Timber Plantations owned by Sino-Forest in Tang Kong Village, near Gaoyao, Southern China on June 28, 2011.Adam Dean for The Globe and Mail
Several executives of Sino-Forest Corp. have been shareholders or employees of one of the company's major timber suppliers, according to documents released by a committee of directors investigating fraud allegations against the TSX-listed firm.
These executives – including former chief executive officer Allen Chan and co-founder Kai Kit Poon – had financial ties to the parent company of a key supplier of forestry assets called Huaihua Yuda Wood Co. Ltd., the committee found.
Undisclosed related-party transactions are a central element of the investigations into Sino-Forest being conducted by the Ontario Securities Commission and the RCMP.
Sino-Forest shares plunged more than 70 per cent in June after short-seller Carson Block and his firm, Muddy Waters LLC, levelled damning allegations against what was once Canada's largest publicly traded forestry company. Among its accusations, the Muddy Waters report claimed some of the company's timber suppliers and the brokers who sell its trees were related to the Chinese forestry firm.
Those links raise questions about whether Sino-Forest bought and sold Chinese forest land at fair-market value, as they would have if all the deals were with arm's-length parties. The Muddy Waters report alleges that the company has used related parties to "fabricate sales transactions" without tipping off auditors.
According to committee documents, Mr. Chan and Mr. Poon were among a group of founding shareholders of a company called Sonic Jita Engineering Ltd. in 1997. Sonic Jita is the sole shareholder of Huaihua Yuda Wood, which has been a major supplier to Sino-Forest since 2007.
Another early Sonic Jita shareholder was Chan Wai Ling. "No employee named Chan Wai Ling was identified in Sino-Forest's employee record," the committee document says. However, according to a source familiar with Sino-Forest's early days, Chan Wai Ling is also known as Leslie Chan, who is a former Sino-Forest executive and Allen Chan's wife.
Regulatory filings by Sino-Forest from the 1990s say "Leslie W.L. Chan" was a founder and executive director of subsidiary Sino-Wood since 1993 and "was appointed executive vice-president of Sino-Forest in December 1996." Sino-Forest's regulatory filings have referred to Leslie Chan for several years.
Sino-Forest has denied the fraud allegations. A company spokesman said neither the company nor Mr. Chan has any ownership ties to Sonic Jita or Huaihua Yuda Wood. "That Mr. Chan or persons then associated with him had an interest in [Sonic Jita]is not news or relevant to the current ownership of Sonic Jita."
Last month, the company said an interim report released by the directors' committee had cleared the company of a number of key allegations. "Far from being a 'near total fraud' and 'Ponzi scheme' as alleged by Muddy Waters, Sino-Forest is a real company, with real assets and real revenue," said Judson Martin, Sino-Forest's interim CEO.
However, the report also found suspicious ties between Sino-Forest, its employees and the company's timber suppliers and the brokers who sell the trees. The report said that Sino-Forest executives were unable or unwilling to provide all the information requested by the committee regarding relationships with suppliers and brokers.
Mr. Poon and Mr. Chan – who resigned as Sino-Forest's chairman and CEO in August – were succeeded as shareholders of Yuda Wood parent Sonic Jita by a number of individuals with links to Sino-Forest.
Li Haiboa was a Sonic Jita director and shareholder between 1998 and 2005. According to the committee documents, Mr. Li appeared on Sino-Forest payroll records between 1999 and 2009.
Chen Jun, who according to the Hong Kong Companies Registry was a Sonic Jita director since 2007, began working for a Sino-Forest subsidiary on July 1, 2010, payroll records show. The committee document says Mr. Chen, "in a statutory declaration dated Aug. 15, 2011," stated that he resigned as a director of Sonic Jita and sold his shares on July 30, 2010.
A filing with the Hong Kong Companies Registry shows Mr. Chen resigned from Sonic Jita on July 30, 2010. But the filing wasn't made until June 10, 2011, about a week after the release of the Muddy Waters report, which included allegations about Sonic Jita and Yuda Wood's ties to Sino-Forest.
In addition to Sonic Jita's directors' ties to Sino-Forest, the committee documents also show links between Yuda Wood employees and Sino-Forest. In a filing to the OSC, Sino-Forest named Chen Guixiang as a "contact person" at Yuda Wood. Sino-Forest's company records identify Chen Guixiang as an employee whose term of employment "may overlap" with employment at Yuda Wood, according to the committee documents.
Finally, in an interview with investigators in September, Yuda Wood's legal representative, Huang Ran, stated that George Ho, a Sino-Forest vice-president who was among those named by the OSC in its fraud allegations and temporarily suspended by the company, controlled one of Yuda Wood's bank accounts.
Sino-Forest is expected to file its third-quarter results by the end of the week to comply with a Dec. 15 deadline. The directors' committee hopes to file its final report by the end of the year. The report won't, as first hoped, include an independent valuation of Sino-Forest's forestry assets.