Shorting Sino

Stock tumbles as a small research shop accuses Sino-Forest of fraud.

(Photo: Nathan VanderKlippe/ National Post)

A scathing research report sent shares in TSX-listed company Sino-Forest plummeting more than 70% amid allegations of fraud, wiping out roughly $3 billion in market cap. Sino-Forest, with offices in Mississauga, Ont., and Hong Kong, manages tree plantations in China, and has been a favourite forestry stock among institutional investors.

The report from Muddy Waters Research accuses Sino-Forest of falsifying data to inflate the size of its tree holdings in China, among other misdeeds. The company denied the allegations, warning investors to use “extreme caution” when evaluating the report.

Indeed, Muddy Waters is a somewhat obscure outfit, and disclosed that investors should assume it has a short position in Sino-Forest. Its report also comes at a time of increased skepticism toward Chinese companies with listings in North America. Jim Chanos, a prominent hedge fund manager, is shorting many Chinese companies on U.S. exchanges, citing “odd-looking financial statements.”

John Goldman, a Toronto-based portfolio manager with Montrusco Bolton Investments, which owns Sino-Forest shares, says the sell-off is likely “a case of guilt by association.” Still, BMO Capital Markets put shares under review “pending a better understanding” of the company’s timber holding.”