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Photo of one of Sino-Forest's Gaoyao Particle Board operation in the city of Gaoyao, province is Guangdong and country is China .
Photo of one of Sino-Forest's Gaoyao Particle Board operation in the city of Gaoyao, province is Guangdong and country is China .

Sino-Forest clams up as probes continue Add to ...

Sino-Forest Corp. is officially in lockdown mode and warning it will be months before the completion of an independent investigation into fraud allegations.

The Hong Kong-based and TSX-listed company, once Canada’s largest publicly traded forestry business, has halted all substantive interaction with shareholders and the public until a board committee finishes a probe the accusations made by short-seller Carson Block and his firm, Muddy Waters LLC.

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Sino-Forest released second-quarter financial results on Monday but cancelled the customary conference call which allows investors and analysts to ask questions of management.

The independent committee of directors, which is being assisted by accounting firm PricewaterhouseCoopers, was originally scheduled to conclude its investigation by the end of September. Now, Sino-Forest says that report will not be finished until the end of the year.

“As the independent committee and its advisers are still in the process of examining the allegations made by Muddy Waters, the board and management have decided to refrain from hosting any conference calls or providing any public comments on the issues raised by the report, until the completion of the independent committee’s review,” Sino-Forest said in a statement.

The company’s self-imposed silence means that the shareholders will be operating blindly for months when trying to make investment decisions about the Chinese forestry company. Sino-Forest shares have fallen more than 60 per cent since the Muddy Waters report was released on June 2.

Muddy Waters alleged that Sino-Forest has inflated the size and value of its forestry holdings in mainland China and has described the company, which has raised more than $3-billion from investors through debt and equity markets, as a massive “Ponzi scheme.”

Sino-Forest has strongly denied the Muddy Waters allegations and called the short-seller’s report “inaccurate and unfounded.”

A separate investigation by The Globe and Mail, conducted on the ground in China, also raised issues about Sino-Forest’s forestry holdings. A key Sino-Forest business partner as well as local forestry officials in Yunnan province said Sino-Forest’s timber assets were smaller than the company claimed. Sino-Forest disputed the Globe story, calling it an “inaccurate portrayal” of its business, and published a statement from the business partner that differed from earlier statements he had made in an interview with the Globe.

The Ontario Securities Commission has previously disclosed it is also investigating “matters related to Sino-Forest.”

In its second-quarter financial report, Sino-Forest said that the independent committee, which is headed by company director William Ardell, released its first “interim” report on the investigation to Sino-Forest’s board of directors on Aug. 11.

The company did not disclose if the interim report said the independent committee had found any evidence of irregularities or wrongdoing. However, Sino-Forest said the interim report did disclose that the task of investigating is proving more challenging than anticipated and is proving particularly time-consuming and distracting for management and the independent committee.

“Throughout the fact-finding exercise, the independent committee has faced challenges due among other issues to the decentralization of data necessary for the completion of its review,” the company said. “This has lengthened the period of time required for gathering and commencing analysis of vast amounts of electronic data and thousands of documents from all the subsidiaries of the company, including contracts, government documentation, computer and server data, and other information that could relate to the allegations in the [Muddy Waters]report and the Ontario Securities Commission investigation.

“This has been indicative of broader challenges associated with the sourcing and verification of data in China. Additionally, the co-operation with the OSC’s investigation continues to require resources of management and the independent committee alongside the process of the Independent Committee’s review,” Sino-Forest said.

The company reported a 6-per-cent increase in revenue to $317-million (U.S.) during the second quarter. Excluding a $469.5-million non-cash gain from changes to fair-value accounting of financial instruments, Sino-Forest posted a second-quarter loss of $9.8-million compared with a profit of $60.8-million in the second quarter of 2010.

Sino-Forest burned cash in the quarter, posting negative operating cash flow of $90-million, compared with an outflow of $62-million in the same period last year. The fact that Sino-Forest has consistently been cash-flow negative – that is, spending more cash than it generates – has provided fodder for critics who question the company’s business model.

Calls to Mr. Ardell and Sino-Forest chief financial officer David Horsely were not returned Monday. During the past few weeks, a series of requests for comment from top management at Sino-Forest, including chairman and chief executive officer Allen Chan, have drawn no responses.

Executives at Hong Kong-listed Sino-Forest subsidiary Greenheart Group Ltd., have also not responded to interview requests.

Sino-Forest (TRE)

Close: $6.09, down 56¢

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