Friday, August 1, 2014

Steal three billion dollars, get a 700 thousand dollar fine: the scammers have a better business model - Sino Forest edition

Sino Forest - familiar to many of my readers - was a large forestry company listed in Canada with operations in China.

It claimed almost 1 million hectares of forest generating twenty cubic metres of chips per hectare per year.

Market cap was in the billions.

The only problem was that the forest did not exist.

Today the Chief Financial Officer admitted wrongdoing, paid a fine and agreed to disgorge some money for the benefit of victims of the scam.

The (Canadian) Financial Post notes:
Mr. Horsley agreed to pay $700,000 in the settlement, and is barred permanently from being a director or officer of a public company. Mr. Turner noted that Mr. Horsley also agreed to pay $5.6-million to settle shareholder lawsuits related to Sino-Forest’s collapse. He [the OSC chair] viewed that as an appropriate penalty, which is why he endorsed the relatively small OSC settlement.
Later the paper deadpans:

At its peak, Sino-Forest was the biggest forestry firm on the Toronto Stock Exchange, with a market value of more than $6-billion. It also raised a staggering $3-billion from investors between 2003 and 2010 before falling into creditor protection in 2012.

Simple question: Where did that $3 billion that was raised go?

Answer: Into someone's pocket.

Have you made a few billion dollars lately?

Repeat after me: the fraudsters have a better business model.


PS: There is out there a multi-billionaire fraudster who is completely absent from the Forbes list of global billionaires. Whatever: at a minimum the Forbes list is like Sino Forest: lacking credibility.


Anonymous said...

Balzac lives!

Penny O'Hallaran said...

I don't agree with your analysis John.

The fines and legal expenses would more than outweigh the money raised. I expect the individual and their family is financially devastated.

While I naturally have zero sympathy for the fraudster, in fact I have antipathy for him (her) and a sense of outrage on behalf of those defrauded; your point is not valid.

Chris H said...

Sorry, John's analysis is spot on. He isn't saying that the exec who has to pay is the one who made off with the $3 billion.
And without knowledge we don't have we can't tell whether the exec is personally devastated (much less their family).
Australian examples like the well-known Gunns insider trading fraud suggest, though, that penalties are very likely to be less even than the personal profit of those penalised.

Dan Davies said...

The fines and legal expenses would more than outweigh the money raised

One can't compare the total money raised to the settlement of this one case against the CFO. But:

a) the majority of the $3bn seems to have gone to Chinese fraudsters who are likely to never be prosecuted at all (or at least, not for this; in general, shonky operators in China often come to a sticky end one way or t'other).

b) insider share sales are always a matter of public record so it's not hard to find out that David Horsley sold C$11.2m worth of shares on the way up. So if he spent less than C$4.9m on lawyers' fees (which he surely did; this is an agreed plea bargain in a securities case, not a prolonged criminal trial), he came out ahead of the game.

(John; might want to edit the post to make it clear that the monetary amounts are, I think, in Canadian dollars rather than USD).

Anonymous said...

This is a tad simplistic but it reflects the common media perception (which isn't actually accurate).

It actually wasn't the fraud it was portrayed to be - the issues are a bit more complicated. There is a tax refund of about $700m and the Authorised Intermediaries hold about say $350m. The company owns a shell in HK too (Greenheart) which in turn owns forests in NZ and in Asia.

The forests did in fact exist (although SF often didn't own these given Chinese legal restrictions on foreigners owning property). SF would typically hold contractual rights to the forests. Accordingly, when a short seller obtains the property title it shows that SF is not the wrong - aha, a fraud! But in reality they had contractual rights to the forests.

After the scandal broke, the AI (authorised intermediaries) saw which way the wind was blowing and pocketed the money. That is where the crooks are here.

The problem for the bondholders going forward is that without being an influential large Chinese entity, you will not be able to recover any value (especially the tax refund).

RC after he lost $400m on the equity (don't feel too bad for him, he and his brother's net worth exceeds US$25b) looked at the bonds and spent (together with the company) around $40m on DD with PWC and other consultants. This confirmed that the assets were there (although the forests were very poor quality - usually the wood is just used for formwork type uses).


Black Sambo

Anonymous said...

Penny, enlighten me,what were the fines and legal expenses? I have no idea, but I am hoping you can tell me. Also, just checking, but how much worse is it to be "financially devastated" then to be in prison (because I assume the cost of going to prison is part of the business model)? One last question. How much money did the individual and his family spend from criminal proceeds while the scam was going on (again, part of the business model)? I don't know any of these answers, but it is all part of the business model you say John's analysis is wrong about (and neither of us is addressing the larger point that someone or some group of someones has a few billion dollars that is unaccounted for).

Anonymous said...

I don't understand how this works. He's in China - why is he agreeing to pay $700k? Couldn't he simply refuse to pay?

Outside regulatory agencies have no jurisdiction in China. Isn't that why all executives at US-listed Chinese frauds have gone unpunished? CCME, RINO, etc.

Frozen in the North said...

I predicted this outcome several years ago.

Anonymous said...

I love it. The auditor for SINO forest settled for upwards of $192m, the director settles for $700 k, the class action suit is ongoing against the OSC, RBC and god knows how many others and us little investors have to sit and watch as the perpetrators remain unaccountable. For example, Paul Quinn the forestry analyst for RBC who staunchly promoted and aggressively supported SINO Forest is still working for RBC. I hope the class action lawyers take note when it comes to RBCs turn to defend themselves and as for the OSC and their reverse takeover policies which allowed for SINO Forest to slip into the Canadian market unfettered by any due diligence blows me away and my investment.
Vive la Revolution Bay Street.
Not the 1%

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