Sino-Forest, for people not familiar with it, was engaged in forest land management in China. The company was traded publicly in Canada, but operated in China.
Last year Muddy Waters, an investment firm, released a report alleging that Sino-Forest was not all it seemed to be. At the very least its processes and the facts seemed, on more careful inspection, to be somewhat opaque.
The story is not pretty – the firm is now in CCAA protection. There were complex related party transactions, including undisclosed ones. The auditors have resigned. A Board Committee investigating the situation has reported, but not fully unravelled the web of relationships between Sino-Forest and related companies. Regulators are alleging fraud. Police are investigating. Shareholders have been wiped out.
The new lawsuit alleges a number of accounting violations that the plaintiffs feel that auditors should have caught. The first response by the auditors suggests the case is without merit. To the extent that audit practices were weak, one can be sure that all the big firms have plugged most of those gaps. Whether the case has merit or not, will likely take years to resolve.
Regulators are not only on the case at Sino-Forest, but also looking at the broader question of management being very remote from the day to day operations. The story will continue to develop on a number of fronts.
While the story is not yet done, the destruction of value is clear, and many will continue to watch the ongoing developments. The difficulty in understanding whether a) Sino-Forest was a sound company that has been sandbagged or b) a fraud that has been found out, or c) something in between is focusing regulators on cross-listed and foreign operated companies.