What the Sino-Forest fraud allegations means for NZ deal

"An investment in knowledge always pays the best interest." - Benjamin Franklin, (1706 - 1790)

What the Sino-Forest fraud allegations in Canada-China forest sales means for New Zealand deal

China-based Sino-Forest Corporation appears to have structured a New Zealand forestry deal along the same lines those for which it has been hauled before the court in Canada on charges of massive fraud around forest asset valuations.

The Overseas Investment Office, which cleared transactions involving Sino-Forest Corporation and its Greenheart offshoot in New Zealand, released to the Southern Hemisphere Forest Industry Journal the detailed reports on its decisions around Sino-Forest’s dealings.

Although significant segments of the reports are missing due to confidentiality reasons, sufficient remains to indicate a similar pattern to those transactions in China now attracting fraud allegations in Canada.

A document lodged by the Ontario Securities Commission (OSC) in Canada alleges Sino-Forest and its top executives took part in a broad-ranging scheme to falsely inflate the company’s assets and revenue. Sino-Forest traded on the Toronto Stock Exchange and was valued at more than C$6 billion. The charges centre around allegations the executives and the company violated Toronto provincial securities laws by overstating the company’s financial performance.

The alleged fraud includes the unjust enrichment of the company’s co-founder, former chairman and CEO Allen Chan through Sino-Forests purchase of a company he had an undisclosed interest in.

The OSC has subsequently widened its investigation to include scrutiny of how the company was able to raise billions of dollars from Canadian investors. Caught up in the OSC investigation are “gate-keepers”, who oversaw Sino-Forest’s financial statements along with a raft of lawyers and underwriters who helped the company raise funds on the Canadian market.

The “gate-keepers” were all rewarded with fees during Sino-Forest’s raising of more than C$3 billion from investors lured by the promise of riches through accessing the rapid growth of the forest industry in China.

A key element in the alleged fraud was the use of associated companies through which Sino-Forest executives were reported to have transfer money in a “circular” fashion between various entities in a series of related transactions.

One of the main entities involved in this alleged practice is Greenheart Forestry, which was involved in a transaction involving a pine plantation in New Zealand’s Northland region. The Sino-Forest and Greenheart transactions, which on the face of it appear to follow the same pattern as those involving the attracting fraud charges in Canada, were cleared by New Zealand’s OIO.

In a statement, Annelies McClure, Manager of the OIO in NZ says: “The OIO is aware that the Ontario Securities Commission has initiated proceedings against Sino-Forest Corporation and six of its former officers regarding allegations of fraud. The OIO continues to closely follow the Ontario Securities Commission investigations and once the proceedings have been completed and the findings released, the OIO will decide what next steps to take. The OIO understands that the hearing will be held by the Ontario Securities Commission on 12 July 2012.”

Lawyers representing the Chinese forestry company and its executives appeared at an OSC hearing on Thursday, but indicated Sino-Forest may be unwilling to defend the charges given it is being wound up.

Regarding what it calls “The Standing Timber Fraud”, the OSC document states Sino-Forest and Overseas Management (i.e. Chan and three others) “Engaged in numerous deceitful and dishonest courses of conduct that ultimately caused the assets and revenue derived from the purchase and sale of Standing Timber (that constituted the majority of Sino-Forest’s business) to be fraudulently overstated, putting pecuniary interests of Investors at risk contrary to Ontario securities law and contrary to the public interest.”

Regarding what it calls The Greenheart Transaction, the OSC alleges fraud by Chan and materially misleading statements by Chan and Sino-Forest, outlined as follows below.

In 2010, following a complex series of transactions, Sino-Forest completed the purchase of a controlling interest in Greenheart, a public company listed on the Hong Kong Stock Exchange.

“Chan secretly controlled companies that received over US$22 million as a result of the purchase by Sino-Forest of this controlling interest in Greenheart. The Greenheart Transaction was significant to Sino-Forest’s business and cost the company approximately US$120 million.

“Chan fraudulently concealed his involvement in the Greenheart Transaction and the substantial benefit he secretly received. Chan and Sino-Forest misled the public through Sino-Forest’s continuous disclosure. Chan falsely certified the accuracy of Sino-Forest’s AIFs (annual information forms) for 2008, 2009 and 2010 as these documents did not disclose his interest in the Greenheart Transaction.

Chan’s course of conduct relating to the Greenheart Transaction constituted fraud and the making of misleading statements, contrary to Ontario securities law and contrary to the public interest, the OSC document says.

Sino-Forest’s New Zealand transactions in late 2010 and 2011 involved 12,587 hectares of forestland owned at the time by one of the investment parterships operated by North American-based Global Forest Partners, GFP Mangakahia Forest Venture Ltd. No price was officially disclosed for the Sino-Forest purchase of the Mangakahia forest from the GFP consortium following the approval received on 13 October 2010. However, information circulated in the New Zealand forestry sector after it was announced Sino-Forest had sold the forest to Greenheart Group Ltd.

The Overseas Investment Office approval report released to the Journal regarding the Sino-Forest sale to Greenheart sale included the detail that the “consideration” amounted to NZ$101 million or US$77 million at the time, or about US$53,000 per hectare.

However, industry sources indicated that once the sale to Greenheart was complete, Sino-Forest booked a profit of $6-$7 million.

The NZ OIO reports outline the assessment process used to see whether or not those overseas companies and persons involved in purchasing assets in New Zealand under its jurisdiction are suitable.

“We have sought sufficient information from the applicant for us to be assured about the accuracy of the information supplied and have sought evidence from the applicant for us to be able to judge whether the criteria and factors that apply to the relevant category of overseas investment are likely to eventuate,” the OIO said regarding the Greenheart purchase.

“We did not consider it necessary to seek input from third parties in order to verify the information or evidence gathered.”

On the question of whether “the relevant overseas person” demonstrated financial commitment to the overseas investment, the OIO stated that although the investment was in essence an intra-group transfer, Greenheart and Sino-Forest were retaining separate legal counsel to help ensure “a robust process”.

“As such, [Greenheart] has committed significant resources in connection with this investment, including through engaging legal and other advisors to assist in structuring the proposed transaction and negotiating the transaction documents. This criterion is met.

On the question of whether the relevant overseas person, or all the individuals with control of the relevant overseas person, of good character, the OIO reported stated:

“A statutory declaration has been received from a director of [Greenheart] that has the effect of stating that all the individuals with control of the relevant overseas person are of good character.”

The OIO assessment was that it was “satisfied that the statutory declaration can be relied on because it complies with the requirements of the Oaths and Declarations Act 1957.”

For more details, go to: http://www.southem.com/2012/06/southern-hemisphere-forest-industry-journal-vol-18-no-1/

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