Sino-Forest Corporation (SNOFF)

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Paulson Speaks Out on Sino-Forest
BY AZAM AHMED
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Muddy Water Slams Some Chinese Stocks
John A. Paulson, founder of hedge fund Paulson & Co., has taken a lot of heat this month for his investment in the Chinese timber company Sino-Forest.

News reports suggest his firm, which manages about $38 billion, could have lost up to $500 million when shares of the company plunged amid questions about its finances.

In a memo to investors, Mr. Paulson said the actual loss was closer to $100 million based on the average price the firm paid for the shares since it began buying in 2007. But from the stock’s price at end of last year, the firm lost $562 million.

The loss comes as a blow to the hedge fund firm, which made billions during the financial crisis by placing bets against the subprime mortgage market. Many wondered how such a seemingly prescient investor could have fallen prey to a company with potentially shaky auditing and finances. A research firm Muddy Waters recently issued a scathing report on a Chinese forestry company, calling it a “pump and dump” scheme that has been “committing fraud.”

The Paulson letter says that the firm conducted considerable due diligence on Sino-Forest. The hedge fund team reviewed public filings, participated in conference calls and talked with management and analysts covering the company. A Paulson employee visited the company in China, spent time with customers and met with a member of the Chinese government who deals with forestry matters, the letter said. The memo was first reported by AR Magazine.

“As a passive investor in public companies, Paulson has access to the same information that everyone else in the securities markets does,” according to the memo. “Like other public market investors, we must rely on audits and underwriter due diligence for comfort that financial statements and disclosures are accurate and reflect the true state of affairs at companies with publicly traded securities.”

In late June, Paulson & Co. decided to sell their more than 30 million shares. The hedge fund had been the biggest shareholder in the company.

“Paulson reviewed both sides’ written materials, asked questions, and engaged in further independent research, including conversations with the chairman of the special committee about the scope and process of their investigations,” the letter stated. “Although Sino-Forest steadfastly denies the Muddy Waters allegations, stands by its public disclosures and financial statements and maintains that there is no fraud, we believe significant uncertainties exist and we made the determination to sell our full position and await the results of the independent investigation.”

Ultimately, the firm concluded that even if Sino Forest cleared its reputation, the company’s share price was likely to stay depressed for long time.

http://dealbook.nytimes.com/2011/06/24/paulson-speaks-out-on-sino-forest/