China stock fiasco slams Paulson and retirees alike

Ron Salmon first invested in Sino-Forest Corp. as a speculative stock. He bought more shares even after they tumbled 83 percent in June, when the company was accused of fraud. Salmon, a teacher of English as a second language who is semi-retired after a car crash left him quadriplegic, said he carried out his own research into Sino-Forest and was encouraged by other investors buying the stock after its initial plunge. Now he's unable to recover any of his C$42,000 ($42,300) original investment because regulators imposed a trading ban. “It's gut-wrenching,” Salmon, 43, said in a telephone interview from Richmond Hill, Ontario. “I've just been blind-sided.” Other investors caught out by the storm that has engulfed Sino-Forest over the past three months include hedge fund manager John Paulson and billionaire New Zealander Richard Chandler. Sino-Forest has lost at least C$3.3 billion of market value since Muddy Waters LLC, a firm founded by short seller Carson Block, issued a report saying the Hong Kong- and Mississauga, Ontario-based forestry company was exaggerating its Chinese timber holdings. “It now seems quite likely it's a fraud,” said Jaap van der Hart, a money manager at Robeco Groep NV in Rotterdam, which owns 627,100 Sino-Forest shares after selling 272,900 in June. “The key question is to what extent they have defrauded and whether there's potentially still some value.” ‘Difficult Time' Sino-Forest has denied the allegations and established an independent committee of directors to examine and respond to them. Stan Neve, a spokesman for the company in New York, said in a telephone interview yesterday that the company won't comment on the substance of the allegations until after its review is completed. “The independent committee recognizes that this has been a difficult time for the company's stockholders and we appreciate their continued patience,” Neve said. Paulson, president of New York-based Paulson & Co., sold all his Sino-Forest shares in June and took a C$462 million loss, the firm said in a letter to clients. Paulson, who made $15 billion for his backers in 2007 betting against subprime mortgages, had been Sino-Forest's largest shareholder, with a 12.5 percent stake. Armel Leslie, a spokesman at Paulson, declined to comment. John Goldsmith, a Toronto-based money manager at Montrusco Bolton Investments Inc., also exited his Sino-Forest position, after examining data released by the company following the publication of the Muddy Waters report. Montrusco Exit His Montrusco Bolton Canadian Equity Fund held 75,200 shares at the end of May, which he said were bought at an average cost in the “high teens.” Goldsmith sold his holding June 9, seven days after the report came out, at C$5.22 a share. “We definitely lost money, but we're not stuck with a piece of paper that's worthless,” Goldsmith said in an interview. “I would have been insane to hold onto that name.” While Paulson and Montrusco got out, Sino-Forest represented an opportunity for other investors. Wellington Management Co., a Boston-based investment firm, said in July it owned an 11.5 percent stake. Chandler, who profited in the previous decade as a shareholder in SK Group by successfully pushing for reform at the South Korean company, boosted his Sino-Forest stake to 19 percent, making him its biggest investor according to data compiled by Bloomberg. Chandler declined to comment through Richard Barton, a Hong Kong-based spokesman. ‘Confidence Bolstered' Those purchases swayed Salmon, who had carried out research on the Internet and by looking through Sino-Forest statements. “After doing my research and seeing what had happened with those other big fund managers getting involved, my confidence was bolstered,” he said. The Ontario Securities Commission, Canada's main securities regulator, halted Sino-Forest shares before the start of trading on Aug. 26 and said there may have been fraud at the company. The OSC is poring over tens of thousands of documents as it investigates the company. The stock closed at C$4.81 on Aug. 25 on the Toronto Stock Exchange, down 74 percent since June 1, the day before the Muddy Waters report was released. It continued to trade over the counter in the U.S. on Aug. 26 before being halted, falling to $1.38 and giving the company a market value of $338.4 million. Chairman and Chief Executive Officer Allen Chan resigned Aug. 28. ‘Domino Effect' “Carson Block has just started a domino effect that everybody has jumped on,” said Warren Perzel, a 66-year-old retired chief financial officer for a Calgary-based aviation company who invested C$10,000 after the shares plunged. Perzel said he doesn't think Sino-Forest is a fraud. Other investors also facing loses include Tucson, Arizona- based Davis Selected Advisers LP, the second-largest shareholder with 30.9 million Sino-Forest shares, or 13 percent. Laura Berger, a spokeswoman for Davis, didn't immediately respond to an e-mail request for comment. Ivy Investment Management Co., which is based in Overland Park, Kansas, held 15 million shares, or 6.1 percent, through its Ivy Global Natural Resources Fund as of June 30, according to filings. Frederick Sturm, the fund's manager, didn't immediately respond to e-mails seeking comment. Put Contracts “If it's really a fraud, then it's a big shame, a big disgrace this could have happened and for so long,” said Van der Hart. He said Sino-Forest's impact on Robeco “was limited” as it represents 0.3 percent of the company's holdings, which includes 10 billion euros ($13.7 billion) in emerging-market equities. Block said in an Aug. 26 interview he was still betting Sino-Forest would drop further. Block said Sept. 18 in an e- mailed response to questions from Bloomberg News that he doesn't disclose trading positions. Some holders of Sino-Forest put contracts also have gained from the stock's plunge. There were 8,993 outstanding put contracts, which collectively entitled the holders to sell about 899,300 Sino-Forest shares “at prices substantially in excess of their current values,” the Canadian Derivatives Clearing Corp. said in a Sept. 12 letter. The CDCC successfully petitioned the securities commission on Sept. 15 to modify the trading ban to allow some outstanding options to be exercised. That's little comfort for Salmon. “It's painful,” Salmon said. “I'm considering it a write-off.”