By: Canadian Business
As the Ontario Securities Commission’s case against Sino-Forest nears its end, questions remain about how enforceable any possible outcomes might be.
Lawyers have been delivering their closing remarks over the past few weeks in what has been one of the most complex cases in the OSC’s history, encompassing more than 170 days of hearings, 22 witnesses, over 22,000 pages of transcripts and thousands of exhibits.
If the securities watchdog wins the case, former CEO Allen Chan and four other former executives of the now-defunct forestry company could be permanently banned from Canada’s capital markets, or fined up to $1 million for each failure to comply with Ontario securities law.
But some observers question how consequential such actions would be because all five of the accused live in China.
“Even if the securities commission is entirely successful, what purpose will it serve?” says Garth Myers, a lawyer at Koskie Minsky who is representing Sino-Forest shareholders in a class-action lawsuit against the former company and its underwriters.
“Sino-Forest as a company doesn’t exist anymore. The other individual defendants likely will never sit on boards or be officers of public companies again in any event, so it may be a pyrrhic victory.”
Established in 1994, Sino-Forest was an Ontario-based company that conducted most of its business in China. It was once the most valuable forestry company listed on the Toronto Stock Exchange, with a market capitalization of $6 billion, before its collapse in 2012.
The OSC has accused Chan and four other former executives — Albert Ip, Alfred Hung, George Ho and Simon Yeung — of defrauding investors by overstating the company’s assets and revenue.
Defence lawyers have argued that what the OSC is calling fraud were actually mistakes made by a rapidly-growing company, and that Canadian regulators have failed to understand Chinese business customs.
Regardless of who wins, Myers says collecting any fines that may be levied could pose a challenge.
A memorandum of understanding between the OSC and the China Securities Regulatory Commission could help on that front, says Douglas Cumming, a finance professor at York University’s Schulich School of Business.
However, the bankrupt entity may not have the cash to cover any possible fines.
“A tremendous amount of money was spent defending Sino-Forest and its officers and inside management in the OSC proceedings that could otherwise have gone to compensating Sino-Forest shareholders,” said Myers.
Sino-Forest has already burned through $60 million of the $62 million it had in insurance policies, and the bulk of that money — all but $4.2 million, which went to shareholders — has gone to defending the company and its former executives in legal proceedings, said Myers.
Neil Gross, the executive director of investor rights group FAIR Canada, says the case highlights how risky it can be to allow emerging companies to use Canada’s capital markets to raise money.
“Those risks have materialized, repeatedly, in frauds costing Canadian investors enormous amounts of money,” Gross said in an email.
Canadian policy-makers should take some time to assess whether the benefits to Canada’s capital markets outweigh such risks, he said.
Carson Block, the chief executive of Muddy Waters — the activist investment firm that first blew the whistle on Sino-Forest — says that despite any possible enforcement hurdles, the money the OSC has spent on the case is worth it.
“It signals that the OSC is willing to go the distance to hold people accountable,” says Block.
Muddy Waters released a research report on June 2, 2011, that alleged Sino-Forest was a Ponzi scheme and accused it of massively exaggerating its assets, causing trading in its shares to be halted.
Nearly five years after that initial report, Block says the case has been a lesson for investors.
“Sino-Forest opened the eyes of a great many Western investors to the prevalence and scale of fraud in China,” Block said in an email.
“The hard lessons from Sino have protected investors from losing billions more to China frauds.”