Canadian-headquarted Sino-Forest (TSE:TRE) said that Allen Chan has "voluntarily resigned" as chairman and CEO of the Chinese forest plantation operator, pending the outcome of an internal review into fraud allegations, while Standard & Poor's withdrew its rating on the company.
On Friday, provincial markets regulator the Ontario Securities Commission suspended trading in Sino-Forest shares and recommened the resignation of four key directors, including Chan, before quickly rescinding the latter decision. The regulator is investigating Sino-Forest following a report flagging up fraud at the forestry company in early June.
"Sino-Forest and certain of its officers and directors appear to have misrepresented some of its revenue and/or exaggerated some of its timber holdings," the OSC said in its findings last week.
Shares in Sino-Forest have fallen 73% over the past year to $4.81 on August 25, the day prior to the suspension. In late August last year, the company's shares were trading at around the $18 mark. Standard & Poor's Global Timber & Forestry Index, in which Sino-Forest has a weighting of almost 10%, was down 16.98% for the year to date on August 26.
In a statement, Standard & Poor's analyst Frank Lu said: "We lowered the rating on Sino-Forest partly because we believe recent developments point towards a higher likelihood that allegations of fraud at the company will be substantiated." Before withdrawing its coverage, S&P had cut its rating on the company to CCC- from B.
Ratings agency Moody's Investors Service also cut its rating on Sino-Forest to Caa1 from B1, and warned it was continuing its review of the company for possible further downgrades.
Sino-Forest's recent woes began in June, when Hong Kong-based independent research firm and short-seller Muddy Waters issued a sell rating on Sino-Forest, alleging in a report published on June 2 that the company was a "multi-billion dollar Ponzi scheme" that has been "aggressively committing fraud...since 1995".
In a statement released on Sunday, Sino-Forest named current vice-chairman Judson Martin as the new CEO, and company director William Ardell as chairman. Ardell is also the chairman of the independent committee that is reviewing the charges levelled at the lumber company by Muddy Waters.
Since the allegations first surfaced, significant trading activity in Sino-Forest stock has taken place. New Zealand businessman Richard Chandler took a 10.85% stake in the company in July, increasing the holding to 18% as of early August, becoming its largest shareholder.
Also last month, well-known U.S. money manager John Paulson took a loss on his stake in the beleagured timber company, as his $37 billion Paulson & Co. hedge fund firm sold its entire holding of 34.7 million shares, or around 14% of the company.
Sino-Forest is also the subject of a $6.5 billion class action lawsuit filed in mid-June by Ontario law firms Koskie Minsky LLP and Siskinds LLP.
Earlier this month, the company said it swung to a loss in the second quarter on higher costs and lower gross margin from plantation fibre operations.
For the three months ending June 30, the lumber company reported a net loss of $9.8 million, from a profit of $60.8 million a year ago, excluding a gain of $470 million from the fair value adjustment of its convertible notes. Revenue for the period rose 6.3% to $317.4 million.