency board meeting Thursday and appointed a special committee of three independent directors, including Mr. Ardell, to review the claims. Sources said the board also agreed to hire an independent accounting firm to investigate the claims.
“The directors believe that this is a company of substance. They are shocked and they intend to take a hard look at these claims,” said the source.
Sino-Forest’s board is under intense pressure to contain the damage. In heavy Canadian trading on Friday, the company’s stock collapsed like a fallen tree, wiping out a total of $2.3-billion from the company’s total stock market valuation in one day. On the Toronto Stock Exchange, Sino-Forest closed at $5.23, a 64-per-cent drop from the previous day and a 79-per-cent drop from the company's 2011 peak valuation of $6.2-billion in March. The company has lost nearly $5-billion in market value in that span.
The stunning wipeout raises awkward questions for a company that was rated a “buy” by seven Bay Street analysts, backed by respected investors such as Wall Street’s John Paulson and a large cast of leading Bay Street investment banks including TD Securities and RBC. Its auditors are the global accounting firm Ernst & Young.
Sino-Forest is one of hundreds of Chinese companies that have gained entry to North American stock exchanges through a technique known as a reverse takeover of a dormant public company. While reverse takeovers have been a common practice, regulators and politicians in the United States have become concerned about the sharp influx of Chinese-led reverse takeovers. The U.S. Securities and Exchange Commission recently launched an investigation of U.S.-listed Chinese stock plays after several were accused of accounting irregularities and fraud.
Until this week, Sino-Forest was untouched by scandals that have tainted some of its smaller competitors. Last month an independent committee of directors at China Forestry revealed that the Hong Kong-listed company had falsified logging permits. Cathay Forest, which is listed on the TSX Venture Exchange, had its stock suspended in late January and the company is probing a variety of investments and contracts related to its timber assets.
Created in 1994 through a reverse takeover on the Alberta Stock Exchange, Sino-Forest's main business is buying and selling giant blocks of trees. It manages nine tree plantations in China and one in New Zealand. Sino-Forest is also involved in log trading and manufacturing of some wood products such as plywood and flooring.
“Let me say clearly that the allegations contained in this report are inaccurate and unfounded,” Sino-Forest chairman and chief executive Tak Yuen (Allen) Chan said in a statement Friday.
Mr. Chan, a trained sociologist from Hong Kong who started in business with Chinese ventures in the 1980s in everything from the hotels to clothing sectors, is the architect of the sprawling Sino-Forest enterprise.
