08/26/2011 09:35 EDT | Updated 11/10/2011 11:32 EST

OSC Alleges Fraud At Sino-Forest

Sino Forest

UPDATE: The Ontario Securities Commission has backtracked on a demand that the top executives at Chinese timber company Sino-Forest resign.

In what the Globe and Mail described as a "stunning reversal," the Ontario financial regulator did not explain why it removed the demand from its order, issued earlier Friday, to cease trading Sino-Forest shares.

But OSC spokesperson Wendy Day told the paper the commission had been "persuaded" during the course of the day that Sino-Forest's senior management could not be compelled to resign without a hearing first.

Original story follows below

The Ontario Securities Commission has stopped all trading in Sino-Forest shares, alleging fraud at the TSX-listed Chinese forestry company.

The regulator said Friday the company "appears to have engaged in significant non-arm’s length transactions which may have been contrary to Ontario securities laws and the public interest."

The company has been under a cloud of suspicion since June when U.S. short seller and research firm Muddy Waters alleged the company was effectively a giant fraud. Among other things, the firm accuses Sino-Forest of shuffling timber holdings between various divisions in an attempt to inflate their actual value.

Sino-Forest owns timber holdings in China, but is listed on several North American stock markets. The stock has been in freefall since the allegations surfaced, and the company's attempts to calm investor fears have so far been ineffective.

Sino-Forest "appear to have misrepresented some of its revenue and/or exaggerated some of its timber holdings," the OSC said in the statement Friday

The regulator accuses officers and directors at the company of "engaging or participating in acts …which they know …perpetuate a fraud."

The OSC also ordered all of the company's directors and executives to resign their positions immediately.

The company's shares have been halted in Toronto, but the company's shares in New York dropped 65 per cent within seconds of the market opening.