Sino-Forest Corp. , the TSX-listed Chinese forestry company whose shares have collapsed following fraud allegations, repeatedly misrepresented its financial statements, backdated stock options and engaged in unusual and undisclosed related-party transactions, according to fresh allegations levelled in a proposed class-action lawsuit seeking more than $7-billion in damages.
The notice of action, filed on behalf of a group of Sino-Forest shareholders who purchased shares in various offerings between 2007 and 2011, is seeking more than $6.5-billion in damages from Sino-Forest, its top management, directors, and auditors Ernst & Young LLP, as well as the Beijing office of Pöyry Consulting Co. Ltd., which published reports about the size and value of the company's forestry assets.
A host of investment banks – including TD Securities Inc., Dundee Securities Corp., RBC Dominion Securities Inc., Scotia Capital Inc. and CIBC World Markets Inc. among others – that underwrote Sino-Forest's equity offerings were also named as proposed defendants in the action, which seeks an additional $824-million related to the stock sales.
None of the allegations contained in the suit have been proven and the lawsuit has not yet been certified as a class action. An external Sino-Forest spokesman said the company had no comment on the matter and none of the other proposed defendants have yet had an opportunity to file documents in response.
The suit was delivered to the Ontario Superior Court of Justice on Tuesday, said Dimitri Lascaris, of Siskinds LLP in London, Ont., which filed the claim along with Koskie Minsky LLP in Toronto.
The lawsuit also accuses Sino-Forest, its former chairman and chief executive officer Allen Chan, co-founder K.K. Poon, and chief-financial officer David Horsley of participating in a conspiracy to defraud investors by overstating Sino-Forest's profits and assets, and seeks an additional $50-million in punitive damages from these defendants.
"The defendants profited handsomely from the market's resulting appetite for Sino's securities. Certain of the individual defendants sold Sino shares at lofty prices, and thereby reaped millions of dollars of gains. Sino's senior management also used Sino's illusory success to justify their lavish salaries, bonuses and other perks," the lawsuit says.
As well, the claim accuses Sino-Forest of backdating or mispricing stock options granted to Mr. Chan, Mr. Horsley and other insiders of the company.
Class-action lawfirms are rushing to file claims against Sino-Forest, once Canada's largest publicly listed forestry company, boasting a market value in excess of $6-billion. Fraud allegations levelled by short seller Carson Block and his firm, Muddy Waters, which were published in early June, precipitated a collapse in the company's shares from a peak of more than $25 to less than $5 each.
The company has denied the Muddy Waters allegations and set up a special committee of independent directors assisted by accounting firm PricewaterhouseCoopers to investigate.
Trading in Sino-Forest shares was halted last Friday by the Ontario Securities Commission, which accused Mr. Chan and other executives of fraudulent activity, engaging in related-party transactions and overstating some of the company's timber holdings. Mr. Chan stepped down as executive chairman and CEO on the weekend. Several other executives in China have been suspended or seen their duties curtailed.
The lawsuit claims that Sino-Forest overstated its revenue from its early days after being founded by Mr. Chan and Mr. Poon and going public in Canada by way of a reverse takeover of a dormant shell company (thus avoiding the scrutiny of an initial public offering).
The suit also claims that the company made "false" statements regarding sales from a joint venture with the Leizhou Forestry Bureau in Guangdong province "as Leizhou never generated such sales."
The claim also alleges that Sino-Forest made misleading statements about a company it had allegedly invested in and was doing business with called Shanghai Jin Xiang Timber Ltd (SJXT). The lawsuit claims that Sino-Forest's 1999 financial statements note a non-interest bearing loan of $796,000 (U.S.) made to SJXT, which was, according to previous statements made by the company, a related party, and therefore materially misleading and in violation of generally accepted accounting principals.
According to the claim, Sino-Forest's 1999 financial filings said a 264-per-cent increase in sales of lumber and wood products was "largely to the increase in new business generated from our investment in Shanghai Jin Xiang Timber Ltd."
However, beginning in 2001, despite its claims in previous annual reports of its "promising" and "very significant" investment in SJXT, any references to the investment "simply evaporated, without explanation, from Sino's disclosure documents," the lawsuit says.
The claim alleges that "in fact, and unbeknownst to the public, Sino never invested in a company called 'Shanghai Jin Xiang Timber Ltd.'"
The claim also alleges that Sino-Forest's plantation acquisitions in Jiangxi province are "far smaller than Sino has claimed," according to local forestry bureau officials.