Sino-Forest execs blame Canada fraud charges on ‘cultural differences’
Monday, September 8, 2014 at 1:28PM
Richard L. Cassin in Albert Ip, Alfred CT Hung, Allen Chan, Canada, China, Emily Cole, George Ho, Hugh Craig, Muddy Waters, OOntario Securities Commission, Simon Yeung, Sino-Forest Corp

Lawyers for executives of collapsed Sino-Forest Corp., a China-based company that was once a high flyer on the Toronto Stock Exchange, said their clients never committed fraud but followed common business practices accepted in China.

But Ontario Securities Commission (OSC) lawyer Hugh Craig said in hearings last week, “It was a Canadian company. It raised money from Canadians in Canada. A culture of accountability must be recognized.”

Sino-Forest Corp. bought and sold standing timber in China. It raised about $3 billion from February 2003 until October 2010 through sales of equity and debt securities in Canada. At its peak the company had a market capitalization of $6 billion.

In June 2011, Hong Kong-based Muddy Waters published a report that described Sino-Forest as “a near total fraud."

The stock price collapsed, the Toronto Stock Exchange delisted Sino-Forest's shares, and the company filed for bankruptcy.

In May 2012, the OSC brought formal charges alleging that . . .

Sino-Forest and members of its overseas management engaged in numerous deceitful and dishonest courses of conduct connected with the purported purchase and sale of timber in the People’s Republic of China. . . . Sino-Forest provided grossly misleading disclosure to investors and that certain former executives attempted to mislead [the OSC] staff’s investigation.

Charged with fraud are ex-CEO Allen Chan and former senior executives Allen Chan, Albert Ip, Alfred C.T. Hung, George Ho, and Simon Yeung.

The OSC said the executives "engaged in a complex fraudulent scheme to inflate the assets and revenue of Sino-Forest and made materially misleading statements in Sino-Forest’s public disclosure record related to its primary business."

The case before the OSC is expected to last until next June.

Craig, the regulator's lawyer, said evidence will show that Sino-Forest backdated contracts, sold assets before it actually owned them, and created fake Chinese government documents, according to a report by the Star.

Craig said cash from sales by Sino-Forest was diverted and didn't always flow through the company's books. “Due to lies, no investor could make an informed decision,” he said. “Billions of dollars were lost.”

Emiily Cole, a lawyer for ex-CEO Allen Chan, said because Sino-Forest was a foreign company operating in China, it wasn't allowed to open bank accounts, accept money from customers, or exchange money freely, the Star said.

She said "it simply wasn’t possible for Sino-Forest to collect cash for sales, so off-book payments were the way to transfer money."

David Horsley, Sino-Forest's ex-CFO, reached a $5.6 million settlement in July with the OSC and shareholder and note holder plaintiffs. A D&O liability policy funded $5 million of the settlement and Horsley paid $600,000.

Ernst & Young resigned as auditors for the company in April 2012. In its charges, the OSC said the former outside auditors weren't aware of the fraudulent practices at the company.

The OCS said it plans to call as witnesses former CFO Horsley and other ex employees, Chan's administrative assistance who'll testify by video from Hong Kong, former EY auditors, and OSC staff investigators, the Star said.

Chan’s lawyer said nothing her client did caused or contributed to any investor losses.

It was the Muddy Waters' report that caused “immediate and catastrophic losses to investors,” Emily Cole said.

She said she intends to call as witness Dr. Randall Peerenboom, an American who has lived in China for more than 20 years, the Financial Post said.

She said he'll explain how business practices viewed as “surprising, if not shocking” to Canadian regulators were the only way to do business in China because of currency and banking restrictions.

“These events did not take place on Bay Street or even rural Ontario. The panel should not draw any conclusions about them as if they did,” Cole said.


Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.

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