Sino-Forest Bankrupt, May Sue Muddy WatersBy Byrne Hobart
| Yahoo! Finance – 2 hours 42 minutes ago
Controversial Chinese timber company Sino-Forest has filed for bankruptcy. The firm never recovered from a report from investment research firm Muddy Waters, alleging that the company had falsified financial statements and was engaged in a long-running Ponzi scheme.
Among the biggest losers: hedge fund manager John Paulson, whose eponymous hedge fund lost $107 million on the stock—and who could have lost far more, had he not sold his position in June, shortly after the first Muddy Waters report came to light.
Forbes listed some of the most damning allegations from Muddy Waters' report:
1. Sino-Forest uses informal leasing agreements with government forestry agencies rather than clearly defined legal arrangements based on legislative mandates.
2. Chinese regional forestry officials asked Sino-Forest to keep leasing and sales agreements confidential. If asked by third parties, they would deny having issued them in order to avoid sanctions for exceeding their authority.
3. Sino-Forest management introduced a person to auditors as the vice-chief of the forestry bureau of Hunan province, who was no longer in that position but was a paid consultant.
4. Sino-Forest runs its business through 58 holding companies incorporated in the British Virgin Islands. They are unwilling to release their financial records.
5. Auditors have been able to examine only 28 of the 267 bank accounts the company has in mainland China.
While the company's market value has plummeted from its $6 billion peak, not everyone lost money in the collapse—according to Bloomberg, company insiders sold $83 million worth of shares in recent years. Sino-Forest is not the first Chinese company to collapse after accusations of fraud, but it's among the most established companies to fall victim to dubious accounting: it was founded in 1994, and listed on the Toronto Stock Exchange since 1995.
Despite dismissing key executives and now declaring bankruptcy, Sino-Forest's management insists that Muddy Waters' report is false. They plan on suing Muddy Waters for $4 billion.