The Ontario Securities Commission (“OSC”) has almost completed its case in the high-profile Sino-Forest Corporation (“SFC”) hearing that began on September 2, 2014. SFC and certain of its former executives are alleged to have engaged in widespread fraud relating to its public financial disclosure. Specific allegations involve the fabrication or overestimation of revenue and assets, falsified evidence of ownership, backdated contracts, and undisclosed control over particular customers and suppliers. The hearing is presently on a brief hiatus, with the respondents expected to begin their defence in late March of this year.

SFC, its former CEO, Allen Chan, and senior executives under Mr. Chan’s supervision are alleged to have engaged in one of the biggest securities frauds in Canadian history. SFC was a Canadian public company trading on the TSX with business operations in the People’s Republic of China (the “PRC”). On June 2, 2011, Muddy Waters, a U.S.-based short seller, released a report that indicted the company of fraudulent conduct and labelled SFC a “Ponzi scheme”. Despite the immediate internal investigation conducted by an Independent Committee at the behest of the company’s directors, SFC’s share prices plunged, costing Canadian investors billions. The company filed for CCAA protection in 2012.

Notable among the allegations is the OSC’s assertion that SFC’s public financial disclosure misrepresented its proprietary rights to the forests it allegedly owned in the PRC. There is uncertainty as to whether SFC ever possessed such rights, and the evidence on this issue will need to be viewed in the context of the murky state of PRC land ownership laws.

The Panel has heard evidence from notable SFC players, including former directors and officers of SFC, members of the Independent Committee, Mr. Chan’s personal assistant and representatives of Ernst & Young LLP, one of SFC’s former auditors.

It is expected that the respondents will maintain that SFC operated in the PRC to the best of its ability given the realities of government restrictions on land ownership and foreign company operations in a communist territory, resulting in some unorthodox business practices from a Canadian viewpoint. The OSC asserts that despite any such practices, SFC was a Canadian company subject to Canadian standards of accountability.

The hearing will continue to deal with the complexities that arise in the age of Canadian investments in emerging markets such as the PRC. At odds are the aims of securing investor protection and confidence in the integrity of Canadian stock exchanges, while accounting for the nuanced business realities of foreign emerging markets.

We will continue to follow the matter closely and provide updates as events unfold.