August 28, 2011 – By Euan Rocha and Ryan Vlastelica
TORONTO/NEW YORK (Reuters) - Sino-Forest, a Chinese forestry company accused of fraud, said on Sunday Allen Chan had resigned as chairman and CEO and that it placed three senior employees on administrative leave, due to information uncovered in an ongoing internal review.
Toronto-listed Sino-Forest has seen its stock price plummet since June, when short-seller Carson Block accused the company of fraudulently exaggerating the size of its forestry assets. Sino-Forest had denied any wrongdoing and appointed a committee of its independent directors to investigate the matter.
However, on Friday, the Ontario Securities Commission (OSC) ordered a 15-day halt in trading of Sino-Forest shares and said it appeared that Chan and other executives had misrepresented revenues and kept bogus accounts.
The Sino-Forest saga is the most prominent among a series of accounting scandals in recent months to have tainted the image of Chinese companies listed in North America. The scandals have prompted trading halts, de-listings, lawsuits and regulatory probes both in Canada and the United States.
Shares of Chinese clothing and footwear company Zungui Haixi, just a week ago, fell more than 75 percent after the company said auditor Ernst & Young suspended its audit pending an investigation into certain issues it identified.
Sino-Forest's own market capitalization has fallen by roughly C$4 billion since Block and his firm, Muddy Waters, accused the company of fraud on June 2.
The company did not provide details on what prompted these actions, but indicated that Chan agreed to step aside prior to the issuance of the OSC's cease-trade order.
"The three overriding priorities of the company are to complete the work of the independent committee, to cooperate with the OSC and to preserve shareholder value," it said.
Chan will become founding chairman emeritus and will assist with operational matters and the internal review, as requested, the company said in a brief statement. It did not identify the three employees placed on administrative leave, but said they would remain available to assist the company, if required.
A fourth senior employee has been asked to act solely on the new CEO's instructions and help with matters relating to the review and the company's operations, Sino-Forest said.
David Horsley will continue as chief financial officer, while Tom Maradin will remain vice president of corporate finance, the company said.
The OSC, Canada's main securities regulator, is continuing its Sino-Forest investigation and on Friday demanded that Chan and four other officers resign. But in a surprising about-face, it rescinded that order, saying it lacked the power to force them out until after a hearing, expected within 15 days.
The company said it has been cooperating with the OSC throughout, by responding to numerous and extensive information requests and providing regular periodic briefings. It noted that the allegations made by the regulator are still unproven.
The company said its own review would likely take another four months to complete.
Sino-Forest also said the OSC's stock trading halt will not trigger any defaults on outstanding debt. The company "does not believe any default under its guaranteed senior notes or its convertible senior notes has been triggered by these events."
Sino-Forest would continue to review the terms of all of its debt and other contractual arrangements, it added.
According to its annual information form for the year to December 31, 2010, Sino-Forest had outstanding short- and long-term debt of $2.07 billion. Beyond $87.7 million being repaid this month, Sino-Forest has no other long-term debt due this year.
It does have roughly $345 million in long-term debt due in 2013, along with $424.5 million that matures over 2014 and 2015, according to the 2010 annual report. As of June 30, the company held cash and cash equivalents of about $900 million.
(Reporting by Euan Rocha; Editing by Braden Reddall)