Sino-Forest denies accusations, stock plunges

TORONTO (Reuters) – Sino-Forest Corp Friday denied it had exaggerated its Chinese forestry holdings in financial filings, an accusation that triggered a sell-off in the Canadian-listed company’s shares.

Shares of Sino-Forest, which operates forest plantations in China, fell more than 65 percent when trading resumed on Friday morning. It dropped as much as 25 percent on Thursday before being halted by the Toronto Stock Exchange.

The sell-off followed a report by a research firm called Muddy Waters that called Sino’s revenue accounting structure into question and alleged that the company made inaccurate statements regarding its assets.

Trading on the Toronto Stock Exchange was halted on Thursday afternoon with the stock at C$14.46. The shares were trading at $4.99 after reopening late Friday morning.

Sino said it was not contacted by the research firm, Muddy Waters, for comment ahead of publication of its report.

“We recommend shareholders take extreme caution in responding to the Muddy Waters report,” the company said.

Muddy Waters in its report said it held short positions in Sino’s shares and could realize significant gains from a share price decline. It said its clients also held short positions in Sino, essentially bets that the stock would drop.

Sino Forest said its board appointed an committee consisting of three of its independent directors to investigate the allegations. It said the Muddy Waters report had a substantial impact on its reputation and prices of its securities.

The Muddy Waters report also prompted a sell-off in Sino’s bonds and in the process dragged down the China high-yield offshore sector on Friday morning.

BMO Capital Markets cut its rating on Sino-Forest to ”market perform” from “outperform” on Friday, following the allegations from Muddy Waters.

BMO also put its price target on shares of Sino-Forest under review, “pending a better understanding of the company’s timber holding.”

Dundee Capital Markets analyst Richard Kelertas noted that, at its annual shareholder meeting earlier this week, Sino emphasized its “culture of accountability”.

Sino has a long track-record and has completed debt and equity offerings without once being the subject of legal concern, said Kelertas in a recent note to clients.

Analysts have noted that shares of the company have come under pressure from short-sellers in recent weeks, due to lingering concerns about accountability. (Reporting by Euan Rocha; editing by Frank McGurty)