The RCMP have launched a criminal investigation into whether executives of Sino-Forest Corp. defrauded Canadian investors who pumped billions into the Chinese timber producer.
The Mounties’ probe centres on whether senior executives committed fraud by overstating the value of the company’s forest assets and its revenue, according to two sources familiar with the investigation.
Presenting language, jurisdictional and geographic issues, the investigation will pose significant challenges for the RCMP, which has struggled to close high-profile securities fraud cases in the past.
Sino-Forest was the largest forestry company on the Toronto Stock Exchange, achieving a market value of more than $6-billion as investors drove up its share price to capitalize on China’s strong economic growth and soaring demand for wood. But this summer, an investment-research analyst alleged that it “massively exaggerates” its holdings of timberland in mainland China. In August, Ontario securities regulators stepped in, placing a freeze on all trading in the company’s shares and saying that they, too, had found evidence of fraudulent activity.
The start of the criminal probe marks the most serious legal setback yet for the company. But it will also be a significant challenge for the RCMP’s financial fraud unit, known as the Integrated Market Enforcement Team, and a test of its ability to conduct a major stock-market fraud investigation overseas. Sino-Forest’s operations are in mainland China and most of its key executives are Chinese citizens based in Hong Kong. The case is so complex that even the company’s own internal investigation has been delayed by several months.
IMET has been widely criticized for moving too slowly on high-profile cases, such as the alleged accounting fraud at Nortel Networks Corp., and failing to win convictions in court. In the Nortel case, it took four years from when the scandal first broke for criminal charges to be laid.
If the allegations are proven, Sino-Forest would represent one of the largest stock-market frauds in Canadian history and a key example of the increasing difficulty of regulating and policing the activities of companies operating in foreign jurisdictions but listed on Canadian markets. It is not a new problem: one of the country’s most notorious stock-market scams – the Bre-X Minerals Ltd. gold fraud of the 1990s – took place in Indonesia, and the RCMP proved unable to collect enough evidence to lay criminal charges.
The Ontario Securities Commission has alleged that Sino-Forest executives, including former chairman and chief executive officer Allen Chan, appeared to be engaging in acts that “they know or reasonably ought to know perpetuate a fraud.” Mr. Chan, a Hong Kong resident and former restaurant manager who co-founded Sino-Forest in 1992, stepped down as chairman and CEO in August and is understood to be co-operating with investigators.
A separate investigation by The Globe and Mail found evidence of undisclosed related-party transactions by Sino-Forest and a key business partner in China disputed the size and value of the company’s forestry assets in Yunnan province.
Mr. Chan and Sino-Forest have denied the allegations. The company set up a three-member independent committee of directors to investigate the fraud accusations. It hopes to complete a report on the matter by the end of the year. James Bowland, a former investment banker with BMO Nesbitt Burns, resigned from Sino-Forest’s board and the independent committee last week. The company did not give a reason for Mr. Bowland’s departure.
A Sino-Forest spokesman would not comment on the RCMP investigation. RCMP Superintendant Dean Buzza, who heads the IMET unit, would neither confirm nor deny a police probe of Sino-Forest.
The RCMP has a poor track record of investigating and securing enough evidence for criminal convictions in major fraud cases.
Bre-X Minerals Ltd. – The most notorious stock-market fraud in Canadian history, Bre-X claimed it had discovered a massive gold strike in Indonesia. The scheme unravelled in 1997 when it was revealed the company had been salting the core samples from the deposit. Former Bre-X chief geologist John Felderhof was the only person ever charged. In 2007, he was found not guilty on charges of illegal insider trading and acquitted of issuing false press releases.
Royal Group Technologies – The RCMP’s new IMET team made a huge splash by raiding the downtown Toronto offices of the Bank of Nova Scotia and parking a police camper van outside the bank for days in 2005 as part of its investigation into Royal Group Technologies. In 2008, the Mounties unveiled fraud charges against Royal Group founder Vic De Zen. In 2010, Mr. De Zen was found not guilty of fraud by an Ontario judge.
Nortel Networks – On the same day it announced charges against Mr. De Zen, the IMET also filed charges against Nortel’s former CEO Frank Dunn, ex-CFO Douglas Beatty and former controller Michael Gollogly. The trio are accused of falsifying Nortel’s financial results to trigger millions of dollars of bonus payments. Their trial is slated to begin in January and has faced delays, due in part to problems reviewing 23-million pages of documents turned over to the RCMP by Nortel.
Livent Inc. – Garth Drabinsky and Myron Gottlieb are alleged to have manipulated the financial statements of Livent between 1992 and 1998 but it took until 2002 for the RCMP to lay charges. Mr. Drabinsky and Mr. Gottlieb were convicted on two counts of fraud each in 2009 and began serving respective sentences of seven years and six years in September. After spending less than a month behind bars, Mr. Drabinsky filed a request to be released on bail as he tries to appeal his fraud convictions.