A month after a short-seller's fraud allegations wiped out more than $3-billion from Sino-Forest Corp.'s market value, the Ontario Securities Commission says it is conducting a "targeted review" of Canadian-listed companies with operations in emerging markets such as China.
The regulator said it will examine the disclosure of "certain" companies and how they attained stock market listings in Canada. The OSC said it will also focus on the role played by the auditors and corporate underwriters who help to bring these companies to market.
The high-profile meltdown at Sino-Forest has highlighted the wave of Chinese companies that, like Sino-Forest, gained access to Canadian capital markets through reverse takeovers or RTOs.
By acquiring a dormant shell company with a Canadian stock market listing, these Chinese businesses have been able to list on the TSX or other Canadian exchanges without filing a full prospectus.
Sino-Forest was among the pioneers of the now-controversial practice. It acquired a Canadian listing in 1994 through an RTO. By early 2011, Hong Kong-based Sino-Forest had grown to become Canada's largest forestry firm with a market value of as much $6-billion.
A June 2 research report by short-seller Carson Block and his firm Muddy Waters LLC devastated Sino-Forest's share price, erasing more than two-thirds of the company's value.
A separate independent investigation by The Globe and Mail also found discrepancies in Sino-Forest's public statements regarding its forestry holdings. In an interview, Xie Hongting, the chairman of a key Sino-Forest partner said the company had acquired less than 14,000 hectares of forest plantations in Yunnan province, far short of the approximately 200,000 hectares the company claims it has acquired under a "master agreement."
Sino-Forest maintains it has purchased about 13,300 hectares of "forestry assets and leased land" directly from Mr. Xie's company, and another 180,000 hectares of "forestry assets only" from other sellers in Yunnan.
Last month, the OSC said it had launched an investigation into matters relating to Sino-Forest. OSC officials interviewed Mr. Block last week as part of the probe, according to people familiar with the matter.
Scores of Chinese companies have listed in Canada and the United States in the past three years through RTOs. However, many of these companies have come under scrutiny in recent months as short-sellers such as Mr. Block have made accusations ranging from related-party transactions, to inflated sales, to full-blown Ponzi schemes.
In Canada, Sino-Forest is not the only Chinese company to have been embroiled in controversy. Shares of TSX-Venture listed Xianburg Data Systems Canada Corp. were halted in April after the company failed to file its financial statements on time.
Areheda Mining Ltd., another Chinese company, is facing a delisting after also failing to file its financial statements on time. Meanwhile, shares of Kaiyue International have been halted since December at the company's request while it tries to complete an acquisition.
In the United States, the Securities and Exchange Commission has been looking into Chinese RTOs since late last year. In early June, the SEC issued a bulletin warning investors of the perils of RTO companies. SEC chairwoman Mary Schapiro said recently the SEC is developing new polices and regulations for reverse takeovers.
The OSC's brief statement on "emerging market issuers" marks the first time the regulator has said it will probe the issue of Chinese RTOs. OSC officials refused to elaborate on Tuesday's press release that included a statement by chairman and chief executive officer Howard Wetston.
"Issuers who access our market and the advisers who support them have important responsibilities to investors and we will take regulatory action as warranted to ensure those responsibilities are met," Mr. Wetston said in a statement.
The OSC said it has already contacted several companies and their advisers as part of the review.
Sino-Forest had been a market darling, benefiting from strong investor appetite for a play on China's growth. The company's statements disclosed that it controls more than 700,000 hectares of forest plantations in China, and with the help of Canadian underwriters, Sino-Forest raised more than $1-billion in equity and debt from investors.
Earlier this year, Sino-Forest shares traded above $25. The stock fell below $2 following the Muddy Waters report which alleged Sino-Forest did not own all the trees it claimed and was involved in related-party transactions. The stock has since rallied above $5.
Sino-Forest has denied the allegations and has launched an independent investigation to review the company's assets. The review is expected to take months.
This article has been corrected from an earlier version.