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After eight months and more than $35-million, the mystery of Sino-Forest Corp. is no closer to being solved.

An independent committee investigating fraud allegations at the TSX-listed company has failed to provide definitive answers regarding the timber firm's assets and relationships with key business partners.

In a report released early Wednesday the committee conceded that after spending millions of dollars over several months it could not unravel the complex web of Sino-Forest's dealings with its timber suppliers, nor could it get to the bottom of the company's relationships with the brokers who sell its trees to customers in mainland China.

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The inconclusive report raises fresh questions as to how the embattled company will be able to release its financial results or recover from a devastating scandal that has rocked what was once Canada's largest publicly traded forestry firm.

The task of deciphering Sino-Forest's convoluted business practices now rests with Canadian authorities, including the RCMP and the Ontario Securities Commission. Both agencies will be hard pressed to determine the true nature of the company's business considering that its assets and the bulk of its executives are in China.

The report identified at least two transactions conducted with suppliers that were controlled by Sino-Forest employees. It appears that these deals were not reported to the company's board nor were they disclosed publicly as related-party transactions. The committee said it was unable to reach "definitive conclusions" about certain relationships with other Sino-Forest suppliers and brokers.

Hindered by unco-operative management, reticent third-parties and missing and incomplete corporate records and documentation, the committee said it had terminated the internal investigation despite the fact that "there remain outstanding issues that have not been fully answered."

The report deals a critical blow to Sino-Forest investors and management, which have been defending the Toronto-based and Hong Kong-headquartered company against fraud allegations made by short-seller Carson Block and his firm Muddy Waters LLC since June. It also raises questions as to how the beleaguered company will be able to release its long-delayed third quarter financial report.

There remains a slew of unanswered questions about potential related-party transactions and the validity of the company's previously reported revenues and it is unclear how Sino-Forest's auditor Ernst & Young or its audit committee will be able to sign-off on the timber firm's financials.

"I think they are in a massive quandary at the moment," said Dimitri Lascaris, a lawyer with Siskinds LLP, one of two law firms leading a proposed class action suit in Ontario against Sino-Forest and its advisers.

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"They have to be satisfied that they can substantiate the claim that the reported revenues of the company are and have been in compliance with GAAP [Generally Accepted Accounting Principles] There appears to be a woeful absence of evidence to support those representations," Mr. Lascaris said.

Sino-Forest's failure to release financials has breached covenants on the company's $1.8-billion in outstanding debt. Bondholders have seized effective control of Sino-Forest's major corporate decision-making in exchange for not tipping it into bankruptcy.

The head of the independent committee, Sino-Forest chairman William Ardell, will now shift focus to leading a restructuring committee which must submit a plan to raise capital to the bondholders by March 31. Sino-Forest, which had less than $600-million in cash in November, has said it is considering selling assets or the entire company.

However, it is also unclear how Sino-Forest can sell timber assets without an independent verification of their value. The independent committee's report said a third-party consulting firm has, so far, verified just 150 hectares of forest assets in China's Yunnan province. Sino-Forest has said it controls more than 800,000 hectares of timber.

"It does not seem like the report has addressed the issues and can restore investors' confidence," Annisa Lee, a credit analyst at Nomura Holding Inc. in Hong Kong told Bloomberg News. The appraisal of the assets is "key for bondholders to asses the evaluation of the company and to determine whether the company could sell assets and raise cash," Ms. Lee added.

Once boasting a market value of more than $6-billion, Sino-Forest's shares collapsed in June and have been halted by the OSC since August. The regulator accuses Sino-Forest executives, including co-founder and former chief executive officer and chairman Allen Chan, of participating in fraudulent activity.

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"It's a complex case and our investigation continues," Tom Atkinson, the OSC's director of enforcement, said in a statement.

Sino-Forest said it has now responded to questions posed by the OSC in a December 7 letter and is working on responding to further inquiries made by the regulator on December 22.

If it receives help from Chinese authorities, the RCMP may have the best chance of unravelling Sino-Forest's convoluted business practices. The police force has the ability to investigate individuals in international jurisdictions if it believes crimes have been committed in Canada.

Neither Judson Martin, Sino-Forest's Canadian CEO, nor its chairman, Mr. Ardell, would comment on the report.

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About the Author
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

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