Sino-Forest investors file class action suit, allege misrepresentation

By Caroline Salls

Pittsburgh, Feb. 1 - Sino-Forest Corp. said a class action lawsuit has been filed against it and other defendants on behalf of purchasers of Sino-Forest shares on the Over-the-Counter market and on behalf of non-Canadian purchasers of Sino-Forest debt securities.

The company said the amount of damages sought is not specified in the complaint.

"In stark contrast to the investing public's perception of an enormously successful forestry business in the fast growing PRC market, Sino-Forest was, in fact, materially misleading both investors and regulators," the plaintiffs said in the lawsuit filed on Jan. 27 in the Supreme Court of the State of New York, County of New York.

"Sino-Forest's assets, revenues and income were all materially overstated," the plaintiffs said in the filing.

In addition, the purchasers said the company's financial statements and other disclosures were misleading because they failed to disclose that many of Sino-Forest's significant business transactions were with unknown or related parties.

The plaintiffs said Sino-Forest also allegedly misrepresented and failed to disclose the true terms of agreements it had entered into in the PRC for the acquisition of plantation acreage by vastly overstating the amount of timber it had acquired during the period in question.

"In many instances, no documentation or inadequate documentation existed to support Sino-Forest's timber holdings and related assets and the valuations attributed to those properties on Sino-Forest's financial statements," the lawsuit said.

"Sino-Forest failed to disclose that the company lacked adequate internal controls to substantiate its financial performance or verify its assets and contractual relationships; that its operations were permeated by unsubstantiated and undisclosed related party transactions; and that its financial statements were misleading and not prepared in accordance with the applicable accounting standards."

The plaintiffs said information regarding Sino-Forest's alleged fraud first came to light in June 2011 when Muddy Waters, LLC published a detailed report alleging improper and illegal conduct at the company.

Trading prices sink

According to the lawsuit, disclosures related to the defendants' misconduct caused the trading prices of Sino-Forest's stock and its debt securities to decline dramatically.

Specifically, the investors said, the common stock, which had traded as high as $26.64, last traded at $1.38 before trading was halted in the United States. The plaintiffs said the company's debt securities "are now priced at a fraction of their original value."

The plaintiffs said individual defendants named in the lawsuit earned millions of dollars in compensation because of Sino-Forest's artificially inflated stock price, and their misleading portrayal of the company's finances allowed Sino-Forest to raise billions of dollars by issuing debt and equity securities to investors.

"This was critical to the company's survival since the company had a negative cash flow - it was spending more money than it was taking in - yet was spending enormous sums purportedly to purchase new assets," the complaint said.

"Sino-Forest's inflated stock price also allowed it to use its shares as currency to acquire other companies and assets."

The investors said the company was only able to complete a $600 million notes offering in October 2010 because of the concealment of Sino-Forest's true financial condition.

Committee report

In addition, Sino-Forest released the final report of an independent committee of its board of directors.

The independent committee was established in June 2011 in response to allegations made in the report issued by Muddy Waters.

Although there are outstanding issues that have not been fully answered, the committee said it released the report in light of a contractual commitment to noteholders that the report be delivered to the board by Jan. 31 and because the committee has concluded that its work "is now at the point of diminishing returns."

According to a news release, the independent committee will cease its investigative and oversight activities. Any issues that remain outstanding will be referred to an audit committee or special restructuring committee.

The committee reported that it was not able to reach definitive conclusions regarding relationship issues.

The independent committee also said a forestry area verification exercise was successful, and forestry consultants' duties will now expand to include a verification and validation process of the key components that underpin the company's forest value.

According to the report, this exercise will involve a highly structured process that will over time systematically assess the area of forest cover and merchantable volume across the Sino-Forest estate.

The company said it has hired Stewart Murray to help it compile a full forest description and implement a forest asset valuation framework.

Toronto-based Sino-Forest is a commercial forest plantation operator in China.

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