Blogs & Comment

Skepticism mounts against Sino-Forest short seller

Muddy Waters Research founder holds a conference call with analysts, but are cracks appearing in his case?

Sino-Forest Corp.’s trading price is shown on an electronic display at the TSX in Toronto on Tuesday, June 7, 2011 (Photo: Norm Betts/Bloomberg/Getty)

Muddy Waters Research continued its assault on Sino-Forest shares with founder Carson Block hosting a conference call for analysts Monday night. The call was the first chance for analysts to question Block en masse, who has been making the media rounds to discuss his allegations that the TSX-listed forestry company is a massive Ponzi scheme.

The call itself was “somewhat rambling and light on details,” wrote Raymond James analyst Daryl Swetlishoff in a research note Tuesday. Block did little to allay analysts’ skepticism toward his claims.

Swetlishoff points to two “glaring inaccuracies” in Block’s original report. Block claims that the $231.1 million in revenue Sino-Forest made by selling timber in China’s Yunnan province is grossly exaggerated. Such an amount exceeds the province’s harvesting quota by six times, he says, and is also logistically impossible. “Transporting the harvested logs would have required over 50,000 trucks driving on two-lane roads winding through the mountains from this remote region, which is far beyond belief (and likely road capacity),” he wrote.

But Sino-Forest disclosed in its management discussion and analysis for both the first and second quarters of 2010 that the revenue was generated by selling standing timber, meaning the company did not cut down and transport any of these trees.

During the call, Block didn’t adequately address this discrepancy, according to Swetlishoff. “This is a very basic error regarding one of the primary allegations by [Muddy Waters], considering the large number of purported man-hours spent in the ‘investigation,'” he wrote.

Secondly, Block claims Sino-Forest overstated the size of its timber assets in Yunnan, citing evidence that it only owns 21,000 hectares. On Monday, however, Sino-Forest released a slew of documents to showing it owns 173,000 hectares. 

Based on his findings in Yunnan, Block made the assumption that Sino-Forest is perpetuating similar fraud with regard to its holdings in other provinces in China. Analysts on the call, however, questioned the validity of extrapolating these findings “when the details of the accusations in Yunnan, where the majority of the report’s analysis was undertaken, fail basic checks,” wrote Swetlishoff.

Block also raised further questions and accusations with regard to Sino-Forest’s accounting methods and corporate structure, though admitted on the call that “we didn’t really do our accounting tour de force.” He hinted more bombshells are coming soon. “Our resident accounting monster is chomping at the bit to get going.” (The full extent of Block’s accounting claims against Sino-Forest are complex. Business Insider has provided a detailed explanation here.)

Sino-Forest, meanwhile, is fighting back. In addition to the deluge of documents released on Monday, the company set up an independent committee to review the allegations and confirm the legality and authenticity of its supporting documents. It also appointed PricewaterhouseCoopers late Monday night to assist with the investigation.

Chairman Allen Chan vowed vindication in a statement released by the company. “It is important people recognize the motivations of Muddy Waters, because it is they who deliberately muddy the waters, not us. 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. “It is the rest of us that lick our wounds, while they lick their lips.”

“It is important people recognize the motivations of Muddy Waters, because it is they who deliberately 
muddy the waters, not us. 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.
“It is important people recognize the motivations of Muddy Waters, because it is they who deliberately 
muddy the waters, not us. 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.