Monday, August 29, 2011

Sino Forest Epilogue

Since I already did two posts on Sino, might as well make it three and out.

Last Friday, the Ontario Securities Commission suspended trading in Sino Forest stock, alleging that the company may have defrauded investors by exaggerating its profits and assets.
Initially, the order also called for the resignation of the company's CEO Allan Chan and other officers and directors. That portion of the order was then excluded (apparently the OSC doesn't have such authority), but the CEO and several others resigned anyway.

This would appear to be the argument that ends the discussion concerning this case. But you never know, there are always dissenting opinions and conspiracy theorists.  This announcement followed a flurry of news which included a very strange second quarter earnings report in which the company's erst-while rock solid operating margins evaporated, a three-month delay of the "independent review"  and downgrades from the major ratings agencies.

Carson Block is looking like a champ. For his part, John Paulson took his lumps like a man. It was big loss for his fund, but he showed he could recognize when he was wrong.
I do feel for the analysts who came out to support the company. Lesson learned, hopefully. Don't trust everything they tell you, sometimes the numbers are simply a lie. Company officials are NOT your friends.

As for the bond angle, there is a bright spot. On Aug 17, Sino paid its 2011 bonds in full. So whoever took a flier on that trade I mentioned in my previous post, made out like a bandit. I wasn't that brave.

Sino stock may be suspended, but the bonds can be traded OTC, as far as I can make out.
My Bloomberg is indicating a 26 bid on the 2014's (the ones I luckily sold at 72). Ouch!


  1. Hate to say, but...I (and others) feel vindicated. I want to thank Dalmady for providing a forum where the more seriously minded Sino-Forest believers and skeptics politely duked it out.

    I also want to thank J.M. Delano for being one of the few longs I know who were fair, respectful, and willing to take the fraud accusations seriously.

    As I mentioned many times, Paulson was and remains unfairly criticized. I believe Wellington Management and Richard Chandler deserve 1000x more criticism and scorn than Paulson. I recommend you pull your money out, if you invest in either Wellington or Chandler.

    It's one thing to be duped by fraud; it's entirely another to be complicit in it, whether by sheer incompetence or ill will.

  2. Good job Alex!!! And .. kudos for Carson Block and MW pals.

    As we may see "a third tier firm" may do greater research and due diligence than top Street analysts.
    Unfortunately, investors that lost money after MW call cannot sue the analysts that rating a buy for Sino.

  3. With all due respect, nobody cares about the sell side analysts (when's the last time you heard about a sell side analyst uncovering fraud? they eventually go to the buyside, or set up a independent shop). The real surprise is the mistake of the buyside analysts, and of respectable shops.

    The only people who considered Carson Block/Muddy Waters 'third tier' were the ignorants (long-only sheep, main stream media, etc) . Those of us who've been following the China fraud space (which includes the market) knew he was top tier. How many people do you know that can move a stock 60%-80% in hours or days?

  4. Alex

    Glad you dumped those bonds.


  5. Anyone who got paid in full for an August 11 SNOFF bond will likely face a fraudulent conveyance claim when (not if) the company files for bankruptcy. The clock is ticking...

  6. Last Anon. In theory perhaps. This a Chinese company backed into a Canadian shell. Where is that claim going to be filed? Under what law?
    Will it be worth it? If they can claw back only "net gains", there isn't all that much to obtain. There was only $87 million outstanding of this bond at redemption. Investors who held it from issuance only gained the interest (I don't think you can claw back capital).
    We'll see what happens.

  7. Doesn't make a lot of sense for a company that is a massive fraud to redeem a large tranche in full. Possible, but not very likely. Strange stuff.

  8. Nothing strange at all. Bonds were due, they were not redeemed ahead of time. Sino had cash and paid. It was only $87 million.

    The fact that Sino is misrepresenting the value of its assets doesn't mean it doesn't have any. It does, just not what they claim to have.