Sino-Forest Corp. , the embattled timber company facing fraud allegations, has failed to respond to requests by the Ontario Securities Commission for information about its assets and relationships with key business partners in China, according to a senior OSC investigator.
Wayne Vanderlaan, of the OSC's enforcement branch, said in a sworn affidavit that Sino-Forest has not replied to requests for information, made in a Dec. 7, 2011, letter, regarding claims that the company's "cash balances, timber assets, book values and revenues" were "verified" by an independent committee of directors.
Mr. Vanderlaan said the OSC letter asked the independent committee "a number of questions" about Sino-Forest's statement that the committee's review verified these assets, but the OSC has not received specific responses.
The affidavit underscores the major challenges investigators are facing as they seek definitive answers to the many questions around Sino-Forest – a company with an opaque and complicated business model, which operates in a country with poor government record keeping.
The OSC also sent a letter to the counsel for the independent committee on Dec. 22, requesting specific information on relationships between Sino-Forest, timber suppliers and brokers in China who sell Sino-Forest's trees, called authorized intermediaries or "AIs." More than a month later, the OSC still hasn't received responses to these questions, Mr. Vanderlaan said.
The OSC inquiries indicate the regulator is focusing its investigation on potential undisclosed related-party transactions by Sino-Forest, which was once the largest forestry company on the TSX. This week, the OSC extended a cease-trade order on Sino-Forest shares until April 16. In August, the commission alleged that several Sino-Forest executives, including company co-founder, chairman and chief executive officer Allen Chan, participated in fraudulent activity. Mr. Chan resigned as Sino-Forest chairman and CEO in August. The RCMP is now investigating potential criminal charges.
None of the allegations have been proved.
Mr. Vanderlaan's affidavit indicates that the OSC is concerned about the company's claims that the assets have been verified and has reservations about the veracity of the committee's investigation process. The affidavit highlights a "significant number of factors affecting this process" that were identified in the committee's interim report.
Released in mid-November, the redacted report indicated the committee encountered a slew of issues as it tried to unravel Sino-Forest's business. These included a lack of co-operation from executives, who dragged their feet for more than two months before providing basic information on the company's business partners. When the information was finally provided, some of it was incorrect. As well, these business partners refused to provide the committee with any documentation verifying transactions with Sino-Forest.
Sources close to Sino-Forest said the company and the committee continue to co-operate with the OSC investigation and is working to address the specific inquiries in the December letters. They said the inquiries were lengthy and extremely detailed, which is why a response has taken so long.
Sino-Forest's independent committee is expected to release its final report next week. The company's shares collapsed in June after a short seller issued a damning research report accusing the company of fraud. Sino-Forest has been unable to release its third-quarter financial statements and debt holders have seized effective control of the company as it tries to sell assets and avoid insolvency.