The newsworthy thing about this was that large trading institutions were fooled, not just retail investors. Paulson & Co., a New York based hedge fund and one of the largest in the US, was the largest shareholder with 34.7 million shares, which on the morning of the announcements by Muddy Waters was valued at $624 million. At the close of trading on the same day, the stake was only worth $501 million and the shares later fell to only $6 each. Ouch.
Some of the highlights from Muddy Water’s report made for fairly grim reading:
- Sino-forest was one of the rare frauds committed by an established institution. In Sino-forest’s case, its early start as an RTO [Recovery Time Objective] fraud, luck and deft navigation enabled it to grow into an institution whose “quality management” consistently delivered on earnings growth.
- Sino-forest, which was probably conceived as another short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since its RTO in 1995.
- The foundation of Sino-forest’s fraud is its convoluted structure whereby it runs most of its revenues through “authorised intermediaries”. AIs supposedly process Sino-forest’s tax payments, which ensures that TRE leaves far less of a paper trail.
- On the other side of its books, Sino-forest massively exaggerated its assets. Sino-forest overstated its Yunnan timber investments by approximately $900 million.
- Sino-forest relied on Jaakko Poyry (a consultancy firm in the energies and resources sector) to produce reports that gave it legitimacy. Since Sino-forest provided fraudulent data to Poyry, the reports did nothing to ensure that the company was legitimate.
The moral of this story being: if something seems too good to be true, it probably is.
Categories: Crime & Corruption