OSC faces document quagmire in Sino-Forest investigation
Ontario’s securities watchdog is digging into alleged fraud at Sino-Forest Corp. (TRE-T4.81—-%), but is finding it no easy task.
Lawyers at the Ontario Securities Commission revealed Thursday that its investigators are sifting through “tens of thousands” of documents related to the Chinese forestry company, most of which are in both traditional and modern Chinese,longchamp outlet
and will need to interview hundreds of people, many of whom will need a translator.
The OSC also said that Sino-Forest does not have a centralized e-mail system, meaning that electronic documents cannot be accessed with ease. Investigators must track down these files in different Sino-Forest offices across China.
The disclosures, which were made at a commission hearing into the case on Thursday, underscore the difficulties that face regulators and the company’s board of directors as they try to find out the truth about what was once Canada’s largest publicly traded forestry company.
Sino-Forest owns, manages and sells forestland in mainland China and once had a stock market value of more than $6-billion. But the company has been under intense pressure since early June, when an analyst called the company a “multibillion-dollar Ponzi scheme” that was engaged in “substantial theft.”
Last month, the OSC halted trading in the shares, citing evidence of fraud. The regulator said the company may have misrepresented some of its revenue and exaggerated some of its timber holdings, but declined to provide specifics.
At Thursday’s hearing, the commission extended the trading halt until Jan. 25, 2012, to give its team – and the company’s board – time to thoroughly research the Sino-Forest’s operations. Investors who are both long and short the stock must now wait it out until at least then, and no one is sure if the stock will ever trade again.
While the extended trading halt is rare for Canada, it isn’t unheard of. At least five other Chinese-based firms that trade here are currently halted by regulators because they are under investigation. Examples include Xianburg Data Systems Canada Corp., United China International Enterprises Group Ltd. and Cathay Forest Products Corp.
“We have strong concerns with the integrity and reliability of the issuer’s financial statements,” OSC lawyer Karen Manarin said during the hearing. OSC rules require a public hearing to be held within 15 days of issuing a temporary cease-trade order. The initial halt was issued on Aug. 21.
The OSC is also looking to protect investors with its halt. “There is not enough information in the market to allow investors to make an informed decision,” Ms. Manarin said.
Although the extension was requested by the regulator, Sino-Forest agreed with the request. Rob Staley, the company’s lawyer, said the company supported the extension because the company’s own internal independent investigation would be jeopardized if the OSC released more details about evidence it has gathered.
Mr. Staley also said the internal investigation has taken more time than initially thought because it is “a complex process” involving evidence in Canada, Hong Kong and mainland China. Although the fact-finding mission was initially supposed to have wrapped up by the end of September, it has now been extended until at least the end of 2011. The trading halt has been extended for almost a month afterward to give the OSC time to consider the committee’s work.
The OSC’s move has been controversial to some investors because even the short sellers who predicted a lower stock price can’t get their money out. But the commission has a mandate to protect investors, and does not want people trading on speculation.
“It is unusual to cease trade an entire company’s stock because it does affect the entire investor base and nobody can trade,” said Kelley McKinnon, a partner at Gowlings and the former deputy director of enforcement and chief litigation counsel for the OSC. “But the OSC is saying, ‘On balance, the greater public good is to stop the trading.’?”
The OSC refused to offer up any more information Thursday about the evidence it has gathered. “Disclosure will impede the investigation,” Ms. Manarin said.
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