Sino-Forest shares plummet as it denies U.S. analyst allegations of fraud
By Craig Wong, The Canadian Press – 1 hour ago
Shares of Sino-Forest Corp. (TSX:TRE) fell almost 60 per cent in morning trading after the company denied allegations by a U.S. financial analyst that accused it of massive fraud.
The stock was down $8.46 or 59 per cent to $6 on the Toronto Stock Exchange at Friday midday as more than 17 million shares changed hands.
The drop followed a 20 per cent plunge Thursday after Muddy Waters Research published a scathing commentary accusing the company of wildly exaggerating its assets and fabricating sales transactions.
The company appointed an independent committee of directors Friday to investigate the allegations, however executives said they were confident the comments in the report would be disproven.
"It is important that our independent committee thoroughly address Muddy Waters' allegations, and they will have my full support and those of the management team in doing so," chairman and chief executive Allen Chan said in a statement.
"However, let me say clearly that the allegations contained in this report are inaccurate and unfounded."
The company's shares were halted Thursday following the Muddy Waters report, which among other things called Sino-Forest's efforts to raise capital "a multibillion-dollar ponzi scheme."
Sino-Forest noted that Muddy Waters held a short position in the company. A short position allows an investor to profit when a share falls in price.
"Muddy Waters' shock-jock approach is transparently self-interested and we look forward to providing our investors and other stakeholders with additional information to rebut these allegations," Chan said.
The company's independent committee includes the company's independent directors including chairman William Ardell. The group's mandate is to examine and review the allegations contained in Muddy Waters' report, and report back to the board. The company said the key findings of the investigation will be released to shareholders.
Shares in the company, which traded for more than $25 as recently as April, had been trending lower even before the Muddy Waters report.
On Friday, BMO Capital Markets analyst Stephen Atkinson lowered his rating on Sino-Forest to "market perform (speculative)" in light of the issues raised by Muddy Waters.
"At the analysts' presentation after the annual general meeting on May 31, 2011, proof of ownership (Forest Certificates) was requested but the chairman and CEO, Allan Chan, did not want to release this information for competitive reasons," Atkinson wrote in his report to clients.
"From Sino-Forest's perspective, the timberlands are valued by Jaako Poyry and the process monitored by Sino-Forest's auditor, Ernst and Young."
Atkinson said that BMO's target price for the stock was under review, pending a better understanding of Sino-Forest's timber holdings.
Muddy Waters placed an estimated value of less than $1 for Sino-Forest shares.
The largest shareholder in Sino-Forest is Paulson & Co. Inc. with a 14.13 per cent stake in the company, while Davis Selected Advisers LP holds a 12.58 per cent stake. Mackenzie Financial Corp. holds 6.95 per cent.
Earlier this week, Sino-Forest said some of its subsidiaries have struck deals to buy forests in Shaanxi and Yunnan provinces in China.
The company said its wholly-owned subsidiary Sino-Panel (China) Investments Ltd. has acquired up to 260,000 hectares of matured plantation forest. It can also lease the underlying land over a number of years.
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