Sino-forest files for protection
Scandal-plagued timber firm SinoForest Corp. is blaming detractors as it files for bankruptcy protection and puts itself up for sale.
As a consequence of fraud accusations “a Chinese-canadian success story” has “ground to a halt,” the company stated in court filings on Friday. The company has $392 million in cash and remains viable but needs court-supervised restructuring to hold off creditors and provide “time and stability required to normalize operations following the al- legations made against the company by research firm Muddy Waters,” said Sino-forest CEO Judson Martin. “We believe the full value of our assets will only be achieved if we are able to continue operating the business, and repair and preserve relationships with our customers and suppliers,” Martin said.
Sino-forest is also seeking $4 billion and the recovery of profits from Muddy Waters and its research director Carson Block, citing “defamation and unlawful interference with economic activity” for last June’s report, which said Sino- Forest overstated its timber holdings. On the heels of such scathing accusations, the company’s stock plummeted, wiping out $3.5 billion in shareholder value. It also triggered investigations by the RCMP and Canadian and Hong Kong regulators, nine class-action lawsuits and was halted from trading on the Toronto Stock Exchange. Sino-forest said it has had difficulty obtaining credit and collecting debts and has had to divert resources from normal business to counter the report. If a suitable takeover offer doesn’t materialize, the com- pany wants to implement a restructuring plan that will see its lenders take control. In court documents, Sino-forest alleged Muddy Waters was guilty of fraud, suggesting the research firm had used its knowledge of Chinese business practices to concoct unfounded allegations to drive down Sino-forest’s share prices. They claim the company schemes to “secure a short position in Western-listed companies with substantial business interest in China” and then profits by issuing “sensational allegations of fraud, corruption and illegal activity.”
Sino-forest is also seeking redress from 100 unnamed hedge funds, investment funds and private investors whom they say knew the content of the Muddy Waters report before it was issued and subsequently sold long or bought short.
Queen’s University business professor Louis Gagnon doubts the suit’s merits. “Muddy Waters has done what financial analysts do, what hedge funds do: they’ve been basically trying to dig dirt, identifying opportunities to earn a profit by bring information to the marketplace,” he said.