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Staff are seen at the Sino-Forest and Sino-Panel China headquarters in Guangzhou, Southern China on June 29, 2011. (Adam Dean For The Globe and Mail)
Staff are seen at the Sino-Forest and Sino-Panel China headquarters in Guangzhou, Southern China on June 29, 2011. (Adam Dean For The Globe and Mail)

Sino-Forest report raises new questions Add to ...

Sino-Forest Corp.’s search for answers has become tangled in the complex web woven by the company’s own executives.

A months-long investigation by a committee of Sino-Forest Corp. directors has concluded the company has rights to the vast tracts of Chinese forestland it claimed, but also uncovered a raft of evidence of suspicious activity at what was once Canada’s biggest publicly-traded forestry company.

The 111-page report includes suggestions that Sino-Forest employees falsified records and created unusually close relationships with suppliers and customer intermediaries that include, in at least one case, sharing access to bank accounts. But it also purports to refute some of the key allegations made by short seller Carson Block and his firm Muddy Waters LLC – accusations that caused the stock price to plunge, wiping out billions of dollars in shareholder wealth, and touched off investigations by the Ontario Securities Commission and the RCMP.

Mr. Block alleged that Sino-Forest executives had engineered a massive Ponzi scheme, overstated both its revenue and its timber assets on a grand scale in order to raise billions from investors, many of them Canadian.

In response, the company launched an internal probe, which led in August to the resignation of chief executive officer Allen Chan. Three other senior executives were placed on administrative leave.

The new CEO, Canadian businessman Judson Martin, said Tuesday that the interim report proves Mr. Block wrong. “My takeaway on this is that this is not a fraudulent company – full-stop,” he said. “Muddy Waters had very strong allegations – fraud, dishonesty, thievery – and I believe this very importantly brings that to a close.”

But the report, parts of which were redacted, also illustrated the murkiness and convoluted nature of its dealings in China, and underscored that there may never be definitive answers to some of the questions that still swirl around the company.

For example, the independent committee of the board said it’s satisfied the company has the rights to about 800,000 hectares of trees, as it has said.

But the total forestry holdings were confirmed through purchase contracts and other means, rather than “plantation rights certificates” that would establish legal rights.

The committee revealed that the absence of these certificates is a major concern for the OSC. “The OSC expressed grave concerns as to such absence and surmised in its discussions with the [independent committee]that such absence is per se evidence of fraud,” the report said.

Even if the land rights are ultimately verified, the independent committee has made little progress in investigating Sino-Forest’s network of brokers, also known as authorized intermediaries (AIs), which sell the company’s timber holdings to customers.

The committee met with a number of these brokers over the course of a month, but “the interviewees declined to show any evidence of financial transactions,” leaving the committee to admit that is it “unable to compel the AIs and suppliers to co-operate or to produce documents.”

Verifying transactions that have been conducted through the authorized intermediaries is crucial to the investigation because these entities are Sino-Forest’s selling agents. While the committee believes Sino-Forest owns the rights to its timber, no one has been able to verify the prices at which this timber has been sold, nor has anyone produced an independent valuation of the assets.

The committee acknowledged that such a valuation is necessary, and is in the process of hiring an independent firm to do the work.

The independent committee said a “whistleblower” e-mail discovered by Sino-Forest’s Canadian legal firm Bennett Jones alleges a Sino-Forest employee and two agents of the company “engaged in improper activities,” including “transactions potentially not in the best interests of Sino-Forest shareholders; personal profit; bribery of government officials; and falsifying company records.” The committee’s advisers said management’s response to the allegations has been “insufficient,” according to the report.

In at least two cases, the committee’s advisers identified forestry bureau officials who were either “concurrently or subsequently employees of, or consultants to, Sino-Forest.” In Hunan province, the committee’s advisers learned that a vice-chief of the forestry bureau drew a basic salary from the bureau in addition to a monthly payment of 15,000 yuan ($2,411 Canadian) from Sino-Forest for his work as a “consultant.”

The IC also found that in some cases, forestry bureau confirmations of Sino-Forest’s timber holdings were prepared by the company itself using “notional forestry bureau letterhead on which a forestry bureau chop [official seal]was then obtained.” There were also indications that “gifts or cash payments are made to forestry bureaus and forestry bureau officials,” the report said.

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