Early this morning, Muddy Waters sent out the following email:
The Globe & Mail, one of Canada's largest newspapers, has published a lengthy investigative piece on Sino-Forest's holdings in Yunnan. The article corroborates Muddy Waters' research showing that TRE has massively overstated its Yunnan timber holdings.
Muddy Waters is still short Sino-Forest.
Bottom line: a small 2-person operation outsmarted a $35 billion hedge fund courtesy of the first thing in a true investor's arsenal: real due diligence. The second and third things for those asking are, getting big enough where an economy of scale is all tha matters to any "investing" decision, and hubris. Next up: See No Forest halted indefinitely like most other Chinese fraudcaps, while John Paulson continues the denial farce, saying he is still "supportive." Unfortunately, we doubt his LPs will be, and with no "selectively created" CDOs available to offset the massive loss, and with Bank of America about to drop back to Paulson's cost basis in the mid $9s (which it will very soon once the liquidations prompt the firm to unwind the most liquid assets first), we wouldn't be surprised to see the unwind of the biggest hedge fund "success" story in recent history begin in earnest.
The key part from the Globe and Mail investigation:
The Globe’s investigation raises particularly hard questions about a key agreement in March, 2007, that Sino-Forest says gave it the right to buy timber rights for up to 200,000 hectares of forest in Yunnan over a 10-year period for between $700-million (U.S.) and $1.4-billion. The trees were to be bought through a series of agreements with an entity called Gengma Dai and Wa Tribes Autonomous Region Forestry Co. Ltd., also known as Gengma Forestry. The company says it has fulfilled virtually all of the agreement with Gengma and now owns more than 200,000 hectares in Yunnan. But officials with Gengma Forestry, including the chairman, dispute the company’s account of the deal, telling The Globe and Mail that the actual numbers are much smaller. Xie Hongting, the chairman of Gengma Forestry, said in an interview that the transactions carried out so far by Sino-Forest amounted to less than 14,000 hectares.
From the Globe and Mail piece:
Globe inquiry finds irregularities in timber company's disclosure; Chinese forestry officials open probe
Embattled Sino-Forest Corp. TRE-T, once Canada's biggest publicly-traded timber company, appears to have substantially overstated the size and value of its forestry holdings in China's Yunnan province, according to figures provided by senior forestry officials and a key business partner there.
During two weeks of on-the-ground reporting that included interviews with Chinese government officials, forestry experts, local business operators and brokers, The Globe and Mail uncovered a number of glaring inconsistencies that raise doubts about the company's public statements regarding the value of the assets that lie at the centre of the company's core business of buying and selling Chinese timber rights.
Once a stock market favourite, Sino-Forest has had a spectacular fall since a short seller's report, published June 2, alleged that the company engaged in large-scale fraud and is inflating the value of its timber assets. The shares are down 82 per cent since the release of that report, written by Carson Block of Muddy Waters LLC, representing a paper loss of $3.7-billion to investors in little more than two weeks.
The company has denied all wrongdoing and the board of directors formed a committee to probe the allegations raised by Muddy Waters. The investigation is expected to last months and has begun with representatives from PricewaterhouseCoopers checking Sino-Forest's bank accounts to verify the more than $1-billion (U.S.) the company says it holds in cash at Chinese banks and other financial institutions.