Troubled Chinese Timberland Operator Faces Another Shareholder Lawsuit

(September 30, 2011) — Fund manager Northwest & Ethical Investments and Comité syndical national de retraite Bâtirente, a Quebec labor-sponsored retirement system, have sued Sino-Forest Corp.

The suit, filed on behalf of Sino-Forest Corp., shareholders is seeking class-action status on behalf of investors who purchased shares or notes in the Chinese timberland operator between Aug. 17, 2004, and June 2, 2011, Benefits Canada reported.

Sino-Forest has come under increasing scrutiny as of late. Early this month, two pension funds filed a $6.5 billion class-action lawsuit against the timber company, along with its head executives and auditor Ernst & Young. The suit was filed by trustees of the Labourers’ Pension Fund of Central and Eastern Canada and the trustees of the International Union of Operating Engineers Local 793 Pension Plan for Operating Engineers in Ontario. Both schemes purchased shares in Sino-Forest from March 19, 2007 to June 2, 2011, the period covered by the lawsuit, when the forestry firm raised more than $2.7 billion in the capital markets. During this period, the underwriters and auditors also earned large fees for their services, the suit explained.

The suit alleged that the officers and directors of Sino-Forest misrepresented financial statements, backdated stock options, and overstated forest holdings in China and elsewhere. Additionally, it claimed that former Ernst & Young partners and employees were among directors and management at Sino-Forest, and that Ernst & Young’s “independence was impaired by the significant non-audit fees it was paid” from Sino-Forest from 2008 to 2010, totaling nearly $3 million.

“Since 2003, Sino-Forest has raised approximately $2.986 billion from public investment and/or debt securities issues, including four public offerings between 2004 and 2009, which approximately raised $1.05 billion,” the complaint said.

Late last month, the Ontario Securities Commission ordered that trading of Sino-Forest’s securities be halted. It stated that the company and some officers and directors appeared to be engaging in conduct “they know or reasonably ought to know perpetuate a fraud on any person or company.”

Sino-Forest has also been a top holding for John Paulson–founder and president of New York-based hedge fund Paulson & Co. In July, the Advantage Plus Fund, Paulson’s flagship, reported that it lost 11% in June as a result of huge losses with Sino-Forest. The firm dropped about 73% from its closing price on June 1. Paulson & Co. subsequently sold the entire stake in Sino-Forest as of June 17.