sino-Forest execs deny fraud, call OSC allegations a misinterpretation of Chinese business practices
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Barbara Shecter | September 2, 2014 2:10 PM ET
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TORONTO – Canadian regulators laid out a “road map” Tuesday they said will prove Hong Kong-based executives carried out a massive fraud at Sino-Forest Corp., which traded at $6-billion on the Toronto Stock Exchange before its spectacular collapse. But lawyers for the accused argued that the Ontario Securities Commission has simply misinterpreted common Chinese business practices.
Sino-Forest raised $3-billion in Canada’s capital markets before a short-seller’s allegations of fraud and revenue inflation – and a subsequent investigation by the Ontario Securities Commission — felled the firm and wiped out the holdings of scores of shareholders.
Hugh Craig, a lawyer for the Ontario Securities Commission pledged Tuesday to call more than a dozen witnesses and present thousands of pages of documents and other evidence to back up accusations of multiple instances of fraud – including selling timber rights before they had even been acquired.
These events did not take place on Bay Street or even rural Ontario
But a lawyer for former Sino-Forest chief executive Allen Chan, as well as the legal representative for four other former senior executives, said Canadian regulators made the mistake of looking through “a North American lens” when interpreting Sino-Forest’s timber ownership and sales contracts in China.
“These events did not take place on Bay Street or even rural Ontario,” Emily Cole, a lawyer for Mr. Chan, told a three-member panel of OSC commissioners that began hearing the Ontario regulator’s case against the former Sino-Forest executives on Tuesday. “The panel should not draw conclusions about them as if they did.”
Ms. Cole plans to call an expert witness on Chinese law and business culture who will testify that Sino-Forest’s operations were in keeping with the requirements and constraints of the developing market.
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She said her witness, Dr. Randall Peerenboom, an American who has lived in China for more than 20 years, would explain how business practices viewed as “surprising, if not shocking” to Canadian regulators was the only way to do business in China where money could not be exchanged freely and local bank accounts were impossible to get.
The OSC’s fraud accusations centre in part on Sino-Forest’s practice of buying and selling timber assets without any cash passing through the company. Purchasers bypassed the company entirely by paying Sino-Forest’s suppliers.
This accusation “pre-supposes they could have sent money to Sino-Forest – it simply wasn’t possible,” Ms. Cole said, adding that setting up offshore companies in the British Virgin Islands was in no way “nefarious” because it was similarly required.
Keep an open mind about these differences in business and culture
“Keep an open mind about these differences in business and culture,” she urged the OSC panel.
Markus Koehnen, who is representing former senior Sino-Forest executives Alfred Hung, Albert Ip, George Ho, and Simon Yeung, spent more than two hours Tuesday afternoon walking the panel through such concepts at guanxi, or relationship building. He said understanding the key component of Chinese business that goes well beyond networking would clear up concerns over declaring revenue based on agreements made in farmers’ fields, and the perceived impropriety of a series of close business connections between Sino-Forest and key customers and suppliers.
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The OSC alleges that Sino-Forest’s top executives hid these relationships that helped perpetrate the fraud, which Mr. Craig said included “the fabrication of assets and revenue.”
Mr. Chan and the other accused former executives take the allegations seriously and are anxious to explain the steps they took to address and disclose uncertainties related to doing business in China, their lawyers said.
Mr. Koehnen acknowledged that the extensive probe by regulators dug up some “mistakes” the fast-growing company had made as it developed — but he said such occurrences are not usual.
Peter J. Thompson/National Post
Peter J. Thompson/National PostStaff of the OSC hopes to call a handful of witnesses who would testify from Hong Kong, including former Sino-Forest CEO Allen Chan’s former assistant.
“The fact that someone makes an operational mistake doesn’t make it fraud,” he said, noting that all the company’s cash was accounted for in an internal probe by Sino’s independent directors, despite lingering questions about timber ownership.
“It’s an odd fraud where there’s no cash missing at all,” Mr. Koehnen said.
He said his clients plan to testify, and would prefer to do so in Canada rather than by remote link to Hong Kong if certain issues are worked out. He declined to say what might stop them from coming to Canada.
Staff of the OSC hopes to call a handful of witnesses who would testify from Hong Kong, including Mr. Chan’s former assistant. If the bid to line up these witnesses is successful, it could involve early morning or late evening hearings to accommodate the time difference between Hong Kong and Toronto.
Mr. Chan’s lawyer, Ms. Cole, pointed out that Carson Block, the short-seller whose bombshell report in June of 2011 was the beginning of Sino-Forest’s fall, is not on the OSC’s list of expected witnesses.
Mr. Craig, counsel for OSC staff, acknowledged the role of Mr. Block’s report in the Sino-Forest story in his opening arguments Tuesday. But he said the risk of losses to investors – a key element of fraud – was independent of the report and pre-dated it.
“The risk of this loss was always present, given the flaws in Sino-Forest,” Mr. Craig said.
“No investor could make an informed decision whether to buy or sell Sino-Forest securities.”
Mr. Craig anticipated evidence from the accused about different business practices in China, but he urged the panel to remember that Sino-Forest raised billions of dollars in Canada’s markets and was subject to Ontario securities law.
In addition to allegations of backdating purchases and sales of timber assets, the former Sino-Forest executives are accused of misleading independent directors, auditors, and OSC investigators.
The case is expected to continue well into 2015 |
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