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OSC has failed to prove Sino-Forest founder committed fraud: lawyer

Timber plantations owned by Sino-Forest are seen in Southern China in this 2011 file photo.

Adam Dean/The Globe and Mail

Sino-Forest Corp. founder Allen Chan may have made decisions that appear unusual because of different business practices in China, but he did not commit fraud at the failed forestry company, his lawyer told an Ontario Securities Commission hearing Tuesday.

"Odd is not fraud," lawyer Emily Cole said in closing remarks at the lengthy Sino-Forest hearing.

The OSC has accused Mr. Chan and four other Sino-Forest senior executives of fraud, alleging the Hong Kong-based management team misled investors by overstating Sino-Forest's revenue and assets between 2007 and 2010.

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Ms. Cole, however, argued Tuesday that the OSC has failed to prove its case against her client, noting the "avalanche" of documents tendered by commission lawyers do not prove the truth of what happened at the company, especially since most are written in Chinese and there is disagreement about their exact translation. Lengthy files of e-mails are little more than "hearsay evidence," she said, adding there is no proof of wrongdoing just because an e-mail is "suspicious."

She also said Mr. Chan has a sociology degree and is untrained in business and accounting, and was raised in Hong Kong with no experience doing business in North America. As a result, she said he leaned heavily on Canadian executives and board members who had intimate familiarity with the company's business decisions and made the key decisions about how Sino-Forest accounted for transactions and reported its financial statements.

Ms. Cole said Mr. Chan was entitled to rely on their accounting "sub-certifications" as the basis for his certifications of Sino-Forest's financial filings. She also argued it can't be assumed that Mr. Chan knew of wrongdoing just because another senior officer may have known it.

"It's not enough for [OSC] staff to point to Mr. Chan and say 'the buck stops here,'" she said. "That is not the law."

The long-running Sino-Forest hearing began in September, 2014, and is expected to continue into next week. OSC staff completed their closing remarks earlier Tuesday, allowing Ms. Cole to begin her closing comments. The hearing is also scheduled to hear closing remarks later this week from lawyer Markus Koehnen, who is representing all four of the other accused executives.

In addition to Mr. Chan, the accused in the case are former senior executives Albert Ip, Alfred Hung, George Ho and Simon Yeung.

Sino-Forest was once a $6-billion company trading on the Toronto Stock Exchange, but collapsed in 2011 after a short seller wrote a report questioning its accounting practices and calling the company a "Ponzi scheme." The case has been the largest fraud hearing for the OSC since the Bre-X Minerals Ltd. trial, covering almost 180 hearing days and generating over 22,000 pages of transcripts.

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In remarks last week, OSC lawyer Hugh Craig said Sino-Forest executives have been unable to produce maps or contracts proving the company's claims that it owned more than 500,000 hectares of standing timber assets in China through its British Virgin Islands (BVI) subsidiaries, which were valued at $2.5-billion (U.S.) at the end of 2010.

Mr. Craig said there was "very little evidence that Sino-Forest did real business" within the BVI model.

However, Ms. Cole said it is the OSC's responsibility to prove its fraud allegations and is not the legal responsibility of Mr. Chan or other executives to find documents proving the existence of the timber holdings. "The burden is on staff to prove its case," she said.

The OSC also accused Mr. Chan of failing to disclose his hidden ownership interest in Greenheart Resources, a company Sino-Forest acquired through a series of transactions.

Ms. Cole said Mr. Chan fulfilled his duties honestly "and did not conceal anything from the board" and was not the beneficial owner of the companies that sold Greenheart to Sino-Forest.

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