Sino-Forest shines light on Muddy Waters

Sino-Forest Corp. fought back Monday against allegations that it exaggerated its timber assets in China by releasing a trove of files documenting much of its holdings and what it has in the bank.

The documents, mostly in Chinese and posted online Monday, included a 2007 master agreement for the purchase of timberlands in Yunnan, as well as individual purchase agreements for timberlands in the Chinese province.

Other documents included forest and woodland rights certificates as well as bank statements for accounts in Hong Kong and China that show how much cash the company holds.

"The recent events have caused several shareholders to request clear proof of ownership of the company's timber assets," the company said in a statement.

"The board is anxious to respond to this request and has commenced actions to address this, focusing first on Yunnan province, where the company's largest hectarage of purchased plantations are held and where the short seller focused its attacks."The company also invited financial analysts to tour its Chinese plantations in July.

The shares, which had traded for more than $18 last week before short seller Muddy Waters Research published a scathing commentary on Sino-Forest, were up sharply on Monday.

The stock was up $2.16 or about 40 per cent at $7.39 on the Toronto Stock Exchange at midday, adding back more than $500 million to the company's stock market value.

Scotia Capital placed its rating on the company under review.

"Satisfactory responses to most major allegations/issues will take time as the burden of evidence has been elevated to a new level and uncertainty around the shares will, therefore, likely remain for some time," Scotia Capital wrote in a note to clients.

"We emphasize that this situation remains fluid and suggest a high degree of caution."

Law firm hired

Sino-Forest also said Monday that it has also hired an independent law firm to address the allegations.

"The company believes Muddy Waters' report to be inaccurate, spurious and defamatory," the company said in a statement.

"Muddy Waters' self-interest is transparent: to make money from the fall in Sino-Forest's share price on the back of a decline that itself precipitated."

The company noted it also intends to announce, later Monday, the name of an international accounting firm that it has hired.

Carson Block, director of research at Muddy Waters, accused Sino-Forest of exaggerating its assets and fabricating sales transactions.

Muddy Waters, which has said it held a short position in Sino-Forest, placed an estimated value of less than $1 for Sino-Forest shares.

A short position allows an investor to make money on a stock when the price falls.Sino-Forest's largest shareholder is Paulson & Co. Inc. with a 14.13 per cent stake in the company. Paulson & Co., a New York hedge fund led by billionaire John Paulson, made millions by betting the market for mortgage securities would collapse.

Sino-Forest's other large shareholders include Davis Selected Advisers LP, which holds a 12.58 per cent stake, and Mackenzie Financial Corp., with 6.95 per cent.

Sino-Forest owns and manages tree plantations in China, sells standing timber and wood logs and makes engineered wood products.

The company also holds a majority interest in Greenheart Group Ltd., a Hong Kong-listed investment company with forest operations in Suriname, South America and New Zealand.