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Former executive of collapsed Sino-Forest settles with OSC

Timber Plantations owned by Sino-Forest are seen in Tang Kong Village, near Gaoyao, Southern China on June 28, 2011.

ADAM DEAN/The Globe and Mail

Ontario's securities regulator has permanently banned a former executive of Sino-Forest Corp. from being a public company officer or corporate director, among other penalties – a shred of resolution as the fallen forestry giant still faces allegations of fraud.

The Ontario Securities Commission approved a settlement deal with David Horsley, the former chief financial officer of Sino-Forest, ordering him to pay a $700,000 fine to the OSC, which comes alongside a promise to pay $5.6-million to Sino-Forest investors as part of an upcoming class-action settlement.

OSC lawyer Hugh Craig said there were several breaches of Ontario securities law that Mr. Horsley agreed to, which represented a "significant settlement and significant admission."

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Mr. Horsley admitted that his lack of knowledge of Sino-Forest's business, absence of due diligence and dependence on the company's management in China – including Sino-Forest CEO Allen Chan – allowed the company to make "materially misleading disclosures" to investors.

As CFO of Sino-Forest, Mr. Horsley was responsible for certifying annual and interim filings that were presented fairly, without misrepresentations.

Mr. Horsley acknowledged that he didn't meet these requirements, and that he provided "incorrect or untrue" information in a letter to corporate finance staff in 2008.

"He simply did not do his job," said Mr. Craig. "He did not familiarize himself with the business environment Sino-Forest was operating in. He was not a veteran of the forestry industry, and certainly not a veteran of overseas operations," he said.

Mr. Horsley attended the hearing, but did not speak. Peter Wardle, a lawyer for Mr. Horsley, declined to comment on behalf of his client.

During the proceedings Mr. Wardle emphasized that Mr. Horsley's "sins" were "of omission rather than commission" because OSC staff found no evidence that Mr. Horsley's conduct was dishonest, reckless or willfully blind.

Still, OSC vice-chair James Turner, who oversaw the hearing, said a CFO is an "important gate keeper in ensuring the integrity of reporting in the financial markets" and that Mr. Horsley "substantially failed" investors and capital markets in that role.

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The settlement is particularly significant because it comes less than three months ahead of a larger OSC hearing that involves other Sino-Forest executives and the company itself. Those proceedings will dig deeper into the OSC's allegations that investors and auditors were misled about the company's timber holdings in China.

Mr. Horsley agreed to co-operate with the OSC and testify as a witness at that hearing.

Sino-Forest was once the largest forestry company listed in Toronto with a $6-billion market capitalization, although all of its assets were in China. The company's stock plummeted in 2011 after a report from short-seller Muddy Waters LLC made allegations about the company's business practices, calling Sino-Forest a "ponzi scheme." Securities regulators then began investigating.

The OSC alleged in mid-2012 that Sino-Forest and some of its executives were involved in a "complex fraudulent scheme to inflate the assets and revenue of Sino-Forest." Sino-Forest and its executives have denied the allegations, which have not been proved.

Mr. Horsley was not facing fraud allegations and was not found to be aware of or involved in any of the fraud alleged against Sino-Forest and its other management.

He tried to resign in 2011 before the report was released, but withdrew his resignation at the board's request.

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The settlement with Mr. Horsley is intended to serve as a warning to other CFOs working in unfamiliar business environments that they need to have "heightened vigilance," Mr. Craig said.

"It is no answer to this Commission to say 'Well, that's the way things are done over there," Mr. Craig said.

"Although the operations may be 'over there' they are regulated here, under the Ontario Securities Act."

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More


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