An RCMP investigation into fraud allegations against Sino-Forest Corp. will face significant hurdles because the Toronto-listed timberland company’s key people and operations are in China’s territory, experts say.
Though it has offices in suburban Toronto, virtually all of Sino-Forest’s operations and senior executives are in Hong Kong and mainland China, where it owns timberlands and manufacturing plants.
“We’re going to really have a test of how effective Canada’s laws are extraterritorially,” said Richard Powers, a professor of business law at the University of Toronto.
“A lot of the focus of this investigation and possibly any charges that come out of it will be based in China.”
Richard Leblanc, a business law professor at York University’s Osgoode Hall law school, said the RCMP can’t just go over to China and arrest executives and bring them back for trial if charges are laid.
“It is likely that the executives would resist on the basis of a lack of jurisdiction,” he said.
The Ontario Securities Commission confirmed Thursday that it called in the police as it continued with its own investigation into allegations Sino-Forest overstated the value of its assets and revenue.
The OSC and a special committee of the company’s board both launched investigations earlier this year after fraud allegations were levelled in June by short-seller Muddy Waters Research.
None of the allegations has been proved but the analyst who first made them hasn’t wavered.
“We believe Sino-Forest has engaged in fraudulent activity and we welcome any investigations by Canadian authorities,” Muddy Waters research director Carson Block said Thursday.
Sino-Forest issued a brief statement early Friday saying it could not comment on the RCMP investigation.
In an email to The Canadian Press, spokeswoman Sarah Rivers said Sino-Forest’s independent committee “is in the latter stages of its own extensive examination” into the allegations raised by Waters.
She said Sino-Forest “will respond fully by year end” and is co-operating with the OSC and the RCMP’s investigations.
The RCMP’s Toronto Integrated Market Enforcement Team, which investigates securities fraud cases, declined to comment Thursday.
Securities lawyer Joseph Groia, who was once director of enforcement at the provincial regulator, said the decision to refer a case to police is an extraordinarily difficult one because it changes the rules of the investigation.
“Their practice is to usually try to investigate cases for as long as they possibly can before they make that decision and they only make that decision as a result of them uncovering evidence that essentially forces them to make that decision,” he said of the regulator.
Powers noted that the RCMP’s IMET branch has had limited success in the past.
“Because of their failures in the past, I think we have to assume that in taking on a high-profile case that they have committed the resources required to manage this case properly,” Powers said.
A Sino-Forest board member who was involved in the company’s internal probe resigned last week.
When the OSC filed its cease trade order against the company in August it also named then-chief executive Allan Chan and four other executives including senior vice-president of development and operations Albert Ip, vice-president of corporate planning and banking Alfred Hung, vice-president of finance George Ho, and Simon Yeung, a vice-president at a Sino-Forest subsidiary.
Chan has since resigned as chairman and chief executive, but remains founding chairman emeritus, while Sino-Forest has suspended Ho, Hung, and Yeung and curtailed Ip’s duties and responsibilities.
A final report by the company’s special committee is expected by the end of the year.
Sino-Forest (TSX:TRE) is one of a number of Chinese companies listed on the Toronto Stock Exchange facing allegations of fraud.
On Wednesday, the Ontario Securities Commission extended a cease trade order against Chinese shoe manufacturer Zungui Haixi Corp. (TSXV:ZUN) until the end of its investigation into the company.
The regulator originally stopped trading in the shares on the TSX Venture Exchange in September after Ernst & Young LLP suspended an audit of Zungui and advised the company’s audit committee that an independent investigation of financial results was warranted.
Zungui’s independent directors resigned in protest earlier this year, along with the firm’s chief financial officer, after they told the regulator they weren’t assured of funding or co-operation for an internal investigation.