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Sino-Forest accuses OSC of approaching case from a Western ‘lens’

A lawyer for former Sino-Forest executives facing fraud allegations said the Ontario Securities Commission was applying North American business standards in reviewing his clients’ actions.

Adam Dean/The Globe and Mail

A lawyer for four former Sino-Forest Corp. executives facing fraud allegations from the Ontario Securities Commission says the regulator has been looking at the case through a "North American lens," mistaking everyday business practices in China for evidence of wrongdoing.

Markus Koehnen, a lawyer for former Sino-Forest executives, Albert Ip, Alfred Hung, George Ho and Simon Yeung, told the second day of an OSC hearing that his China-based clients fulfilled their duties as directors and did "not engage in any fraud."

The OSC hearing, which is expected to last into next year, is looking into fraud allegations around Sino-Forest, once worth as much as $6-billion on the Toronto Stock Exchange.

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In his opening statement, Mr. Koehnen said the OSC, reading internal company e-mails during its probe, had wrongly seized on discussions of "workarounds" for Chinese government rules or other business practices common in China.

The OSC alleges Sino-Forest had undisclosed control over some of its suppliers from whom it bought timber or land-use rights in China, and Mr. Koehnen said the OSC bases this allegation on e-mails showing Sino-Forest officials knew how much a supplier had itself paid for an asset.

But Mr. Koehnen told the panel these e-mails his were simply Sino-Forest's reaction to investigations it faced by China's foreign-exchange regulator, which was probing to ensure that foreign cash the company converted into Chinese currency was actually used as Sino-Forest said it would be. The company, he said, needed to ensure that its suppliers' records were accurate, or Sino-Forest could face steep fines or other penalties.

"Their suppliers were entrepreneurial businesses in rural China," Mr. Koehnen told the panel. "These are not Shanghai investment bankers."

He also told the panel about the Chinese concept of guanxi, or personal networks, which in Chinese business means doing deals with friends based on trust. While the OSC has singled out the company's alleged practice of "backdating" forestry contracts, Mr. Koehnen said Sino-Forest's representatives in rural China routinely made oral contracts with trusted suppliers – contracts later converted to paper with a standard template at Sino-Forest's offices.

Mr. Koehnen also specifically addressed the OSC's allegations aimed at Mr. Ho, a former Sino-Forest vice-president who was raised and educated in Canada. The OSC alleges that Mr. Ho controlled a bank account of a major Sino-Forest supplier in China, Yuda Wood, using this as evidence of undisclosed control of that company.

But Mr. Koehnen said Mr. Ho set up the account as a "business lever" over Yuda, to ensure that it kept up its side of its transactions with Sino-Forest, which often required local suppliers to help handle paperwork problems and deal with land disputes with local villagers.

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About the Author
Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. He spent six years as the law reporter in The Globe’s Report on Business, covering Bay Street law firms and writing about fraud, insider trading and corporate tax avoidance. More

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