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Analysis

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

Like Mandra, Homix was anything but a huge money-spinner. A review of Sino-Forest’s SAIC financial statements shows that its two subsidiaries posted a combined loss of about $1-million in 2009. But those documents also show something else. Sino-Forest’s senior vice-president of administration and finance, Chen Hua – also known as Hua Chen – was a major shareholder in a Homix unit by the name of Jiangsu Dayang Wood Co. Ltd.

The finding is significant because Sino-Forest has never disclosed that Homix was a related party and has strongly denied engaging in any undisclosed related-party transactions. In a June interview with The Globe, Sino-Forest chief financial officer David Horsley insisted that any non-arm’s-length transactions would have been disclosed in Sino-Forest’s financial statements. The OSC’s recent allegations, however, allege that Sino-Forest subsidiaries appear to have engaged in “significant non-arm’s-length transactions.”

The documents obtained by The Globe show Ms. Chen was one of the first shareholders of Jiangsu Dayang in 2003 and increased her stake in July, 2004, when she was also named chairwoman of the board and legal representative.

She sold her shares soon after, SAIC records show, but then bought back into the company in January, 2008, investing three million yuan (about $465,000 Canadian) for a 30 per cent stake. The SAIC files show that Ms. Chen remained a shareholder of the company until Sino-Forest closed the deal to buy Homix in June, 2010.

Sino-Forest refused to comment on Ms. Chen’s apparent interest in Homix.

Jiangsu Dayang, incidentally, holds just two patents in China, both registered in August, 2008. One is for a “wood dyeing method and equipment” and the other is for “wood dyeing equipment.” A check of State Intellectual Property records show that Homix’s other subsidiary had not registered any patents in China.

Despite the gravity of the allegations facing him and the company he co-founded, Mr. Chan has shown no signs of withdrawing from public view to sunbathe and listen to music as he did when his business ventures collapsed in the late 1980s. At least not yet.

When the Muddy Waters report was first published in June, he called the accusations “unfounded,” posted a video on the company’s website addressing the allegations and promised a summertime tour of Sino-Forest’s operations in China to Bay Street analysts.

But soon after, the analyst tour was cancelled, and then Mr. Chan, who according to a document filed with regulators in China is a member of the Chinese Communist Party, went quiet.

On the last Friday in July, a reporter visited Sino-Forest’s executive offices on the 38th floor of the Sun Hung Kai Centre in Hong Kong’s Wanchai district and was told that Mr. Chan was “unavailable.”

Less than an hour later, the Sino-Forest chairman and CEO exited the elevator in the building’s lobby and strode quickly through the marbled foyer.

Half a world away in Toronto, a special committee of Sino-Forest directors was beginning to zero in on the man who helped start it all. At the same time, a group of Canadian investors who had watched helplessly as billions of dollars of shareholder value was wiped out was preparing to launch a class-action lawsuit seeking more than $7-billion from Mr. Chan and his associates. In less than a month, Canada’s top regulator would publicly accuse him of fraud.

But on that hazy Friday in Hong Kong, Mr. Chan seemed unconcerned. Dressed casually in navy slacks, a dark blue polo shirt and a multipocketed red vest, he stepped outside into the moist afternoon heat.

Waiting for him was an air-conditioned chauffeured black minivan. The vehicle, a 2009 Toyota, is registered to a company called Sino-Panel Gaoyao. It is one of more than 100 entities in the complex web of Sino-Forest subsidiaries that Mr. Chan helped engineer over the past two decades.

Mr. Chan climbed in the back seat, said something to the driver, and the automobile quickly sped away.

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