Sino-Forest Timber-Assets Fraud Case: Timber Rights, Transactions and Disclosure

The Sino-Forest timber-assets fraud case concerned reported timber ownership and sales that the Ontario Securities Commission found were supported by deceptive transactions and documents. In its merits decision, the commission found that Sino-Forest and four senior executives committed fraud involving standing timber assets and revenue. It also found misleading public disclosure about ownership, revenue and internal controls. For a forestry or finance employee, the case connects the trees a company says it owns to the contracts, counterparties and payments behind its books.

The Business Investors Were Shown

Sino-Forest described itself as a commercial forest plantation operator in China. Its business included owning and managing plantations, selling standing timber and logs, and manufacturing wood products. Standing timber meant trees still growing in the ground, which the company said it could buy and later sell without harvesting them. That business made ownership and location evidence central to the reported assets.

The company had its head office in Mississauga, Ontario, and its executive office in Hong Kong, with operations offices across mainland China. Its shares were listed on the Toronto Stock Exchange. The merits decision says it raised approximately $3 billion in U.S. dollars from investors through debt and equity securities between February 2003 and October 2010. That financing amount is separate from the value assigned to timber, the company’s stock-market value and any later judgment.

Where Were the Timber Rights?

The commission identified contracts that did not locate the purchased timber and lacked supporting documents that would enable someone to find the plantations. It also found missing contract attachments needed to evidence ownership and forestry-bureau confirmations containing incorrect information about future ownership certificates. Those were specific defects in the documents meant to support the company’s claims. A volume of timber in an accounting schedule could not identify the trees on the ground.

A valuation did not solve that ownership problem. The commission explained that Pöyry’s annual forestry valuation work assumed that Sino-Forest’s title was valid; it did not confirm ownership. Sino-Forest supplied the underlying plantation information and maps for site visits. The commission found that those annual valuations did not assist its analysis of the deceptive documentation.

For a field employee, a plantation’s location and the rights attached to it may be familiar even when the financial statements are not. We would compare that knowledge with the asset descriptions, maps, transfer documents and confirmations used by the finance team. The useful discrepancy may be a specific plantation that a contract cannot identify, or a right that the seller could not transfer. That is a concrete way into the broader securities fraud evidence.

How Sales Were Settled Without Cash Reaching the Company

Sino-Forest carried out much of its business through subsidiaries incorporated in the British Virgin Islands. The merits decision describes their use of sales agents called authorized intermediaries in mainland China. Because those subsidiaries could not hold mainland bank accounts or settle their transactions directly in cash, Sino-Forest used a system that offset amounts its customers owed against amounts it owed suppliers. Customers were instructed to pay suppliers on Sino-Forest’s behalf.

Under that model, revenue recorded from timber sales was used to purchase more timber. The commission explained that the recorded money was never held directly by Sino-Forest or its subsidiaries and that the reported profits remained in mainland China. The independent directors’ investigation also found that the supposed customer-to-supplier payments could involve additional layers of parties. A settled receivable on the books therefore required a separate examination of who actually paid whom.

For a finance insider, the important comparison is between the instruction to offset an account and the evidence that the underlying obligation was paid. We would connect the customer’s balance, the supplier’s balance, the payment instruction and the identity of any intervening payer. A confirmation prepared from the same internal information cannot independently answer every part of that comparison. Your knowledge of how the finance team closed the accounts may explain what a public revenue figure leaves out.

The Counterparties Were Part of the Evidence

The commission found that Yuda Wood, Taiyuan and Kun’an were controlled by, or related to, Sino-Forest. Its examination included who capitalized a supplier, controlled its accounts and handled its dealings. In Yuda Wood’s case, the commission found that Sino-Forest supplied its capital and controlled bank accounts in its name. A company appearing on the other side of a contract was not necessarily an independent business.

Those findings give an employee’s knowledge of counterparties a specific purpose. The person arranging signatures, maintaining account access or preparing documents may recognize the same people acting for buyer and seller. We compare those roles with the relationship represented in the financial statements and audit evidence. The relevant question is who controlled the transaction, as well as which company name appeared on it.

A Plantation Purchase That Inflated the Books

The Gengma plantation example shows the documentary difference. The commission found that the true purchase was from Gengma Dai to a Sino-Forest subsidiary. The genuine contracts were supported by forestry-rights certificates, cash payments, tax invoices and their use with government authorities. Separate purchase contracts naming Yuda Wood were fictitious and had been created to increase the assets shown in Sino-Forest’s financial statements.

The commission found that Yuda Wood never owned that plantation. Sino-Forest nevertheless recorded contracts with Yuda Wood at more than five times the price it actually paid Gengma Dai. This was a finding about false purchase documents and inflated assets, rather than a disagreement over which valuation model to use. An employee familiar with the actual seller or payment could identify the transaction behind the larger book entry.

Greenheart Raised a Separate Conflict

The Greenheart acquisition involved a different problem: the chief executive’s undisclosed financial interest. The commission found that he beneficially owned companies involved in the transaction and concealed that interest. It separately found fraud against Sino-Forest investors and disclosure failures concerning Greenheart. Those findings concerned a hidden interest in the acquisition, alongside the standing-timber fraud.

For someone involved in acquisitions or accounting, the comparison would reach beyond the purchase price. We would examine who stood behind the selling companies, who directed the payments and what the board was told about those interests. The commission’s Greenheart analysis followed the companies and the proceeds to examine the concealed ownership. An internal transaction file can contain a relationship that the public description omits.

The Findings and the Separate Outcomes

The merits decision made different findings for different executives. It dismissed the standing-timber fraud allegation against another executive, while finding that he, too, had misled the commission’s investigators. That distinction keeps the case from becoming a single undifferentiated accusation against everyone involved. The published findings rest on the commission’s examination of evidence, rather than on the short seller’s allegations.

In its July 9, 2018 sanctions decision, the commission imposed permanent trading and corporate-role restrictions on the five individual respondents. It ordered the former chief executive to pay a $5 million administrative penalty and surrender $60,288,253 obtained through the misconduct, with both amounts in Canadian dollars. The latter amount included compensation and proceeds tied to Greenheart. These were regulatory orders, not amounts reported as distributed to investors.

The separate civil action belonged to the SFC Litigation Trust, which received Sino-Forest’s rights of action under its restructuring plan. In its judgment, the Ontario Superior Court of Justice found the former chief executive liable for fraud and breach of his duties to the company and assessed $2,627,478,000 in U.S. dollars as damages. The court judgment and the commission’s orders addressed different claims. The commission directed that payments under the trust judgment or a final shareholder judgment be credited against its order requiring the chief executive to surrender gains.

Bring the Timber Books and the Public Story Together

A forestry employee may know the location or ownership problem, while a finance employee may know the contracts, counterparties or account offsets. We work with you to connect those observations to what investors were told. For information arising in China, Canada or elsewhere abroad, we assess the connection to a U.S. securities matter with securities fraud whistleblower lawyers. The international setting is part of that assessment.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That is the separate program for fraud against government money; the Sino-Forest decisions described here are Canadian securities and civil decisions. We assess the reporting opportunity around the conduct and evidence you can explain.

Speak With Us About the Timber Books

If you work in forestry or finance and know the timber books tell a different story from the transactions, speak with our whistleblower experts about what you see. We work with you to build the case from the records you know, bring in securities fraud whistleblower lawyers, and stay beside you through the process.