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Analysis

The roots of the Sino-Forest mystery Add to ...

The Globe and Mail has made repeated requests for interviews with Mr. Chan, and visited both his home and office in Hong Kong, but received no response.

A Globe investigation, based on interviews with people associated with Sino-Forest and an examination of legal and regulatory documents in Hong Kong and mainland China, has uncovered a pattern of questionable deals and disclosures from the company that date back to its earliest days. A probe of some of the company’s dealings and financial filings in China indicate that some of Sino-Forest’s business claims are overblown, and may support the allegations made by the OSC.

In addition to finding that the Leizhou joint venture never got off the ground, more recent transactions point to a steady stream of deals that have raised concern. In one case, Sino-Forest acquired a financially struggling forestry company called Mandra with about 150,000 hectares of trees, citing its ability to produce “sustainable cash flow.” The deal boosted Sino-Forest’s stated forestry holdings and helped it raise some $800-million from investors in a financing that was announced the same day. Financial statements obtained by The Globe paint a much different picture of Mandra, and show that nine months before it was acquired, it failed to meet a scheduled payment to creditors. The financial statements raise questions about the value of Mandra’s assets and Sino-Forest’s motivation for the transaction.

In another questionable deal, Sino-Forest paid $7.1-million for a wood products manufacturer that it said had valuable patents. Documents obtained by The Globe, however, suggest the company had few if any useful patents and one of its investors was a Sino-Forest vice-president – making the acquisition an unreported related-party transaction.

These new revelations follow previous findings by The Globe, published in June ( that cast doubt on the size and value of the company’s timber assets in Yunnan province. A key business partner there said Sino-Forest had purchased far fewer trees than the 200,000 hectares it claims to control.

Sino-Forest, which has denied all the allegations levelled against it, declined multiple requests for comment on the Leizhou, Mandra and other findings.

‘We didn’t produce a log’

Mr. Chan and Mr. Poon seem unlikely candidates to have created China’s largest forestry company.

Born Chan Tak Yuen in February of 1952, Allen Chan’s early business ventures had nothing to do with trees. One business was an outright failure.

He attended what was then called Hong Kong Baptist College and studied sociology. According to at least one document filed with Chinese government offices, Mr. Chan’s highest level of education is high school.

In 1980, he took a job working for gambling tycoon Stanley Ho as corporate secretary for the notorious Hong Kong harbour tourist trap called the Jumbo Floating Restaurant. His attempt to purchase a ship building business in 1988 ended in legal action that accused Mr. Chan of misappropriating funds, according to a lawsuit filed in the Supreme Court of Hong Kong.

The controversy arising from those allegations prompted Mr. Chan to withdraw from public view for two years. “It was like a nightmare,” he told CEO Magazine in a 2004 interview. “I couldn’t read in the first year. I could only sunbathe and listen to music.”

But he soon returned to Hong Kong’s business scene as a financial columnist for the Hong Kong Economic Journal and an author of business books penned under the name Koon Chung-lin.

An engineer and 15-year veteran of the Guangdong Forestry Bureau, Kai Kit Poon was so impressed with the writings of Koon Chung-lin that in 1992 he asked Mr. Chan to help start the business that would become Sino-Forest.

While the soft-spoken but gregarious Mr. Chan became Sino-Forest’s public face, helping to raise billions of dollars from Canadian and international investors, Mr. Poon, now 70, provided relationships or guanxi with government forestry officials, connections that in China are key to doing business.

One of Sino-Forest’s first major deals was the 1994 joint venture with the Leizhou Forestry Bureau. The two sides agreed to start an operation that was supposed to produce fibre boards from wood harvested from a Sino-Forest eucalyptus plantation nearby.

In its annual reports, Sino-Forest reported more than $60-million in sales from the operation between 1994 and 1997.

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