Sino-Forest Corp.'s largest shareholder, the investment firm headed by billionaire U.S. hedge fund manager John Paulson, has bailed out, selling its entire position in the embattled forestry company.
Mr. Paulson and his firm, Paulson & Co., best known for prescient calls on the global financial crisis and the price of gold, controlled 14 per cent of Sino-Forest's stock or about 34.7 million shares until recently. Paulson & Co. sold all of those shares by last Friday, according to a filing late yesterday with Canadian securities regulators.
"Due to the uncertainty over Sino-Forest's public disclosures and financial statements, we have sold our stock and await the results of the independent committee's investigation," the firm said in a statement released through a public relations agency.
Sino-Forest shares have plunged 85 per cent since fraud allegations were levelled against it by short seller Carson Block and his firm, Muddy Waters LLC on June 2.
Sino-Forest executives had claimed that Mr. Paulson remained supportive of the company as it sought to beat back Muddy Waters' allegations. "We are certainly in conversation with him and others to talk about what is going on and things that we need to be doing and the alternatives that the company could undertake to respond to some of these allegations. It has been friendly, supportive and suggestive discussions," Sino-Forest chief financial officer David Horsley said in a June 7 interview with The Globe and Mail.
The disclosure of Mr. Paulson's exit came on the same day the company released a lengthy statement to address a Globe investigation that was published Saturday. That investigation, which was based on discussions with Chinese forestry officials and a major Sino-Forest business partner, raised questions about the company's holdings in Yunnan province.
Sino-Forest says it owns about 230,000 hectares of timber in the province. But in an interview with The Globe, Xie Hongting, the chairman of Gengma Forestry, the company through which Sino-Forest said it had acquired the trees, gave a much lower figure. He said transactions carried out by Sino-Forest amounted to less than 14,000 hectares.
In response, Sino-Forest released a statement before markets opened Monday arguing that the article is an "incorrect portrayal of its business" and "reflects some factual misunderstandings regarding the company's ownership of trees in Yunnan."
In its statement, Sino-Forest said the answer given by Mr. Xie to The Globe did not give a complete picture of the transactions. The company said it has bought nearly 25,000 hectares of timber from Gengma and another 205,500 hectares from other parties, using Gengma as a purchasing agent on the transactions.
"This breakdown is completely consistent with the company's public disclosure of its total acquisitions of standing timber hectares in Yunnan province in its first quarter [regulatory filings]" Sino-Forest said.
The disclosure is not consistent with figures that Sino-Forest provided The Globe on Friday, before the article's publication. In an e-mail response to questions that day, Sino-Forest said it had acquired 13,333 hectares of timber "directly from and owned by" Gengma and another 180,000 hectares from other sellers, using Gengma as a purchasing agent.
On Monday, The Globe asked Sino-Forest to clarify these conflicting accounts, but the company declined to comment.
Investors will have to wait as long as three months before they get answers from an independent audit committee that was created in the wake of the Muddy Waters report. The committee has hired accounting firm PricewaterhouseCoopers to look through the necessary documents.
In the meantime, some Bay Street analysts are clearing the field. On Monday, Dundee Securities analyst Richard Kelertas, who had previously hosted a conference call during which he criticized the Muddy Waters report, suspended coverage of the stock until after the independent committee issues its report.
"Dundee has temporarily suspended research coverage of Sino-Forest owing to the current lack of what Dundee considers reliable independent information upon which to base its evaluation," the firm said in a statement.
Tim Kiladze