A report into allegations of a massive fraud at Sino-Forest Corp. (TSX:TRE) by the company's own independent committee has failed to bring investors any closer to seeing a return on their investment in the troubled Chinese timberland company, an observer said Wednesday.
University of Toronto business professor Richard Powers said the report left more questions than answers.
"The question of fraud still hangs in the air," Powers said. "The likely situation now is any assets they do have will be used to satisfy the claims against them."
"How much remains to be seen, but investors are likely looking at cents on the dollar," he said.
The final report by the independent committee investigating the allegations of fraud was released Tuesday night, however it left several key questions unanswered including the value of its forestry assets and questions about certain relationships between the company and its suppliers.
The company said, though some issues remain, the work of the committee was "at the point of diminishing returns."
The independent report came as a new lawsuit was filed against the company in New York on behalf of investors who bought its shares on the over-the-counter market and non-Canadians who bought the company's debt.
Not only does the lawsuit name the company and executives, but it also goes after the company's auditors and underwriters.
"There is still so much that has not really come out yet as to what really happened," said Lawyer Steven Toll of Washington, D.C.,-based firm Cohen Milstein Sellers & Toll, which filed the case.
"There's all kinds of investigations. There's a halt in trading. There's allegations of all kinds of fraudulent conduct, but on the other hand you have the company saying 'we didn't do anything wrong.'"
Meanwhile, Sino-Forest said it "intends to vigorously defend the action."
Earlier this month, an Ontario court named Koskie Minsky LLP and Siskinds LLP as the two law firms to head a class action case making similar allegations of fraud in Canada.
None of the allegations have been proven in court.
Sino-Forest had faced a Tuesday deadline for the independent committee's report under an agreement with its lenders that also calls for a preliminary strategic plan for the company by March 31. The same agreement also gives the company's noteholders considerable control over the sale of the company's assets in a restructuring.
Richard Chandler, a New Zealand investor and the largest holder of Sino Forest shares with just under 20 per cent, has urged for the replacement of the company's board and the appointment of a new chief executive.
New York-based Davis Advisors, which owns 17 per cent of the company and is the No. 2 investor, has also sought a new direction at Sino-Forest.
The independent committee's report said its investigation encountered "numerous challenges in its attempts to implement a robust independent process which would yield reliable results."
The committee pointed to several challenges including China's legal regime for forestry, obtaining information from third parties, Sino-Forest's small management team and cultural and geographic issues.
Though the report confirmed the company's ownership and rights to its timberland holdings, just how much they are worth was another question.
The reported noted the company has hired a consultant to help in determining the fair market value of its forest assets.
"The exercise will involve a highly structured process that will, over time, systematically assess the area of forest cover and merchantable volume across the Sino-Forest estate," the report said.
Powers noted that those suing the company face the same difficulty as investors as much of the company's cash and assets are in China — making repatriation to Canada or the United States a tricky business.
"It is unlikely that investors are going to be happy in the end," he said.
Sino-Forest has raised about $3 billion from the sale of shares and corporate debt issues since 2003 — bought by Canadian, American and international investors.
The investigation was launched after allegations of fraud by short-seller Muddy Waters Research last summer. The Ontario Securities Commission and the RCMP are also investigating the company.
Muddy Waters research director Carson Block declined to comment Wednesday.
Shares in Sino-Forest, which traded for more than $14 before the allegations were made, subsequently fell as low as $1.29 but recovered to $4.81 before trading was halted.
© The Canadian Press, 2012