Sino-Forest Scandal

The deal: Sino Forest Corp. was formed in 1994 as a ‘commercial forest plantation operator’.  It is a Chinese company that claimed to harvest timber to sell to housing developers in China.  The company organized as a corporation, meaning it could raise money by selling stocks to the public.  When an individual (or organization) buys stock in a company, it then becomes a part owner of that company.  If the company does well, and reports high profits, the value of that company (and therefore the share) increases.  In this case, it seems that the owners of Sino-Forest have been operating a kind of phantom business.  In June 2011, an investigative organization called Muddy Waters Research claimed that Sino-Forest has reported false information to the public and its shareholders (basically, they lied about what they were doing and how much profit they had made).  According to Muddy Waters, they didn’t actually harvest any timber; their profits came primarily from stock sales.  It is kind of like a Ponzi scheme: when you get to the nitty gritty of the business, they aren’t actually making anything.  These schemes rely on providing false profit and production reports, and avoiding the investigations of stockholders and the media.

Context:
-The stock market is in a pretty rough spot right now, because the global financial crisis has thrown off consumer confidence.
-“Short selling”, a practice whereby an investor sells securities (ie stocks) with the intention of buying them back when their value has decreased, has lead to the exposure of similar scams
-Some have suggested that governments around the world should coordinate in order to investigate suspicious activities

Significance:
-When news of the Sino-Forest scandal broke, the company’s stock prices plunged.  The company sold mainly to Canadian investors, and these individuals (and organizations) have in turn lost money on their investment.  If the public does not believe a company will turn a profit (as in this case, where it seems that the company is not producing anything at all), no one will want to buy its stock.  Since stocks can only be sold if there are people willing to buy them, shareholders of Sino-Forest now possess stocks that are less valuable than when they bought them.

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