Ontario Securities Commission lawyer Hugh Craig told the opening of the OSC hearing that the allegations against ex-Sino-Forest chief executive Allen Chan and four others involved Canadian investors, which should make them accountable under Canadian regulations.
Established in 1994, Sino-Forest was the first and biggest foreign-owned forestry company in China and did most of its business there even though it was based in Ontario.
"At the end of the day, Sino-Forest was not a Chinese company," Craig told the three-person panel during an hour-long address where he laid out the road map for the fraud allegations.
"This is where a culture of accountability should be recognized," he concluded.
Chan, Albert Ip, Alfred Hung, George Ho and Simon Yeung are accused by the OSC of lying to investors and misleading investigators by inflating the company's assets and revenue.
Craig alleged the five men took part in "deceitful conduct," which included the fabrication of assets and revenue, undisclosed relationships with suppliers and customers and of providing misleading documentation to support the alleged fraud. He said that from 2007 until 2010 the executives misled investors with false financial statements in every quarter.
"No investor could make informed decisions," he said.
At its peak, Sino-Forest was the most valuable forestry company listed on the Toronto Stock Exchange, with a market capitalization of $6 billion. From June 2005 to March 2011, Sino-Forest stock rose by 340 per cent from $5.75 per share to $25.30 per share
In June 2011, New York investment firm Muddy Waters Research released a report that called Sino-Forest a complex Ponzi scheme.
The "bombshell," said Craig, resulted in investors losing billions of dollars after the company's stock plunged to under $2 a share. The company filed for court protection in 2012 and was eventually taken over by creditors. It is now controlled by its bondholders under a different entity called Emerald Plantation Holdings Ltd.
Lawyers for the now defunct Sino-Forest, which is a named defendant in the hearing, are not presenting a defence.
The fraud allegations prompted investigations by the police and the OSC.
Craig said the company did not keep inform investors about its operations, which would have been questionable under Canadian securities laws.
For instance, he said Sino-Forest bought, sold and held timber assets through wholly-owned subsidiaries in the British Virgin Islands, and many of these transactions were "off book" and difficult for auditors to later track.
The company is also alleged to have recorded in their statements timber purchases from suppliers before they were received and to have sold them before the company were owned them.
Craig said the company regularly engaged in a business practice where it would purchase timber from a supplier, but ask that supplier to pay another supplier it was going to sell to — essentially eliminating cash flow through the company.
It also accuses the executives of not disclosing their relationships with major suppliers. The OSC alleges that it found a file on a computer belonging Chan's assistant that listed a number of external companies that were in fact controlled by Sino-Forest.
But Chan's lawyer, Emily Cole, said that although these practices may be peculiar to North Americans, these were "workarounds" that Sino-Forest had to engage in because they were operating in China where they were prevented from registering businesses, opening bank accounts and exchanging money freely.
"They could not conduct business directly, so they had to rely and trust these domestic (customers) and suppliers," she told the tribunal.
It's also not unusual for many of these suppliers to be owned by former employees of Sino-Forest, particularly in forestry, which was a small emerging industry at the time in China.
"These events did not occur on Bay Street or even in rural Ontario, and should not be judged as such," said Cole.
Markus Koehnen, a lawyer representing the four other accused, said what is seen as fraud by the OSC should be seen through a "Chinese lens" as mere "errors" made by a fast-growing company.
"Operational mistakes do not make it a fraud," he said. "The fact that you have bumps in the road and challenges does not make it a fraud."
Koehnen said thatm in the end, the investigators and auditors were not able to find one missing penny from Sino-Forest.
The five accused, who live in Hong Kong and China, were not present at the hearing.
Koehnen said his clients would like to testify at the hearing, but added that he was still working through some "issues" to get them to Canada. Cole did not comment on whether her client would come back to Canada.
This is the largest alleged fraud case to be prosecuted by the OSC since the Bre-X Minerals Ltd. case in 2007.
The hearing is expected to last until June 2015, with the OSC expected to call several witnesses in Canada and Hong Kong, including former employees of Sino-Forest, OSC investigators and auditors at Ernst and Young. If found guilty, the executives could be fined and be permanently banned from working or overseeing any public Canadian company.
Last month, former Sino-Forest chief financial officer David Horsley agreed to pay a total of $6.3 million and testify against his former colleagues as part of a settlement agreement.
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