The saga of troubled Sino-Forest Corp, the Chinese forestry company delisted from the Toronto Stock Exchange, has taken another turn.
This week Canadian securities regulators, who have been investigating Sino Forest in relation to fraud, unleashed damning allegations against key management.
Sino Forest’s top executives, including former chairman and chief executive Allen Chan, allegedly “engaged in a complex fraudulent scheme to inflate the assets and revenue of Sino-Forest and made materially misleading statements in Sino-Forest’s public disclosure record related to its primary business”, according to a statement from the Ontario Securities Commission (OSC).
The OSC's nine month investigation was done in close collaboration with Hong Kong regulatory officials, the statement said.
“Our investigation is continuing into this matter, including an examination of the role of gatekeepers,” OSC enforcement director Tom Atkinson said in a separate statement.
The “gatekeepers”, according to local media, are the service providers such as lawyers who conducted due diligence and agencies who helped Sino-Forest raise money in Canada.
Rob Serjeant, managing director of Pinkerton Consulting Services in Hong Kong, said investigating the people who performed due diligence is not unprecedented, but it is also not a standard practice in fraud cases.
“Sino Forest had cascading failures across the board. Officials will want to know if these people actually evaluated the [due diligence] information and pursued it with a reasonable level of care rather than simply checking the boxes.”
A reasonable level of care involves nuts and bolts work, he added. When looking at deals in Asia “you have to get out and check the physical sources of information and areas, particularly with natural resources”.
If the top story is strong and ties together, look for inconsistencies in the deeper details, he advised.
He suggested on-the-ground verification with the target company but also third-party unannounced verification visits. Comparing the two could uncover inconsistencies.
Serjeant mentioned a scam in China in which a shuttered factory was made to appear fully operational for presentation to a potential investor.
“There is a high level of ingenuity in conducting very complex frauds,” Serjeant said.