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Sino-Forest - the alleged ponzi scheme contributing to Paulson & Co's May and June losses

Thursday, June 16, 2011
Opalesque Industry Update – With a 35m share stake in China-based forestry company Sino-Forest, John Paulson has received a great deal of media attention over the past few days as the Sino-Forest shares have sank following a widely circulated research report released by short seller Muddy Waters that makes the case that Sino-Forest is no more than a multi-billion dollar Ponzi scheme. Paulson’s Advantage Plus fund is reportedly down 13% (for the month of June through 6/10) and Enhanced Partners fund is down 7% (Source), his Sino-Forest shares losses have been estimated at more than $500m since the stock began dropping in May.

Sino-Forest Corporation is a commercial forest plantation operator in the People’s Republic of China. The firm’s operations are comprised of two businesses, wood fibre operations (acquisition, cultivation and sale of timber, etc) and manufacturing (plywood, veneer, etc). In the company’s first quarter 2011 report released earlier this week, they indicated that revenue increased by 35% and EBITDA increased 34% compared to the first quarter of 2010. The company is based in Ontario and Hong Kong and is listed as TRE on the Toronto Stock Exchange.

Muddy Waters, a short seller that according to its website: “Muddy Waters Research sees through appearances to a Chinese company’s true worth. Our research director, Carson Block, is an entrepreneur who’s practiced law and pioneered an industry in China. Our team members are likewise veterans of China’s business trenches who similarly understand how business is really conducted in China. Through their successes and struggles, they’ve developed the knowledge and contacts to navigate China’s muddy waters.” The firm takes its name from an old Chinese proverb: Muddy waters make it easy to catch fish.

Amongst the charges it makes against Sino Forest are:

  • Like Madoff, TRE is one of the rare frauds that is committed by an established institution.
  • TRE, which was probably conceived as another short-lived Canadian listed resources pump and dump, was aggressively committing fraud since its RTO in 1995.

  • TRE massively exaggerates its assets.

  • TRE provides fraudulent data for reporting

  • TRE’s capital raising is a multi-billion dollar ponzi scheme and accompanied by substantial theft.

Since the release of the Muddy Waters Research report there have been multiple opposing opinions about the validity of their ponzi scheme claims. Sino Forest CFO David Horsley said during a conference call with reporters this week that he had spoken with people at Paulson & Co and that they were supportive and were giving input as to what needs to be addressed. The firm also indicated that it will take PriceWaterhouse Coopers up to three months to complete an internal review addressing the Muddy Waters charges.

The Ontario Securities Commission has also opened an investigation into the matter. In addition to the claim that Paulson & Co continues to support the firm, several analysts have also stood by their previous positive coverage of Sino-Forest including RBC Capital Markets.

Following a conference call held by Sino-Forest earlier this week, Muddy Waters released a statement refuting some of the claims the management team made on the call, including the fact that the internal review could be finished in three months.

The firm also noted the dropped calls and blocked questions including a question cut off when Nomura analyst Anissa Lee asked about details on where cash balances are kept. “Management also failed to attempt to answer a question about whether its banks are uncomfortable with extending credit. Instead of answering, there was a death ray type of sound toward the end of the question, and the questioner was no longer there. In true memory hole fashion, management moved onto the next questioner without making any statement in response to the question,“ commented the Muddy Waters team.

Supporting documents to the Muddy Waters charges may be downloaded here: Source


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