Short-Seller Block Regrets Investors Bought Sino-Forest After 89% Retreat

Date: Tuesday, August 30, 2011
Author: Nikolaj Gammeltoft and Matthew Miller, Bloomberg

Carson Block, the short seller who recommended betting against Sino-Forest Corp. (TRE) before it plunged as much as 89 percent, said it’s regrettable some investors were lured into buying the company’s shares following the retreat.

Sino-Forest Chief Executive Officer and Chairman Allen Chan resigned yesterday, two days after the Ontario Securities Commission said the company may have exaggerated timber holdings, backing up Block’s argument. Investors such as Wellington Management Co. and billionaire Richard Chandler boosted their stakes in the Hong Kong- and Mississauga, Ontario- based company during the past few months.

“These two investors took large positions and unfortunately that encouraged some investors to jump into the stock,” Block said today in an interview with Matt Miller on Bloomberg Television. “We weren’t happy to see the stock bounce up and more investors pile in, although it runs contrary to what our goals are,” said Block, who is shorting the shares and stands to profit if the price declines. “This is somewhat of a personal crusade for us.”

Sino-Forest fell to an eight-year low of C$1.99 on June 21 after Muddy Waters, Block’s company, said in a June 2 report that the company overstated forestry holdings. The stock then rebounded, closing at C$7.69 on July 27, as Chandler’s Mandolin Fund Pte and Wellington acquired shares. Canada’s main securities regulator suspended trading last week after the shares closed at C$4.81.

Default Levels

Sara Lou Sherman, a spokeswoman for Wellington, and Richard Barton, a spokesman for Richard Chandler Corp., declined to comment on the firms’ investments in Sino-Forest.

Sino-Forest bonds are trading at levels that show investors expect it to default. Its 10.25 percent notes due in July 2014 fell 50 percent to 35 cents on the dollar on Aug. 26, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities, which have about $400 million outstanding, now yield 50.49 percent.

Chandler said this month he increased his stake in Sino- Forest to 18 percent. His purchases have made him the largest shareholder of Sino-Forest ahead of Davis Selected Advisers LP and Wellington Management Co., according to the most recent filings compiled by Bloomberg.

Company’s Denial

Inconsistencies have been found in the valuation of Sino- Forest’s holdings in China’s Yunnan province, Canada’s Globe and Mail said June 18, citing Chinese government officials and forestry experts it didn’t identify. The newspaper’s report was an “incorrect portrayal” of the company’s business, Sino- Forest said in a statement. The company is conducting its own internal investigation.

“The priorities of the company are to complete the review of the allegations by the independent committee, to cooperate with the OSC and to preserve shareholder value,” Stan Neve, a spokesman for Sino-Forest in New York, wrote in an e-mail today.

Paulson & Co. sold all its stock in the company, according to a June 20 regulatory filing. John Paulson’s New York-based hedge fund, which made $15 billion in 2007 wagering against subprime mortgages, had been Sino-Forest’s biggest shareholder.

“It was a near total fraud,” Block said today of Sino- Forest. “They have been overstating their timber holdings and timber sales since inception.”

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Matt Miller in New York at mtmiller@bloomberg.net