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Don't assume CEO of Sino-Forest knew everything going on in company: lawyer

TORONTO – It can’t be assumed that Allen Chan, the former CEO of Sino-Forest Corp., knew everything that was going on within the forestry company before its collapse, Chan’s lawyer told a securities tribunal Tuesday.

Emily Cole began delivering closing arguments in the Ontario Securities Commission case against five former Sino-Forest executives including Chan who stand accused of perpetrating fraud before the firm’s demise in 2012.

Cole said Chan relied heavily on the company’s directors with regards to the company’s finances, adding that it was reasonable for him to do so given that their knowledge of Canadian accounting and disclosure rules surpassed his own.

As a non-Canadian CEO with no North American training and no formal education in finance, corporate governance and other related matters, Chan often deferred to Canadians who sat on the company’s board, said Cole.

“He has an undergraduate sociology degree,” said Cole.

During board meetings, Chan’s role was to comment on business matters and not the company’s finances, Cole added.

Cole’s submissions contrast with those of Hugh Craig, the lawyer representing the OSC, who argued last week that Chan was a hands-on CEO and the “controlling mind” behind several frauds that robbed shareholders of value.

Sino-Forest, which was established in 1994, was the first and largest foreign-owned forestry company in China. The company conducted most of its business in that country even though it was based in Ontario.

At its peak, Sino-Forest was the most valuable forestry company listed on the Toronto Stock Exchange, with a market capitalization of $6 billion.

From June 2005 to March 2011, the company’s shares rose by 340 per cent from $5.75 per share to $25.30 per share.

In addition to Chan, the OSC has accused former top executives Albert Ip, Alfred Hung, George Ho and Simon Yeung of lying to investors and misleading investigators by inflating the company’s assets and revenue.

The OSC alleges the five men took part in “deceitful conduct” that included the fabrication of assets and revenue, undisclosed relationships with suppliers and customers and providing misleading documentation to support the alleged fraud.

The securities watchdog claims the executives misled investors by issuing false financial statements in every quarter from 2007 to 2010.

Cole argued on Tuesday that the “avalanche” of documents submitted by the securities watchdog should bear little weight in the case because unless the authors of those documents testify, they are merely hearsay.

In addition, many of the documents were written in Chinese, a language that is subject to interpretation, Cole said.

Also, many of the company’s business practices, which may seem strange to North Americans, were a necessary prerequisite to doing business in China, said Cole.

In that country, business is premised on trust and relationships and is less legalistic, and people are less skilled and more likely to make mistakes, she said.

“(OSC) staff would have you believe that what is odd is fraud,” said Cole. “That is not the law.”

The OSC has previously argued that because Sino-Forest was headquartered in Ontario and traded on the Toronto stock market, it should abide by Canadian rules, regardless of the fact that its operations were in China, where business customs may differ.

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