Sino-Forest Corp., whose largest shareholder is hedge fund manager Paulson & Co., plunged a second day after a short seller said the forestry company overstated timberland holdings and production, an allegation it denied.
The stock was down 60% as of midafternoon Friday. Sino-Forest fell 21% Thursday after Muddy Waters LLC, an investment firm run by Carson C. Block that's betting against Sino-Forest, said the company is a “fraud.” Sino-Forest has lost more than C$3 billion (US$3.07 billion) in market value since June 1.
Muddy Waters, based in Hong Kong, said the amount of land the company said it bought from Lincang City in China's Yunnan province doesn't match city records.
Sino-Forest, based in Hong Kong and Mississauga, Ontario, said in a statement Thursday that it will establish a committee of independent directors to examine the accusations.
“The allegations contained in this report are inaccurate and unfounded,” Allen Chan, Sino-Forest's CEO, said in a statement. “Muddy Waters' shock-jock approach is transparently self-interested, and we look forward to providing our investors and other stakeholders with additional information to rebut these allegations.”
The Paulson fund owned 34.7 million Sino-Forest shares or 14.13% of shares outstanding as of April 29, according to data compiled by Bloomberg.
Armel Leslie, a Paulson spokesman, declined to comment.
John Paulson, founder and president of the hedge fund firm, said in a Thursday investor letter obtained by Pensions & Investments that the firm is carefully monitoring Sino-Forest. He said in the letter that “the Sino-Forest position represents approximately 2% of the (Paulson) Advantage strategy,” the company's flagship hedge fund, and that no other Paulson & Co. fund owns the stock.
Regulators and investors have increased scrutiny of Chinese companies trading in North America. The SEC began an investigation last year into the use of reverse takeovers, in which a closely held firm becomes public by purchasing a shell company that already trades. The Bloomberg Chinese Reverse Mergers index of U.S.-listed stocks fell 38% this year through Thursday.
“What you have right now is the forestry business in China is lucrative, but it doesn't seem like anyone has been able to validate what they own, licenses, or the numbers,” said Jeff Papp, a senior analyst for the $250 million Oberweis China Opportunities fund in Lisle, Ill.
Pensions & Investments Reporter Christine Williamson contributed to this story.