Lost in the Woods


New York –Sino-Forest said this week that it will take two to three months for its internal review to be completed and to be able to address the allegations of fraud raised by short-seller Muddy Waters. A whole quarter of uncertainty does not seem to be appealing to investors, and the company’s shares are down more than 80% so far this year, according to Reuters.

As we reported last week, in early June short-seller Muddy Waters published a report accusing Chinese forestry company Sino-Forest of fraud by exaggerating the size of its assets. Just a few days after the report was published, Sino Forest’s shares were down 78%.

Although Sino-Forest denied Muddy Waters’ statements, it did not substantially tackle the accusations promptly – and has not done so yet because it has requested an official investigation and an internal review to clarify the allegations. Nevertheless, it took nearly two weeks after the Muddy Waters’ report was published for Sino-Forest to address investors in a conference call. Some investors see these delays and uncertainty as “reprehensible and inconceivable” behavior by the company.

In our previous report on the topic we mentioned that independent research providers and other analysts covering the company came out in its defense. These supporters include Dundee Capital Markets, New York Global Group and RBC. Nevertheless, Sino-Forest is rated BB-plus by Fitch Ratings – below investment grade. S&P has rated it lower at BB-minus. Moody’s has it rated at Ba2, same as S&P, but has put the rating on watch for possible downgrade.

And not all independents are supportive of Sino-Forest (or of Chinese companies for that matter). Citron Research, an independent research firm that also recommended shorting Chinese stocks, including Sino-Forest, published this sour comment on its blog today:

“If you haven’t yet figured out that there is rampant fraud amongst many Chinese stocks (mainly RTO’s), you obviously live in a “financial cave”.

Time Magazine’s blog The Curious Capitalist wrote: “This year a number of Chinese companies that have listed their shares on US exchanges in the past few years have been exposed as accounting frauds. Last week, shares of Sino-Forest fell 64% after a research report was released that said the Chinese forestry company was overstating its assets. Another company China Mediaexpress, which placed TVs on buses, was shown to have far fewer customers than it claimed.

Stock fraud and accounting fraud is nothing new. And we have plenty of home-grown frauds. Remember Enron. But so far this year, the vast majority of stock fraud seems to coming to American investors by way of China. In mid-May, 15 of the 19 stocks that were halted on the Nasdaq were shares of China-based companies. The shares of two other Chinese companies, including Longtop, have been halted since then. Lawyers and U.S. regulators say gaps in international regulations make it easier for Chinese companies that list their shares in America to falsify financial reports.”

It is yet to be seen who the new Enron is, and independent research providers covering China have a great opportunity here to support interested investors.



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