Sino-Forest slams Muddy Waters, mulls legal action

By Euan Rocha

TORONTO (Reuters) – Sino-Forest Corp Monday accused short-seller Muddy Waters of defamation for alleging in a report that the Toronto-listed company had fraudulently exaggerated its Chinese forestry assets.

Sino-Forest’s strong statement lifted the shares by more than 50 percent Monday morning but the stock was still well below where it was trading before the Muddy Waters research report on Thursday.

The firm’s report, which alleges that Sino-Forest made misleading statements in financial filings, is inaccurate, spurious and defamatory, Sino-Forest said, warning that it was weighing its legal options.

“Given the deeply damaging nature of Muddy Waters’ self-interested attack on the company and its shareholders, the company is considering its legal remedies against Muddy Waters and its principals,” the company said.

Sino-Forest said it intends to make available documentation to prove ownership of its timber assets in China.

The company said it plans to ask securities regulators in Canada and other jurisdictions to investigate Muddy Waters’ trading activities, pointing out that as a short-seller, the firm profits on bets against Sino-Forest and other subjects of its reports.

“It is important people recognize the motivations of Muddy Waters, because it is they who deliberately muddy the waters, not us,” said Sino-Forest Chairman Allen Chan in a statement.

“This is a company that has taken out a major short position in our company and then issued a report designed to make them money by the decline of our stock,” he said. “By now they might be out of their short position and in the money.”

Muddy Waters could not be reached immediately for comment.



The company also said it intends to invite analysts to join the company’s management on a tour of its forest plantations in July.

“The analysts will be invited to suggest specific locations for the tour, and for each plantation visited, the company will present GPS references and the ownership documents,” the company said.

The company said as of March 31 it had $1.09 billion in cash and cash equivalents on hand. Sino-Forest also said it has released on its website a summary schedule of its cash holdings along with details of its bank statements confirming the cash held as of that date.

While many investors have encouraged Sino-Forest to buy back shares to restore investor confidence, the company said it has been advised by counsel that it and its directors and officers are precluded from buying stock in the current circumstances.

“I have spent 17 years building Sino-Forest and I can promise investors we are not guilty of the charges levied against us,” said Chan. “I stand by our audited financial statements, including the revenue and assets shown therein.”

The company said it will begin on Monday to post documents that support its ownership of timber assets, focusing first on it assets in the Yunnan Province, where the company’s largest hectarage of plantations are held. Sino-Forest’s holdings in Yunnan were one of the key targets in the short-seller’s report.

Sino-Forest said it needs the consent from each relevant local government for the disclosure of purchase documents. The company said it is seeking applicable consents on an expedited basis first focusing on consents for its Yunnan purchased plantations.

The strong statement from Sino-Forest sent its shares up more than 50 percent to C$8.05 on Monday morning. Its shares are however, still well below Wednesday’s closing price of C$18.21, which was the day before the Muddy Waters report was published. (Reporting by Euan Rocha; Editing by Frank McGurty)