By now the facts underlying the recently concluded Ontario Securities Commission hearing into Sino-Forest Corporation should be well known. Sino-Forest was a reporting issuer in Ontario, reportedly in the business of operating commercial forest plantations in the People’s Republic of China. Between 1995 and its demise in 2013, when it entered into a Plan of Compromise and Reorganization resulting in its former bondholders receiving substantially all of its remaining assets, it raised approximately $3 billion from investors.
Shortly after a short seller’s report in June 2011 alleging that the Company was a fraud, Commission Staff commenced an investigation that resulted in the issuance of a Notice of Hearing and Statement of Allegations against the Company and the individual Respondents.
After 188 days of hearing extending over a 2 year period, and a further delay of over a year in releasing its decision, the Ontario Securities Commission has finally released its decision concerning allegations of fraud against Sino-Forest Corporation, its co-founder, Chair and CEO, Allen Chan, and senior executives Albert Ip, Alfred Hung, George Ho and Simon Yeung.
The result of the OSC hearing is not a surprise. All of the Respondents (except Yeung) were found to have engaged in dishonest courses of conduct during the period June 2006 to January 2012 that caused the assets and revenue derived from the Company’s purchase and sale of standing timber to be fraudulently overstated, contrary to s. 126.1 of the Ontario Securities Act. That conduct included the provision to the Company’s auditors of false information and documentation, including fraudulent audit confirmations and management representation letters, and back dating of standing timber purchase contract documentation.
Sino-Forest was also found to have engaged in conduct that resulted in Sino-Forest’s public disclosures in respect of its standing timber business being misleading in a material respect, contrary to s. 122 of the Act . Each of Chan, Ip, Ho and Hung were found to have permitted or acquiesced in the making of those misrepresentations.
The OSC further determined that Chan fraudulently concealed his interest in a series of transactions through which Sino-Forest purchased a controlling interest in Greenheart, Group Limited, a public company listed on the Hong Kong Stock Exchange. Sino-Forest made misrepresentations concerning that transaction, contrary to s. 122 of the Act, which Chan permitted or acquiesced in.
Finally, each of Chan, Ip, Hung, Ho and Yeung were found to have made materially misleading statements to Staff during Staff’s investigation.
Nothing in the Commission’s legal analysis underlying these findings is particularly novel. The Commission identified and applied existing law relating to the definition of fraud, the test for materiality as it relates to a reporting issuer’s disclosure obligations, and the standard of care expected of directors and officers of reporting issuers. The defence that business is conducted differently in China was rejected. Regardless of cultural differences that may exist, Ontario securities law applies to reporting issuers in Ontario, and to the conduct of their officers and directors.
The hearing to determine what sanctions should be imposed is yet to be commenced. However, any sanctions are likely to be symbolic only. Administrative fines levied against the individual respondents, all of whom are non-residents, are unlikely to be paid. Barring the individual respondents from further participation in the capital markets of Ontario is a hollow remedy, given the fact that none of the architects of the fraud are in Canada or ever likely to set up residence here. Indeed, the individual respondents remained outside the jurisdiction for the entirety of the hearing, testifying only by video link from overseas, presumably due to concerns arising from an RCMP investigation which never resulted in charges.
Query what the benefit is to the Ontario capital markets and investors from this lengthy and expensive regulatory proceeding, concluded so long after the events in issue.