Great frauds in history: Allen Chan of Sino-Forest

Allen Chan was born in Hong Kong and graduated with a degree in sociology from Hong Kong Baptist College in 1978. He started working life in Hong Kong’s town development and planning department, and went on to take a job in 1984 as a project consultant in the “special economic zone” of Shenzhen, taking advantage of China’s early wave of economic reforms. After attending the 1992 United Nations’ Earth Summit in Rio, Chan become interested in forestry and went on to found Sino-Wood in 1993, which would be merged into Sino-Forest Corporation a year later, with Chan as its chief executive.

What was the scam?

Sino-Forest, which was listed on the Canadian stock exchange in Toronto from 1995 onwards, promised investors that it would make money from a forestry portfolio by acquiring and then running Chinese tree plantations, or by selling them on at a profit to other companies. Sino-Forest’s management invented a huge number of phoney transactions, however, including 450 in the first quarter of 2009, to inflate its profits and revenues. The impression of soaring profits caused Sino-Forest’s shares to surge 540% between 2003 and 2011, giving the firm a peak market capitalisation of C$6bn (roughly US$4.2bn at current exchange rates).

What happened next?

In June 2011 an activist group of short-sellers, Muddy Waters, published a research paper that claimed Sino-Forest’s management was misleading investors and the company was a “near total fraud”. Chan initially denied the allegations, but he resigned as CEO a few months later after the Ontario Securities Commission, the Canadian regulator, suspended trading in Sino-Forest’s shares, which had already collapsed in value. The next year Sino-Forest filed for bankruptcy. In 2017 the Commission ruled that Chan, and several other directors, had indeed committed fraud, a decision that was subsequently upheld in the Canadian courts.

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Lessons for investors

Chan managed to escape criminal prosecution, due to the difficulty of extraditing him to Canada, and Sino-Forest’s investors were wiped out in the bankruptcy. One of those investors was John Paulson’s hedge fund, which injected $500m into the company before it collapsed. Short-sellers such as Muddy Waters, which publish negative research about the companies that they short (ie, bet against) are controversial, but they have a good record of exposing fraud. Sino-Forest’s shares plunged 60% when the scandal broke, but those who listened to the shorts and immediately sold out would at least have recovered something.