It was once Canada's largest publicly traded forestry firm, but less than a year after Sino-Forest Corp. was first rocked by fraud allegations, the company is insolvent and has been forced to seek bankruptcy protection from creditors and put itself up for sale.
In a Toronto courtroom Friday, Sino-Forest secured temporary shielding from holders of more than $1.8-billion in corporate debt, giving breathing room to executives trying to find a buyer for the scandal-plagued company's assets.
The court order, issued under the Companies' Creditors Arrangement Act, heralds the dismantling of a one-time Canadian stock market darling which promised investors a way to cash in on China's rocketing economic growth by way of a booming domestic forestry business. Just a year ago, it boasted a market value of more than $6-billion.
Now, Sino-Forest's business is in tatters, according to an affidavit sworn by chief executive officer Judson Martin. Mr. Martin, a Canadian, took over the top executive job at Sino-Forest last August after co-founder, former chairman and CEO Allen Chan, resigned following allegations of fraud levelled against him and other Sino-Forest executives by the Ontario Securities Commission.
The RCMP and the Hong Kong Securities and Futures Commission are also investigating fraud allegations first raised by short-seller Carson Block and his firm. Muddy Waters LLC, last June.
"Sino-Forest's timber and trading businesses have effectively been frozen and have ground to a halt," Mr. Martin said in the affidavit that confirmed the company is now insolvent.
The former Brascan executive said Sino-Forest is having difficulty obtaining credit from banks and lenders in China and while "generally supportive," the Chinese government has expressed concern "as to the future of Sino-Forest in [China]" Sino-Forest is also having trouble collecting accounts receivable and is facing increasing demands to pay its bills, the affidavit states.
In court Friday, Sino-Forest lawyer Robert Staley said the company has faced alleged "threats of violence" from creditors in China. "Some of the niceties that apply here don't apply there," he added.
"This is a company that right now is frozen. It is a company in distress. And it needs to proceed with this process as soon as possible," Mr. Staley told the court.
Ahead of the CCAA filing, Sino-Forest secured a support agreement with holders of 40 per cent of its outstanding debt securities, which it said will allow it to conduct a process to sell its assets for a minimum of $1.8-billion. Other debt-holders have been invited to sign on to the agreement.
Under the proposed sale process, Sino-Forest will seek letters of intent from prospective buyers for 90 days, and then will have another 90 days to finalize a deal. If no buyer is found, then its assets would be transferred to the company's note holders.
Separately, Sino-Forest filed a lawsuit seeking $4-billion in damages from Mr. Block, Muddy Waters and a group of unnamed hedge funds and investors. The suit alleges that Mr. Block and Muddy Waters built up a short position in Sino-Forest shares before unproven allegations that Sino-Forest was a "Ponzi-scheme," and "near-total fraud," in a report published on June 2. The suit, filed in the Ontario Superior Court of Justice, alleges the hedge funds and investors saw or were made aware of the Muddy Waters report before it was published and traded on that information.
After the Muddy Waters report, an internal investigation headed by a group of Sino-Forest directors spent more than seven months and $50-million trying to unravel Sino-Forest's business operations in mainland China.
While it was able to confirm the company's cash balances, the committee was unable to get to the bottom of relationships between Sino-Forest and its suppliers and the brokers who sell timber to customers. The committee found evidence of unusual and potentially inappropriate links between Sino-Forest employees, former employees and its business partners. But it said it did not find evidence the company was the "near total fraud" or massive "Ponzi scheme" that Muddy Waters claimed it was.
In his affidavit, Mr. Martin said the committee identified about 60 documents in mid-August, "some of which raised potential conduct issues and others of which raised questions as to whether Sino-Forest's relationships with some of its suppliers and [brokers]were conducted at arm's length."
The affidavit said the documents were turned over the OSC, which soon halted trading in the stock and levelled fraud allegations against Mr. Chan and other executives.
Jeff Gray