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Questions linger as panel winds up Sino-Forest probe


HONG KONG (Reuters)—A final report into fraud allegations at Sino-Forest Corp. left many questions unanswered, with scant new detail on the value of its timber holdings or its opaque ties with suppliers.

The report by an internal committee, released late on Tuesday, is unlikely to pacify investors, who have been clamoring for answers since June, when short-seller Carson Block and his Muddy Waters firm likened the Canadian-listed Sino-Forest to a "Ponzi scheme" and accused it of inflating the size of its Chinese forestry assets.

Regulators and law enforcement officials are investigating the company, which denies the allegations. Sino-Forest said in November that preliminary evidence from its internal probe had found no evidence of fraud.

In its final report, the committee admitted it has failed to answer all the questions on the company's business practices in China, including ones about related-party transactions and the valuation of its forestry holdings.

"I don't think the report addresses most of the issues highlighted in the last one and restores investors' confidence, it looks like it's just trying to meet the deadline," said Annisa Lee, Asia credit analyst at Nomura in Hong Kong.

"The valuation of the assets has not been done, which is one of the key things because this is crucial to determine the valuation of the company."

Sino-Forest shares fell more than 70% in the two days after the Muddy Waters report, and trade in the stock was halted in August. Canada's top securities regulator recently extended the cease trade order to April 16.

In a highly technical 13-page report, the panel of lawyers and auditors said it had not been able to assess whether Sino-Forest had a proper "arm's length" relationship with the owners of land on which it had contractual rights over the timber and businesses to whom it sold its wood.

"There remain issues which have not been fully answered," the report said. The probe was "at the point of diminishing returns, because much of the information which it is seeking lies with non-compellable third parties, may not exist or is apparently not retrievable from the records of the company".

Nomura's Mr. Lee said the report had not addressed the very close relationship between the company and its suppliers and customers, a key allegation from Muddy Waters.

"Without doing this, I don't think investors will have the confidence to conclude that there were no related-party transactions," he said.

Sino-Forest was founded in the 1990s by Hong Kong entrepreneur Allen Chan and listed in Toronto through a reverse takeover of a dormant Canadian firm, a practice since criticized as a way to circumvent the more rigorous regulatory standards of a new share offering.

It is the most prominent of the Chinese companies listed in North America whose shares were suspended or delisted last year amid suspicions about their business practices and Chinese regulatory safeguards.

The firm had agreed with its debt holders it would make its final report by Jan. 31.


Sino-Forest's bondholders have had greater influence over the company since earlier this month, when they agreed not to force it into default following a covenant breach related to its failure to release third-quarter results.

Sino-Forest also said it intended to vigorously defend a class action lawsuit brought against it in the United States.

The class action, filed in New York state on Friday, was brought on behalf of investors who bought Sino-Forest shares on the over-the-counter market and non-Canadian buyers of Sino-Forest debt securities It targets current and former management, along with auditor Ernst & Young and underwriters Banc of America and Credit Suisse.

The company is already facing a possible class action lawsuit in Canada.

The panel looked at two of Sino-Forest's Chinese forestry concessions in a sampling exercise and found the company's statements of its assets to be accurate to within 6%. But it said it could not extrapolate those findings to Sino-Forest's broader forestry assets.

The two parcels represent less than 370 acres of the more than 1.9 million acres of timber Sino-Forest has said it controls.

Sino-Forest said it has engaged Singapore-based consultancy Stewart Murray to assist it in verifying and valuing its entire forestry assets.

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