Carson is the real fraud here....
Skepticism mounts against Sino-Forest short seller
By Joe Castaldo| June 07, 2011
Muddy Waters Research continued its assault on Sino-Forest shareswith founder Carson Block hosting a conference call for analysts Mondaynight. The call was the first chance for analysts to question Block en masse, who has been making the media rounds to discuss his allegations that the TSX-listed forestry company is a massive Ponzi scheme.
The call itself was "somewhat rambling and light on details," wroteRaymond James analyst Daryl Swetlishoff in a research note Tuesday.Block did little to allay analysts' skepticism toward his claims.
Swetlishoff points to two "glaring inaccuracies" in Block's original report.Block claims that the $231.1 million in revenue Sino-Forest made byselling timber in China's Yunnan province is grossly exaggerated. Suchan amount exceeds the province's harvesting quota by six times, he says,and is also logistically impossible. "Transporting the harvested logswould have required over 50,000 trucks driving on two-lane roads windingthrough the mountains from this remote region, which is far beyondbelief (and likely road capacity)," he wrote.
But Sino-Forest disclosed in its management discussion and analysisfor both the first and second quarters of 2010 that the revenue wasgenerated by selling standing timber, meaning the company did not cutdown and transport any of these trees.
During the call, Block didn't adequately address this discrepancy,according to Swetlishoff. "This is a very basic error regarding one ofthe primary allegations by [Muddy Waters], considering the large numberof purported man-hours spent in the 'investigation,'" he wrote.
Secondly, Block claims Sino-Forest overstated the size of its timberassets in Yunnan, citing evidence that it only owns 21,000 hectares. OnMonday, however, Sino-Forest released a slew of documents to showing itowns 173,000 hectares.
Based on his findings in Yunnan, Block made the assumption thatSino-Forest is perpetuating similar fraud with regard to its holdings inother provinces in China. Analysts on the call, however, questioned thevalidity of extrapolating these findings "when the details of theaccusations in Yunnan, where the majority of the report's analysis wasundertaken, fail basic checks," wrote Swetlishoff.
Block also raised further questions and accusations with regard toSino-Forest's accounting methods and corporate structure, thoughadmitted on the call that "we didn't really do our accounting tour deforce." He hinted more bombshells are coming soon. "Our residentaccounting monster is chomping at the bit to get going." (The fullextent of Block's accounting claims against Sino-Forest are complex.Business Insider has provided a detailed explanation here.)
Sino-Forest, meanwhile, is fighting back. In addition to the deluge of documents released on Monday,the company set up an independent committee to review the allegationsand confirm the legality and authenticity of its supporting documents.It also appointed PricewaterhouseCoopers late Monday night to assistwith the investigation.
Chairman Allen Chan vowed vindication in a statementreleased by the company. "It is important people recognize themotivations of Muddy Waters, because it is they who deliberately muddythe waters, not us. This is a company that has taken out a major shortposition in our company and then issued a report designed to make themmoney by the decline of our stock," he said. "It is the rest of us thatlick our wounds, while they lick their lips."