Sino-Forest Corp. founder Allen Chan committed a "gross breach of trust" when he misled investors about the value of the company's business deals and revenues for years prior to its collapse, an Ontario Securities Commission lawyer said Monday.
The Sino-Forest case is entering its final phase as lawyers began closing arguments Monday, more than 19 months after the complex fraud hearing began before an OSC hearing panel in September, 2014. Closing remarks are scheduled to continue for 10 days, including four days scheduled for OSC staff to detail their case.
OSC lawyer Hugh Craig led off Monday, alleging that Sino-Forest founder and chief executive officer Allen Chan was responsible for decisions that led to fraud and false reporting of the company's financial statements and "abused the trust" placed in him by shareholders.
"Mr. Chan was the ultimate directing mind of the standing timber fraud," he said.
"This destroyed shareholder value. It was a gross breach of trust."
Mr. Craig said Sino-Forest's executives had years to find evidence to prove Sino-Forest owned more than 500,000 hectares of standing timber assets through its British Virgin Islands (BVI) companies, which generated the bulk of Sino-Forest's revenue and were valued at $2.5-billion (U.S.) at the end of 2010.
Yet they have been unable to produce maps pinpointing the assets or contracts showing clear proof of ownership, he argued.
An independent committee of Sino-Forest's board spent over $50-million (Canadian) investigating allegations of wrongdoing, he said, yet "couldn't find the trees" and nor could the company that took control of the BVI timber business after Sino-Forest's collapse, which later reported the value of the assets at zero.
"If you cannot find the trees, you can't prove existence let alone ownership and value," Mr. Craig said.
By the time the evidence portion of the OSC hearing wrapped up last December, Mr. Craig said "no clear or cogent evidence" had been produced at the hearing to show the existence of the standing timber held within the BVI companies, and said there was "very little evidence that Sino-Forest did real business" within the BVI model.
The OSC alleges five senior executives of Sino-Forest, all based in Hong Kong, committed fraud and materially misled investors by significantly overstating Sino-Forest's revenues and assets between 2007 and 2010.
The OSC also alleges that Mr. Chan failed to disclose his ownership interest in Greenheart Resources, a company Sino-Forest acquired through a series of transactions.
In addition to Mr. Chan, the accused in the case are former senior executives Albert Ip, Alfred Hung, George Ho and Simon Yeung. None attended the hearing Monday and are represented before the OSC by Canadian lawyers. Sino-Forest itself was also named in the case, but went into bankruptcy and wound up its operations, so opted not to present a defence in the case.
The Sino-Forest hearing, covering 173 hearing days and generating more than 22,000 pages of transcripts, has been the largest fraud case for the OSC since the Bre-X Minerals Ltd. trial ended almost a decade ago. The hearing panel, led by OSC commissioner James Carnwath, has heard from 22 witnesses and perused more than 2,050 exhibits in the case.
All of the accused except for Mr. Chan testified during the case, as did independent directors from Sino-Forest's board and other employees of the company in Canada and China.
Sino-Forest was once a $6-billion company trading on the Toronto Stock Exchange, but collapsed after a short seller wrote a damning report in 2011 questioning its accounting practices and calling Sino-Forest a "Ponzi scheme." Regulators began to investigate and halted trading in the company's stock.
In his final remarks, Mr. Craig said the accused did not do enough to assist Sino-Forest's independent committee in its efforts to find documentation to prove ownership of the forestry assets. He said Mr. Ip testified at the hearing that he was "bemused" when independent director William Ardell begged Mr. Ip to help him find documentation to prove ownership of the assets.
"One would think Mr. Ardell would not have to get down on his knees to ask a man to help prove those assets exist," Mr. Craig said.
Mr. Craig also urged the hearing panel not to accept arguments from Mr. Chan and other executives that they relied on inaccurate certifications from others lower down in the company when they certified Sino-Forest's financial filings.
He said Mr. Chan and other executives gave inaccurate information about transactions to others within the company, including Canadian-based chief financial officer David Horsley, so they were to blame for the inaccurate certifications by others.
"You can't certify disclosure when you know it's wrong, very simply," Mr. Craig said.