The Ontario Securities Commission (OSC) ruled on Friday that China-based timber company Sino-Forest Corp., which was formerly listed on the Toronto Stock Exchange (TSX), engaged in fraud.
The OSC’s almost 300-page ruling upholds almost all of the regulator’s allegations against Sino-Forest and several top executives, including the company’s co-founder, chairman and CEO, Allen Chan.
OSC staff alleged that the firm and its executives perpetrated one of the largest corporate frauds in Canadian history. Specifically, the regulator alleged that the firm fraudulently overstated its timber assets and revenue and made materially misleading statements in its public disclosure. It also accused Chan of fraud in connection with Sino-Forest’s purchase of a controlling interest in another forestry company and it alleged that the five executives misled OSC investigators.
The OSC concludes in the decision that Sino-Forest, Chan, and three other executives did overstate the company’s assets and revenue, violating securities laws; that the company made misleading statements in its financials; that Chan deceived Sino-Forest investors when it acquired a stake in another company without revealing his financial interest in the transaction; that it made false statements in its financial disclosure regarding the transaction; and, finally, that all five of the executives misled OSC staff during its investigation.
The decision doesn’t impose any sanctions on the company or its executives. Any penalties, or other sanctions, will be the subject of a future hearing.
Sino-forest was initially listed on the TSX via a reverse takeover and raised approximately US$3 billion from investors in debt and equity between 2003 and 2010. By March 31, 2011, it had a market cap of more than $6 billion until the stock began plunging after short seller, Muddy Waters, LLC, issued a report alleging that the company was a “near total fraud.” This prompted the OSC’s investigation.
Sino-Forest was ultimately delisted from the exchange in 2012 and entered bankruptcy in 2013.
In 2014, the OSC settled with the company’s former chief financial officer (CFO), David Horsley, who admitted to relying too heavily on representations made by Sino-Forest’s overseas management, which prevented him from fulfilling his duties as CFO and led to securities law violations. He was permanently banned from acting as a director or officer of a reporting issuer and was required to pay $700,000 toward the cost of the investigation.
The OSC also entered a no-contest settlement with Sino-Forest’s former auditors Ernst & Young LLP (E&Y) in 2014 in connection with its auditing of the company and another China-based firm. E&Y settled the case without admitting or denying the allegations and agreed to pay $8 million to the OSC.
The episode also caused regulators and the exchange to re-examine the risks and challenges of listing, auditing, and overseeing foreign issuers, particularly companies based in emerging markets.
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