|
Ontario |
Commission des |
22nd Floor |
22e étage |
Securities |
valeurs mobilières |
20 Queen Street West |
20, rue queen ouest |
Commission |
de l’Ontario |
Toronto ON M5H 3S8 |
Toronto ON M5H 3S8 |
Citation:
Date:
IN THE MATTER OF
GEORGE HO, SIMON YEUNG and DAVID HORSLEY
REASONS AND DECISION
Hearing: |
September 2, 3, 4, 5, 8, 10, 11, 12, 16, 17, 18, 19, 22, 24 and 30, 2014 |
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October 1, 2, 3, 6, 8, 9, 10, 14, 15, 16, 17, 28, 29, 30 and 31, 2014 |
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November 3, 5, 6, 7, 10, 12, 13, 14, 17, 19, 20, 21, 24, 25, 26, 27 and 28, 2014 |
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December 1, 3, 4, 5, 9, 10, 11, 12, 15, 16, 17 and 18, 2014 |
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January 6, 7, 8, 9 and 12, 2015 |
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March 16, 17, 18, 20, 23, 25, 26, 27 and 31, 2015 |
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April 1, 2, 8, 9, 10, 15, 16, 17, 20, 22, 23, 24, 28, 29 and 30, 2015 |
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May 1, 4, 6, 7, 8, 12, 13, 14, 15, 20, 21, 22, 25, 27, 28 and 29, 2015 |
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June 3, 4, 5, 9, 10, 11, 12, 17, 18, 19, 22, 23, 24 and 26, 2015 |
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September 1, 2, 3, 4, 9, 10, 11, 14, 15, 21, 23, 24, 25, 28, 29 and 30, 2015 |
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October 1, 5, 6, 7, 13, 14, 15, 16, 19, 21, 22, 23, 26, 27, 28 and 29, 2015 |
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November 2, 4, 6, 9, 11, 12, 13, 16, 18, 19, 20, 23, 25 and 30, 2015 |
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December 2, 3, 4, 7, 8, 9, 10, 14 and 16, 2015 |
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April 18, 20, 21, 22, 25, 26, 27 and 28, 2016 |
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May 2, 4, 5, 6, 9, 11 and 12, 2016 |
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Reasons and |
July 13, 2017 |
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Decision: |
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Panel: |
James D. Carnwath, Q.C. |
- Commissioner and Chair of the Panel |
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Edward P. Kerwin |
- Commissioner |
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Deborah Leckman |
- Commissioner |
Appearances: |
Hugh Craig |
- For Staff of the Commission |
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Carlo Rossi |
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Malinda Alvaro |
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Emily Cole |
- For Allen Chan |
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Rohit Kumar |
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Caleb Edwards |
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2017 ONSEC 27 (*)
Markus Koehnen |
- For Albert Ip, Alfred C.T. Hung, George Ho and |
Stephen Wortley |
Simon Yeung |
Jeffrey Levine |
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Adam Chisholm |
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No one appeared on behalf of
2017 ONSEC 27 (*)
TABLE OF CONTENTS
I. |
BACKGROUND |
1 |
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A. Introduction |
1 |
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B. |
4 |
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C. The Muddy Waters Report and the Events that Followed |
5 |
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D. The Individual Respondents |
5 |
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II. EVIDENCE |
6 |
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A. Witnesses |
6 |
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B. Challenges for Witnesses in the Hearing |
10 |
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C. The Independent Committee Investigation |
10 |
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1. |
Scope |
11 |
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2. |
Management |
11 |
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3. |
The Investigation |
12 |
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(a) Data Capture |
12 |
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(b) Forestry Bureaus |
12 |
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(c) Suppliers and AIs |
13 |
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(d) Challenges |
13 |
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4. |
The Final Report |
14 |
III. |
14 |
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A. Forestry Ownership in Mainland China |
14 |
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B. |
17 |
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1. |
Evidence of Transfer of Forestry Rights |
17 |
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(a) Purchase Transactions |
17 |
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(b) Sales Transactions |
18 |
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2. |
Annual Valuation of |
19 |
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C. Forestry Asset Terminology in |
21 |
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1. |
Description of Assets |
21 |
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2. |
Description of Revenue Streams |
22 |
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(a) |
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Plantations |
22 |
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(b) |
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Plantations and Integrated Plantations |
22 |
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(c) 2010 – Plantation Fibre: Standing Timber and Logs |
23 |
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(d) Revenue Reported from the Sale of Logs |
23 |
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D. Other Issues Relevant to |
24 |
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1. |
Fapiao and Tax Implications |
24 |
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2. |
State Administration of Foreign Exchange (SAFE) |
25 |
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3. |
Company Registrations – SAIC Filings |
26 |
IV. |
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MODEL |
26 |
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A. The BVI Model |
26 |
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B. The WFOE Model |
29 |
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C. Continued Use of the BVI Model and |
30 |
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V. |
ALLEN CHAN’S ROLE AT |
32 |
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A. Testimony of Thomas Maradin |
33 |
i
2017 ONSEC 27 (*)
B. Testimony of William Ardell |
34 |
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C. Testimony of James Hyde |
35 |
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D. Testimony of David Horsley |
36 |
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E. Testimony of Judson Martin |
37 |
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F. Testimony of Fred Clifford |
37 |
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G. Testimony of Dr. Randall Peerenboom |
38 |
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H. Evidence of Ip and Hung |
39 |
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I. Conclusion |
40 |
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VI. ANALYSIS OF THE STANDING TIMBER FRAUD ALLEGATIONS |
41 |
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A. The Standing Timber Fraud Allegations |
41 |
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B. Undisclosed Control Allegations |
42 |
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1. |
Positions of the Parties |
42 |
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(a) |
Staff |
42 |
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(b) Respondents |
43 |
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2. Differences in Translation of Various Terms |
44 |
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3. Independent Committee Investigation into Suppliers and AIs |
46 |
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4. |
47 |
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(a) |
Did |
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Network? |
47 |
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i. Yuda Wood |
47 |
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ii. Kun’an |
55 |
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iii. Taiyuan |
57 |
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iv. Dongkou |
57 |
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(b) |
Other companies Staff alleges are related to |
59 |
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i. Juncheng |
59 |
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ii. Shun’xuan |
60 |
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iii. Dacheng |
61 |
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iv. Yuangao |
61 |
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v. Meishan |
61 |
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(c) |
Company Caretaker List |
62 |
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(d) Huang Ran |
63 |
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5. |
Guanxi |
65 |
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6. |
Conclusion: The Real Issue is Control and Value |
66 |
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7. The Roles of Chan, Ip, Hung, Ho and Yeung |
67 |
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C. Deceitful Documentation Allegations |
70 |
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1. |
Positions of the Parties |
70 |
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(a) |
Staff |
70 |
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(b) Respondents |
71 |
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2. |
BVI Purchase Documentation |
72 |
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(a) |
Purchase Contracts |
72 |
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(b) Forestry Bureau Confirmations and PRCs |
74 |
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i. Forestry Bureau Confirmations |
74 |
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ii. Comparison of PRCs and Forestry Bureau Confirmations |
82 |
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iii. Legal Opinions |
84 |
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(c) |
Villagers’ Resolutions |
87 |
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(d) Locating the Standing Timber |
88 |
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i. Maps |
89 |
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ii. Survey Reports |
90 |
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(e) |
Timing and Scope of the Purchase Documentation Process |
92 |
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ii |
2017 ONSEC 27 (*)
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i. The BVI Model |
92 |
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ii. Q4 2010 |
93 |
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iii. Q3 2009 |
96 |
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iv. Process Documents |
97 |
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v. Backdating of Purchase Documentation |
100 |
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(f) |
Conclusion on Purchase Documentation |
102 |
3. |
BVI Sales Documentation |
102 |
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(a) |
Sales Contracts |
102 |
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(b) Timing and Scope of the Sales Documentation Process |
103 |
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i. Q4 2010 |
103 |
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ii. Sales Documentation Process |
104 |
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iii. Process Documents |
106 |
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(c) |
Misleading the Commission Regarding Revenue Recognition |
106 |
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(d) Conclusion on Sales Documentation |
108 |
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4. |
The |
108 |
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5. |
Who Knew What When |
112 |
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6. |
The Roles of Chan, Ip, Hung and Ho |
114 |
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7. |
Conclusion |
118 |
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D. Undisclosed Internal Control Weaknesses or Failures Allegations |
121 |
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1. |
Positions of the Parties |
121 |
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(a) |
Staff |
121 |
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(b) |
Chan |
122 |
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(c) |
Hung |
122 |
2.Disclosure Requirements under NI
3. |
Were there Undisclosed Internal Control Weakness? |
124 |
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(a) |
Identification of Weaknesses |
124 |
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(b) |
The Lack of Segregation of Duties |
125 |
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(c) |
The failure to remediate the lack of segregation of duties |
127 |
4. |
The Roles of Chan and Hung |
130 |
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5. |
Conclusion |
132 |
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E. Four Examples of Alleged Fraudulent Transactions |
133 |
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1. |
Dacheng Transactions |
133 |
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(a) |
Positions of the Parties |
133 |
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i. Staff |
133 |
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ii. Respondents |
134 |
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(b) The BVI Purchase and Sale |
134 |
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(c) |
The WFOE Contracts |
136 |
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i. The Original WFOE Contracts – Dacheng Location A |
136 |
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ii. The Recorded WFOE Contracts – Dacheng Location B |
139 |
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(d) Pricing and Payments in the Dacheng Transactions |
144 |
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(e) |
Conclusion |
145 |
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(f) |
The Roles of Chan, Ip and Ho in the Dacheng Transactions |
145 |
2. |
450 Transactions |
146 |
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(a) |
Introduction |
146 |
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(b) |
Positions of the Parties |
146 |
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i. Staff |
146 |
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ii. Respondents |
147 |
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(c) |
Structuring the 450 Transactions |
147 |
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(d) Documentation for the 450 Transactions |
148 |
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iii |
2017 ONSEC 27 (*)
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i. The Purchase Contracts and Supporting Documents |
148 |
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ii. The Sales Contracts |
150 |
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iii. Changes to the Terms of the 450 Transactions in Late 2009 and |
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Early 2010 |
151 |
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iv. The Supplemental Purchase Agreements |
154 |
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v. The Harvesting/Sales Confirmations |
155 |
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(e) |
The Accounts Receivable and Accounts Payable Offsetting |
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Arrangement |
156 |
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(f) |
Horsley and the Rainy Season Memo |
160 |
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(g) |
Vendor Financing and Nanning Bank Accounts |
161 |
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(h) |
The Roles of Chan, Ip, Ho and Yeung |
163 |
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(i) |
Conclusion |
164 |
3. |
Gengma #1 Transactions |
165 |
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(a) |
Introduction |
165 |
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(b) |
Positions of the Parties |
166 |
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i. Staff |
166 |
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ii. Respondents |
166 |
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(c) |
The Evolution of the Purchase Contracts |
166 |
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i. |
166 |
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ii. Gengma Contract Set 1 – WFOE Contracts |
170 |
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iii. Gengma Contract Set 2 (WFOE Contract) and Supplementary |
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Contracts |
173 |
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iv. Gengma Contract Set 4 – BVI and WFOE Contracts |
174 |
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v. Assignment Agreement |
177 |
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vi. Conclusion on the Actual Purchase Contracts |
178 |
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(d) The BVI Sales Contracts |
179 |
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(e) |
Conclusion |
181 |
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(f) |
The Roles of Chan and Ip |
181 |
4. |
Gengma #2 Transactions |
181 |
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(a) |
Positions of the Parties |
181 |
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i. Staff |
181 |
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ii. Respondents |
182 |
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(b) Purchases of the Gengma #2 Plantation |
182 |
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i. |
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and 1B |
182 |
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ii. Taiyuan and Gengma Dai Contract – Gengma #2 Contract 2 |
183 |
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iii. Yuda Wood and Gengma Dai Contracts – Gengma #2 Contracts 3A |
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and 3B |
186 |
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iv. Plantation Rights Certificates for the Gengma #2 Plantation |
188 |
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v. Cash Flows, Payments and Settlements |
190 |
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(c) |
Sales of the Gengma #2 Plantation |
191 |
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i. Standing Timber Sales |
191 |
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ii. Land Sales |
192 |
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iii. Pledge of the Gengma #2 Plantation as Collateral |
194 |
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(d) Conclusion |
195 |
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(e) |
The Roles of Chan, Ip and Ho |
196 |
F. Conclusion on the Standing Timber Fraud Allegations |
197 |
||
1. |
The Law on Fraud |
198 |
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(a) |
Actus Reus |
199 |
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i. Dishonest Act |
199 |
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iv |
2017 ONSEC 27 (*)
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ii. Deprivation |
199 |
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(b) The Mental Element of Fraud |
200 |
2. |
The Standard of Proof |
201 |
3. |
Was the Alleged Standing Timber Fraud a Fraud on Investors? |
201 |
(a)The Respondents’ Roles in the Three Elements of the Standing Timber
Fraud |
202 |
i. Undisclosed Control of Purportedly Arm’s Length Companies |
202 |
ii. The Deceitful Documentation Process |
204 |
iii. Undisclosed Internal Control Weaknesses or Failures |
206 |
iv. The Standing Timber Fraud was an Elaborate Scheme to Defraud |
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Investors |
206 |
(b) No Bona Fide Business Purpose |
207 |
(c) The Respondents’ Roles in the Four Frauds |
208 |
(d) Conclusions on the Standing Timber Frauds |
211 |
i. Chan |
211 |
ii. Ip |
211 |
iii. Hung |
212 |
iv. Ho |
212 |
v. Yeung |
212 |
vi. |
212 |
4.Did Chan, Ip, Hung, Ho or Yeung authorize, permit or acquiesce in Sino -
Forest’s conduct contrary to subsection 126.1(b) of the Securities Act? |
....... 213 |
VII.ANALYSIS OF THE STANDING TIMBER MATERIALLY MISLEADING |
|
STATEMENTS ALLEGATIONS |
213 |
A. Materially Misleading Statements |
213 |
1. The Law |
214 |
2.Materially misleading statements allegations are not duplicative of the fraud
allegations |
217 |
3. Who made the statements in the Impugned Disclosure Documents? |
217 |
4.Materially Misleading Statements Regarding Ownership of Assets and
Revenue Recognition |
|
218 |
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(a) |
Analysis of Materially |
Misleading |
Statements Regarding Ownership of |
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Assets |
|
219 |
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(b) |
Analysis of Materially |
Misleading |
Statements Regarding Revenue |
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Recognition |
|
224 |
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(c) |
Did |
Misleading Statements relating to |
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Ownership of Assets and Revenue Recognition? |
226 |
(d)Did Chan, Ip, Hung or Ho Authorize, Permit or Acquiesce in the Making of
|
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of Assets and Revenue Recognition? |
226 |
5. |
Effect of the Four Frauds on the Reported Revenue of |
229 |
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(a) |
The Misleading Statements |
229 |
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(b) |
Did |
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the Four Frauds? |
230 |
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(c) |
Did Chan, Ip or Ho Authorize, Permit or Acquiesce in Sino |
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Making of Materially Misleading Statements with respect to the Four |
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Frauds? |
230 |
6. |
Materially Misleading Statements Regarding Internal Controls |
232 |
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v |
2017 ONSEC 27 (*)
(a) |
The Misleading Statements |
232 |
(b) |
Did |
Statements with respect to |
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its disclosure relating to internal controls? |
233 |
(c)Did Chan or Hung Authorize, Permit or Acquiesce in Making Sino -
Forest’s Materially Misleading Statements relating to its disclosure in
|
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relation to internal controls? |
233 |
B. Is a Due Diligence Defence available to the Respondents? |
234 |
||
1. |
The Law |
234 |
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(a) |
Mistake of Fact and Due Diligence Simpliciter |
235 |
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(b) The Standard of Care Required |
235 |
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2. Analysis of the Defense of Due Diligence as it Relates to the Respondents ... |
236 |
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C. Conclusions on the Allegations of Misleading Statements |
241 |
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VIII. |
ANALYSIS OF THE GREENHEART ALLEGATIONS |
242 |
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A. Review of the Greenheart Allegations |
242 |
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B. The Greenheart Transactions |
242 |
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C. Analysis of the Greenheart Fraud Allegations |
245 |
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1. Was Chan the Beneficial Owner of Fortune Universe and Montsford? |
245 |
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(a) |
The establishment and organization of Fortune Universe and |
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Montsford |
245 |
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(b) Chan’s involvement in Greenheart Resources |
250 |
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(c) |
Treatment of Spirit Land versus Fortune Universe |
252 |
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(d) |
Flow of cash proceeds pursuant to the First and Second Transactions . 253 |
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i. First Transaction |
253 |
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ii. Second Transaction |
255 |
(e)Fortune Universe and Montsford’s Holding and Sale of Sino
Shares |
256 |
i. Fortune Universe |
256 |
ii. Montsford |
259 |
(f) Chan was the beneficial owner of Fortune Universe and Montsford |
260 |
2.Was Chan’s
dishonest act? |
261 |
3.Were
of his beneficial interest in the Greenheart Transactions to the Sino |
|
Board? |
264 |
4. Did Chan have the requisite mens rea for the offence? |
266 |
(a) Chan had subjective knowledge of the prohibited act |
266 |
(b) Chan had subjective knowledge that the dishonest conduct could |
|
result in deprivation to another |
266 |
D. Did |
to |
disclose Chan’s interest in the Greenheart Transactions in Sino |
|
disclosure? |
267 |
1. Were the statements misleading in a material respect? |
268 |
2.Did
122(1)(b) of the Securities Act? |
270 |
3.Did Chan authorize, permit or acquiesce, pursuant to section 122(3) of the
Securities Act, in |
................. 270 |
IX. ANALYSIS OF THE ALLEGATIONS OF MISLEADING STAFF |
271 |
A. The Law – Misleading the Commission |
271 |
|
vi |
2017 ONSEC 27 (*)
B. Allegations against Chan |
272 |
|
1. |
Submissions of the Parties |
272 |
|
(a) Staff’s Submissions |
272 |
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(b) Chan’s Submissions |
272 |
2. |
Analysis |
272 |
C. Allegations against Ip |
273 |
|
1. |
Submissions of the Parties |
273 |
|
(a) Staff’s Submissions |
273 |
|
(b) Ip’s Submissions |
273 |
2. |
Analysis |
273 |
D. Allegations against Hung |
274 |
|
1. |
Submissions of the Parties |
274 |
|
(a) Staff’s Submissions |
274 |
|
(b) Hung’s Submissions |
274 |
2. |
Analysis |
274 |
E. Allegations against Ho |
275 |
|
1. |
Submissions of the Parties |
275 |
|
(a) Staff’s Submissions |
275 |
|
(b) Ho’s Submissions |
275 |
2. |
Analysis |
275 |
F. Allegations against Yeung |
276 |
|
1. |
Submissions of the Parties |
276 |
|
(a) Staff’s Submissions |
276 |
|
(b) Yeung’s Submissions |
276 |
2. |
Analysis |
276 |
X. CONCLUSIONS |
277 |
|
APPENDIX A – GLOSSARY OF TERMS |
I |
vii
2017 ONSEC 27 (*)
REASONS AND DECISION
I.BACKGROUND
A.Introduction
[1]These are our reasons and decision on the merits of allegations made by Staff of the Ontario Securities Commission (Staff and the Commission, respectively) concerning the conduct of
members of its senior management, Allen Chan, Albert Ip, Alfred C.T. Hung, George Ho and Simon Yeung (collectively, the Respondents1 ).
[2]Staff submits the Respondents perpetrated one of the largest corporate frauds in Canadian history.
[3]In its Statement of Allegations, Staff makes four sets of allegations against the Respondents regarding their conduct from June 30, 2006 to January 11, 2012 (the Material Time). First, Staff alleges the Respondents engaged in deceitful and dishonest courses of conduct that ultimately caused the assets and revenue derived from the purchase and sale of standing timber,
a.Did the Respondents engage in dishonest courses of conduct that ultimately caused the assets and revenue derived from the purchas e and sale of standing timber to be fraudulently overstated, contrary to subsection 126.1(b) of the Ontario Securities Act, RSO 1990 c S.5 (the Securities Act) (the Standing Timber Fraud Allegations)?
i.Specifically, did the Respondents engage in what Staff has alleged are the three elements of the Standing Timber Fraud Allegations? Specifically,
A.did the Respondents dishonestly conceal
B.did the Respondents falsify evidence of
1Where we refer to the Respondents’ submissions in these Reasons, they do not include the submissions of
1
2017 ONSEC 27 (*)
fraudulent creation of deceitful purchase and sales contracts, which were then relied on to evidence the purported purchase, ownership and sale of standing timber?
C.did the Respondents deceitfully conceal
ii.Did the Respondents engage in significant fraudulent transactions related to
A.transactions involving a
B.transactions involving the purchase and sale of approximately 450,000 m3 of standing timber (the 450 Transactions)?
C.the purported purchase and sale of a plantation in Gengma County, Yunnan Province (the Gengma #1 Transactions)?
D.the purported purchase and sale of a second plantation in Gengma County, Yunnan Province (the Gengma #2 Transactions)?
iii.Did Chan, Ip, Hung, Ho or Yeung, as officers of Sino
b.Did the Respondents engage in conduct that resulted in
i. |
Specifically, was |
|
respect with respect to: |
A.
B.the effect of the Dacheng Transactions, the 450 Transactions, the Gengma #1 Transactions and the Gengma #2 Transactions on the reported revenue of
C.the material weaknesses in
ii.Did Chan, Ip, Hung or Ho, as officers of
c.Did Chan fraudulently conceal his interest in a series of transactions through which
i.Did Chan engage in deceitful or dishonest conduct in relation to the Greenheart Transactions that was contrary to subsection 126.1(b) of the Securities Act?
2
2017 ONSEC 27 (*)
ii.Did Chan and
iii.Did Chan, as Chairman of the Board and Chief Executive Officer (CEO) of
Forest’s disclosure in respect of the Greenheart Transactions that was misleading in a material respect, pursuant to subsection 122(3) of the Securities Act?
d.Did each of Chan, Ip, Hung, Ho and Yeung make misleading statements in the course of their interviews with Staff during its investigation, contrary to subsection 122(1)(a) of the Securities Act?
[4]Our Reasons are structured as follows. They begin with general background information, as well as discussions of additional background issues that are relevant to our analysis of Staff’s allegations:
I.Background
II.Evidence
III.
IV. |
V.Allen Chan’s Role at
Following this background is our analysis of the Standing Timber Fraud Allegations, which includes a consideration of the three elements of the alleged fraud, and the four examples of allegedly fraudulent transactions:
VI. |
Analysis of the Standing Timber Fraud Allegations |
We then consider Staff’s allegations of misleading statements in Sino
VII. Analysis of the Standing Timber Materially Misleading Statements Allegations
Next, we consider Staff’s allegations of fraud and materially misleading statements in connection with the Greenheart Transactions:
VIII. Analysis of the Greenheart Allegations
Finally, we consider whether Chan, Ip, Hung, Ho and Yeung made materially misleading statements to Staff during Staff’s investigation of this matter:
IX. |
Analysis of the Allegations of Misleading Staff |
To assist the reader, we have also included a glossary of terms, companies and people referred to in these Reasons as an appendix:
APPENDIX A - GLOSSARY
[5]The hearing in this matter has been exceptionally long. The merits hearing started on September 2, 2014. The Panel sat for 188 days over 2014, 2015 and 2016, and the hearing ended on May 12, 2016. Chan, Ip, Hung, Ho and Yeung were represented by counsel throughout the hearing. Sino
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not intend to participate in this matter and no one appeared on its behalf during the hearing.
B.
[6]
[7]
[8]
[9]In its 2010 Annual Information Form (AIF) dated March 31, 2011,
Our vision is to sustainably manage a geographically diversified portfolio of
[10]Between February 2003 and October 2010,
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rose 340% from CA $5.75 to CA $25.30. By March 31, 2011,
[11]On June 1, 2011, trading in
C.The Muddy Waters Report and the Events that Followed
[12]On June 2, 2011, Muddy Waters, LLC, headed by an analyst and
a short position in
[13]On the same day, the Board of Directors of
[14]Following the release of the Muddy Waters Report,
[15]The Commission publicly announced on June 8, 2011 that it had commenced an
investigation into
[16]
[17]On May 9, 2012, the TSX delisted
[18]On May 22, 2012, Staff issued its Statement of Allegations against the Respondents and David Horsley,
[19]On January 30, 2013,
D.The Individual Respondents
[20]Allen Chan was a
[21]Albert Ip was the Senior
and
2The Muddy Waters Report itself was not in evidence. However, the Panel did receive in evidence the reports of the Independent Committee and various
3 The temporary cease trade order, as varied from time to time, remains in place.
4The vast majority of
(i)
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approximately 48 subsidiary companies (the
[22]Alfred Hung was
[23]George Ho was
[24]Simon Yeung was
II.EVIDENCE
A.Witnesses
[25]Twenty two witnesses testified during the hearing.
oversaw the operations of the
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[26]Staff called the following 12 witnesses:
a.Two Staff witnesses, Anthony Long and Maggie Shao, both Senior Forensic Accountants in the Enforcement Branch of the Commission. Mr. Long testified over 27 days at the outset of the hearing and Ms. Shao testified over 19 days nearer to the end of Staff’s case. Both testified about their work in Staff’s investigation into
b.Five former officers or directors of
i.David Horsley was the Senior
ii.Thomas Maradin initially joined
Filings (NI
iii.James Hyde was a member of the
iv.William Ardell was a member of the
v.W. Judson Martin was a member of the
Greenheart, Mr. Martin became
c.Yosanda Chiang was Allen Chan’s Executive Assistant at
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d.Two members of the E&Y audit team that audited
i.Josephine Man is a Chartered Accountant and was a Senior Audit Manager and Audit Planner at E&Y. Prior to joining the Vancouver office of E&Y in 2006, Ms. Man worked in its Hong Kong office from 1996 to 2003. Her native language is Cantonese, she is fluent in English and speaks and understands Mandarin. Ms. Man began working on the
ii.Fred Clifford is a Chartered Accountant and managed E&Y’s client acceptance process with
e.Two witnesses from PricewaterhouseCoopers (PwC), which acted as one of the advisors to the Independent Committee:
i.Steven Henderson is a Chartered Professional Accountant with a designation in Investigative Forensic Accounting, as well as a Certified Fraud Examiner. He was involved in creating the work plan for the Independent Committee advisors and led the Canadian PwC team involved in the Independent Committee advisory process.
ii.James Pomeroy is a Chartered Accountant and Certified Fraud Examiner and is a Vice President of PwC in the forensic services group. As part of PwC’s work advising the Independent Committee, Mr. Pomeroy travelled to and worked out of Hong Kong.
[27]Chan did not testify on his own behalf and called two witnesses:
a.Dr. Randall Peerenboom has a Ph.D. in philosophy, with a focus on Chinese philosophy in the classical period and has a J.D. from Columbia University. He was born and educated in the United States, but has lived in Beijing for most of the past 20 years, where he continues to reside with his family. Dr. Peerenboom has legal experience in the United Kingdom and China and has worked as a professor and in academia. Dr. Peerenboom testified as an expert in the field of Chinese law and cultural practices in China within a comparative global and Asia context.
b.Lei Guangyu was a friend of Chan and a Chinese businessman. His companies were involved in the export/import business, real estate, environmental protection and financial investments . He testified predominantly about his involvement with the Greenheart Transactions by videoconference from Shenzhen, China in Mandarin with the assistance of interpreters. Mr. Lei testified in April 2015, but did not complete his cross - examination by Staff. Between April 2015 and the conclusion of the evidence in this hearing in December 2015, efforts to arrange for the completion of Mr. Lei’s testimony were unsuccessful. As a result, we are
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left with testimony from Mr. Lei that is incomplete, as Staff did not have the opportunity to fully test his evidence through cross
[28]Ip, Hung, Ho and Yeung each testified on their own behalf. With Staff’s consent, they chose to testify by videoconference from outside Ontario. They testified from Hong Kong, and in the case of Ip, from both Hong Kong and the Dominican Republic. Ip, Hung and Yeung testified, wholly or in part, in Cantonese with interpretation assistance. We granted the request of Ho, Hung and Yeung to provide their evidence in chief by written affidavit, on which Staff and counsel for Chan were permitted to cross examine them (Re
[29]Ip, Hung, Ho and Yeung called the following four expert witnesses:
a.Michael Murphy works with AlixPartners in Hong Kong as the Managing Director, Asia Pacific Practice. He specializes in consulting engagements on behalf of investors and boards of directors, as well as debtors and creditors involved in operational and financial turnarounds and loan workouts. He has worked in China for over 20 years. Mr. Murphy was qualified and testified as an expert in Chinese business practices and how they relate to business regulations in China, including business practices arising out of the concept of guanxi, foreign exchange regulation, tax regulation, business structures and email usage.
b.Gavin Hao is a Forestry Consultant with the pulp and forestry consulting firm RISI. He lives in Shanghai and his educational and work experience has been in Chinese forestry. Mr. Hao was qualified and testified as an expert in the Chinese forestry industry. He testified in Mandarin with interpretation assistance.
c. |
Jinrong Liu is the managing partner of Global Law Office in Beijing, China |
|
|
and is licensed to practice law in China. Mr. Liu was qualified and testified |
|
|
as an expert in Chinese law, regulation and government practices as they |
|
|
relate to: |
|
|
i. |
the enforceability of oral contracts in China; |
|
ii. |
the ability of corporations to lend money; |
|
iii. |
whether an entity incorporated in the British Virgin Islands (BVI) |
|
|
may hold a Plantation Rights Certificate; |
|
iv. |
the investigatory powers of the Chinese State Administration of |
|
|
Foreign Exchange (SAFE); |
|
v. |
the concept of “retreating from the front line” as a succession |
|
|
planning mechanism by Chinese government organizations; and |
|
vi. |
the meaning of legal terms and, in particular, those that have been |
|
|
translated in this proceeding as a right of first refusal as contrasted |
|
|
with an option and the term “Project Preparatory Office”. |
Mr. Liu testified by videoconference from his offices in Beijing, China in Mandarin through the assistance of an interpreter.
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d.Dr. Robin Hui Huang is a professor in the Faculty of Law at the Chinese University of Hong Kong, with a research focus that includes corporate law and securities regulation. Dr. Huang was qualified and testified as an expert in translation of the term “wai wei gong si” from Chinese characters into English. Dr. Huang testified by videoconference from Hong Kong.
B.Challenges for Witnesses in the Hearing
[30]Some of the challenges in receiving evidence in this case included witnesses testifying by videoconference from different locations, including Hong Kong, Beijing, Shenzhen and the Dominican Republic, in time zones that were as much as a 13 hours difference from the time zone in which the hearing was being held. Witnesses testified entirely or in part in another language with the assistance of an interpreter. Some witnesses’ testimony continued in these circumstances for many days. The Panel is mindful of the difficulties created by these circumstances.
[31]As one might expect, video conferencing is less satisfactory than direct evidence in a hearing room. While the Panel can see an
[32]Some witnesses testified in Cantonese or Mandarin with the assistance of an interpreter. Despite some difficulties with interpretation, overall, the Panel finds the quality of the interpretation and the seeing and hearing of the witness’ testimony was sufficient to permit the Panel to understand the witnesses and to make findings, including findings of credibility.
[33]The Panel has kept the challenges of testifying under these conditions uppermost in their minds in assessing witness credibility.
[34]We consider the credibility of any oral evidence in the context of all the evidence before us. We believe it important to highlight the at times difficult circumstances under which witnesses were giving evidence and to note that we have tried at all times to consider the credibility of witness statements in light of such circumstances.
C.The Independent Committee Investigation
[35]A major source of documentary evidence in this case was the Independent Committee investigation and its reports. Both Staff and the Respondents refer to the Independent Committee reports in their submissions. We also heard testimony from two members of the Independent Committee (Messrs. Ardell and Hyde) and two members of PwC, an advisor to the Independent Committee (Messrs. Pomeroy and Henderson).
[36]Following the release of the Muddy Waters Report on June 2, 2011, the Board of
Directors established the Independent Committee. The Independent Committee’s mandate was to independently examine and review the serious and
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of the Committee and participated in its process. The Independent Committee advisors were: Osler, Hoskin & Harcourt LLP, Canadian counsel who assisted the Independent Committee in developing the appropriate response and identifying and conducting the mandate; PwC, who were engaged as forensic accountants; Mallesons Stephen Jaques, as Hong Kong legal counsel; and Jun He Law Offices (Jun He), as Mainland China legal counsel. Mr. Bowland resigned as director and from the Independent Committee on November 3, 2011.
[37]The Independent Committee released three reports in the course of its investigation. The First Interim Report was released on August 10, 2011. The Second Interim Report of the Independent Committee of the Board of Directors of the
[38]The Independent Committee’s advisors had issued their own Report on Process to Date on November 13, 2011. When Mr. Henderson of PwC was asked why the advisors issued their own, separate report, he testified that the advisors believed it “important to identify in our own report the limitations and qualifications of the investigation, including recommendations, and the IC considered that information and interpreted it accordingly in writing their own report” (Hearing
Transcript, December 5, 2014 at
1.Scope
[39]The scope of the Independent Committee review was to investigate the ownership structure of the forestry assets on
[40]The Independent Committee focused its investigation on the years 2006 and following. Its process was limited to the examination and review of three core areas: (i) timber asset verification; (ii) timber asset value; and (iii) revenue recognition. Intertwined with these areas of investigation were issues raised in the Muddy Waters Report regarding related party transactions and relationships.
2.Management
[41]At the outset, management’s role was as a resource to the Independent
Committee and its advisors. Management was also tasked with drafting their own response to the Muddy Waters’ allegations in order to possibly refute any allegations immediately. The Independent Committee dealt principally with Chan, Horsley and Mr. Maradin. As the review progressed, the Independent Committee advisors communicated to the Independent Committee that there was a lack of
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full cooperation and openness from Chan, Ip, Ho and Hung, among others in management, during examinations and failure to provide significant amounts of material information as requested.
[42]Mr. Ardell, the Chair of the Independent Committee, testified feedback from PwC and Mallesons to the Independent Committee indicated that Chan, in some instances, was not forthcoming with respect to full disclosure regarding AI and supplier backgrounds.
[43]He also testified that another example of lack of cooperation was Ho’s initial refusal to comply with a request from the advisors for human resources data. Ho expressed concern regarding employee privacy but he did ultimately hand over the data. However, there were discrepancies between the data provided by Ho when compared with human resources data found on other employees’ laptops.
[44]Mr. Martin testified that, as a result of inconsistencies in certain emails and interviews regarding related parties, Chan was asked to resign as CEO in August
2011. Hung, Ho and Yeung were put on administrative leave in late August. Ip’s duties were limited and under the direction of Mr. Martin, who became CEO.
3.The Investigation
[45]The advisors began with identifying and confirming the cash in Mainland China, Hong Kong and Canada and fact gathering: understanding the business model and what all the
(a)Data Capture
[46]Electronic data gathering was initially delayed “in view of the potential cultural and other sensitivities of Management,” according to the Independent Committee advisors November 13, 2011 Report on Process to Date, and did not begin until more than nine days after the Muddy Waters Report. Management was not informed of legal hold notices over data until June 12, 2011 and all employees were sent legal hold notices on June 14, 2011. The advisors discovered that the extent of historical electronic data in
[47]When the advisors were electronically capturing data they discovered that certain
(b)Forestry Bureaus
[48]One of the steps in the review was visiting the local offices of the Chinese state forestry authority, referred to as Forestry Bureaus, in an attempt to verify
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to directly arrange the Forestry Bureau visits. Management declined to do so, maintained control over the arrangements, and attended all visits.
(c)Suppliers and AIs
[49]Another step in the Independent Committee review was to examine
(d)Challenges
[50]The Independent Committee advisors encountered significant challenges in gathering the information required to address the Muddy Waters’ allegations and the other matters outlined in the scope of the review. Among the challenges outlined by Mr. Hyde were the following:
∙Evidence, such as a plantation registration system and documents, were not readily available, and access to Forestry Bureau officials, suppliers and customers was delayed or denied.
∙While there were national policies regarding the issuance of Plantation Rights Certificates (PRCs) (official government documents confirming title) that were to be rolled down to the territorial (county) level, in practice, the advisors found that many county Forestry Bureaus had not yet started this process – many would not admit this and others simply denied the advisors access.
As well, the Independent Committee advisors found some corporate registry offices refused to conduct searches of corporate registrations.
[51]There were geographic challenges. Yunnan, the centre of many of the allegations, is a remote province and visiting Forestry Bureaus in Yunnan involved many days driving on very rough roads where the advisors were worried that “something was going to happen to them, so dangerous getting in,” as described by Mr. Hyde (Hearing Transcript, November 5, 2014 at
[52]Culturally, locals were not used to having people arrive and ask for things in a North American fashion. These parties were not compellable so a “little bit of a dating ritual dance” was necessary before discussing business, according to Mr.
Hyde (Hearing Transcript, November 5, 2016 at
[53]One of the tasks the advisors undertook was to try to establish the standing timber chain of title whereby the advisors were attempting to go back to the very first person who had been granted rights to the land that held the timber. In doing so, the advisors wanted to see if there was a flow of documents that passed title from one to another, which ultimately ended up with
[54]During the review, the Independent Committee learned the attachments that were referenced in the purchase contracts were not attached. They discovered the PRCs had never been issued. They then tried to look to the resolutions of the original villager owners to support title, which the Independent Committee learned were not attached as well. The Independent Committee was told by
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Chan that these were reviewed but not retained. This is discussed in more detail in our analysis of the deceitful documentation allegations.
[55]On September 29, 2011, without warning or explanation, Sino
4.The Final Report
[56]The Final Report of the Independent Committee was issued on January 31, 2012. There was little additional information beyond what was set forth in the November 2011 Second IC Report. The advisors issued a disclaimer stating:
“This Final Report, while based on the work of such advisors, is the report of the
IC and not the report of the IC Advisors ”.
[57]Further references to the Independent Committee’s reports are found within these Reasons.
III.
[58]Our analysis of the Standing Timber Fraud Allegations set forth below in these Reasons also requires some background on how sales of forestry ownership rights were transacted in Mainland China during the Material Time, and, more specifically, the ways in which
A.Forestry Ownership in Mainland China
[59]Gavin Hao, an expert in the Chinese forestry industry, testified that regulation of forestry ownership in China is in a process of reform. The most recent period of reform is a continuation of previous reforms that began with China’s general “opening up” after 1978, which initiated the move away from the collective
ownership of forestry land that existed in China during the earlier part of the second half of the 20th century. Following the promulgation of China’s Forestry Act in 1998, the Chinese forestry industry has moved towards implementation of
anew forestry rights regime, which includes the systematic issuance of Plantation Rights Certificates, or PRCs, and confirmation of ownership of forestry rights. PRCs are official Chinese government documents that indicate the owners of each of the four categories of forestry rights and the location of the plantation with reference to its general location, the plantation boundaries at each of the four cardinal directions, the Forestry Bureau compartment and
[60]Under China’s Forestry Act, there are four aspects of forestry ownership in Mainland China. These four rights are separate and can generally be held by different owners. The four types of forestry rights are:
a.Land ownership: This is ownership of the land itself. Only the state or village collectives can hold land ownership rights. These rights cannot be transferred and cannot be owned by individuals. As a result, these rights were never the subject of
b.Land use rights: This is the right to use the forestry land, such as a lease interest registered on the land. These rights can be held by individuals and used for forestry purposes for a limited time period, and include the
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ability to plant or replant timber on the land.
c.Timber ownership: This is the ownership of the trees, or standing timber, growing on the land, which includes the right to use, protect and harvest the timber. We heard expert evidence that these rights would, in most circumstances, go
d.Timber use rights: This is the ownership of the produce, or fruit, of the trees. In the PRCs we have reviewed, this ownership right has always accompanied timber ownership and is not specifically relevant to our consideration of the allegations.
[61]The two rights that are most important for the purposes of these Reasons are therefore (b) land use rights, and (c) timber ownership.
[62]Proof of ownership of forestry rights in Mainland China is generally provided by the issuance of PRCs by Forestry Bureaus. PRCs are official government documents that include the following information:
∙Excerpts from the “Constitution of The People’s Republic of China” and the “Forest Law of The People’s Republic of China”;
∙The seal of the Forestry Bureau office that issued the PRC (in the case of
∙Confirmation to the party requesting the PRC that the ownership or use rights for the forest, timber and forestland have been registered and that the legal rights and interests are protected by law;
∙A Registration Form of the Situation of Forest, Timber and Forestland for each parcel of land covered by the PRC. These Registration Forms were standardized, with space for the Forestry Bureau to input the following information:
othe owner of each of the four ownership rights; o a description of the general location area;
o geographic boundaries to each of the four cardinal directions;
othe Forestry Bureau compartment and
othe colloquial name for the land; o the area in mu;
o the main tree species for the parcel of land; o the forest type (e.g. timber forest);
o the forestland use period (i.e. the duration of the rights); and
oForestry Bureau seal, name of the “responsible person” at the
Forestry Bureau and the date of issuance.
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∙A Registration of Change certificate, which confirmed that, based on the signed contract that transfers forest rights, the plantation ownership had been changed to be under the name of the purchasing party;
∙A Map of the Boundaries of the Forest, Timber and Forestland to the Four Cardinal Directions, with the parcels of land covered by the PRC identified; and
∙A Notice which included statements that:
othe PRC “is the legal proof of ownership or use rights for forest, timber and forestland and is valid when sealed by the People’s
Government at county level and above or the Forestry
Administration Department of the State Council”;
othe PRC was to be kept by the proprietor of the forest rights;
o“when there is a legal change to the forest rights, this certificate must be presented on time at the original registration and certificate issuing authority for processing the change in registration”; and
o“this certificate should be presented when the various levels of
People’s government and their forest rights management department or judicial authority are investigating and making enquiries on matters related to the forest rights”.
[63]Mr. Hao explained the process for transfer of forestry rights requires both the seller and purchaser to attend at the local Forestry Bureau to register the change. For a transfer from a village collective,
[64]Mr. Hao testified the timelines for the implementation of the new forestry rights rules and regulations has varied from province to province and different provinces have achieved varying degrees of progress in the issuance of PRCs. He testified there are several challenges that have delayed forestry reform, which include:
∙the complexity of confirming land boundaries, which involves participation from forestry authorities, village collectives or farmers and surveyors;
∙historical disputes over land ownership between villagers in the same villages, family clans in the same village collective or neighbouring village collectives that can make confirming ownership challenging or may cause additional disputes with forestry companies which have acquired the land; and
∙questions about the proper distribution of land rights to family units, or households – there is ambiguity about how the term “household” should be interpreted and differences of opinion about how rights should be distributed to households where not all births are registered because they were not compliant with China’s
Hao further explained there are substantial variations in the way PRCs are administered. Some are initially issued to the village collective and held by the
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village chief, while others are issued to households or groups of households that jointly own the forestry rights.
[65]In addition to initial PRC registration challenges, Hao testified about the complexities of the forestry rights transfer process in Mainland China. In negotiations to purchase rights to a particular area from villages or households, a forestry company would likely deal with many individuals with ownership interests, in rural areas of Mainland China where education levels are relatively low and villagers often leave to work as migrant workers in other parts of the country for most of the year. The difficulty villagers may have in understanding or being able to read a contract, and the complicating factor of conducting negotiations in the absence of some villagers, means transacting the transfer of forest rights can be complicated and any subsequent challenges to the validity of the contract may be successful.
B.
1.Evidence of Transfer of Forestry Rights
(a)Purchase Transactions
[66]One of the issues of contention in this hearing is the adequacy of the evidence of
[67]
respect of its land use rights and timber ownership. Sino
Plantation Rights Certificates for Our Purchased
Plantations6
For our purchased plantations, we have applied for the corresponding Plantation Rights Certificates with the relevant forestry bureaus. As the relevant locations where
5As explained further below,
6
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we purchased our purchased plantations have not fully implemented the new form of Plantation Rights Certificate, we are not able to obtain all the corresponding Plantation Rights Certificates for our purchased plantations. Instead, we obtained confirmation of our ownership of our purchased plantations from the relevant forestry bureaus. Based on the relevant purchase contracts and the approvals issued by the relevant forestry bureaus, we legally own our purchased plantations.
[68]As discussed elsewhere in these Reasons,
(b)Sales Transactions
[69]
[70]Since there was no flow of funds in or out of the bank accounts of the BVI subsidiaries that could be audited,
[71]For sales of plantations held in the WFOE Model,
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[72]In addition, for the BVI Model,
a.A letter from a
b.A second letter from the
c.A third letter from the AI/customer to the
d.A fourth letter entitled Confirmation of Receipt of Funds Notification from the supplier to whom the first letter was sent. This letter confirmed receipt of the specified amount from the AI/customer, was dated and was chopped by the supplier.
[73]Ms. Man testified these documents indicated the
[74]Ms. Man was not aware of any collection issues in the BVI Model and did not recall that
2.Annual Valuation of
[75]
(Pöyry) each year during the Material Time to prepare a valuation of its timber holdings.
[76]For its valuation of
…
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than 10 years because growing trees usually involve a longer period of time.
So how Poyry did the valuation model, according to a discussion with Poyry, was that they look at the trees that
(Hearing Transcript, November 13, 2014 at
When questioned by the Panel if she knew why Pöyry used a
We had a lot of discussion with Poyry at that time. They
--or
(Hearing Transcript, November 13, 2014 at
[77]James Hyde, who was the Chair of
November 3, 2014 at 168 and 169).
[78]Unlike the work of the Independent Committee, or a question we are being asked to address in these Reasons, Pöyry’s work did not include confirmation of ownership of assets. Rather, Pöyry’s assumption was that title to forest assets was as provided in the data from
[79]Hung was the contact person for Pöyry at
Hung, or his subordinate, Kenny Wong (whose title was Executive Project Administration), providing Pöyry with an Excel spreadsheet containing information on
[80]For site visits, Pöyry would select a location they wanted to visit (at the county- or
[81]Pöyry sampled a small percentage of
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visited around 1% or 2% of the area that covered
[82]Based on Pöyry’s valuation reports for 2007, 2008 and 2009, Pöyry visited no more than 0.5% of
Pöyry stated, “in comparison with most other forests, the large Sino
[83]To locate plantations to use in its annual valuations, Pöyry relied on maps provided by
[84]As discussed in our analysis of allegations of deceitful documentation, Pöyry’s annual valuations do not assist us.
C.Forestry Asset Terminology in
1.Description of Assets
[85]Although the meaning of the terms trees, timber and logs may seem obvious, it is important to note the different terminology used by Sino
[86]Plantations of trees growing in the ground (i.e. in forests, yet to be harvested) were referred to as standing timber.
[87]The word logs, as one would expect, generally referred to trees that had been harvested into logs. However, we heard testimony that assets referred to as
“logs” in
Forest’s revenue, standing logs referred to unharvested trees that were priced for sale at the expected value of the logs that the trees would yield. In fact, standing timber, logs and standing logs all referred to uncut trees in Sino -
Forest’s nomenclature.
[88]In addition to standing timber,
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companies from owning land use rights, these purchases of land use rights were only made in the WFOE Model.
[89]
2.Description of Revenue Streams
(a)
[90]Between 2003 and 2006,
[91]In 2006, sales of standing timber accounted for 55% of Sino
∙imported wood products;
∙wood chips and logs; and
∙manufacturing and other operations.
[92]During this period, 2003 to 2006,
(b)
[93]In 2007,
Forest’s operations in Purchased Plantations, Planted Plantations and “integrated plantations.” Integrated Plantation revenue was derived from
[94]In 2007,
Plantation Fibre was used somewhat interchangeably with “standing timber”. In
2008 and 2009, Plantation Fibre revenue was reported as derived from all three plantation sources.
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(c)2010 – Plantation Fibre: Standing Timber and Logs
[95]In 2010,
[96]In 2010,
1.Wood Fibre Operations o Plantation Fibre
Standing Timber
Logs
oTrading of Wood Logs
2.Manufacturing and other operations
[97]The frequent changes in terminology in
(d)Revenue Reported from the Sale of Logs
[98]Josephine Man, formerly of E&Y, testified she understood that as of at least 2008, log sales consisted of standing timber that had actually been cut down and harvested into logs. From an audit perspective, evidence of these log sales was provided by written confirmations, in which the customer would confirm the amount of logs received.
[99]By 2010, Ms. Man’s understanding of log revenue had changed, based on what she had been told by David Horsley. She testified Horsley informed her no harvesting was done for 2010, and instead
[100]Although absent from
2.For sales which involve the harvesting of standing timber (either via third party or AI), ensure that the appropriate harvesting rights/logging quota have been obtained by obtaining such evidence as:
a.Confirmation from the AI/third party that the appropriate harvesting rights have been obtained.
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b.Comparing the amount of logs harvested to the area for reasonableness
∙Per inquiry of management, EY was advised that the
Company did not have any integrated sales by BVI subsidiaries that involved harvesting in the current year. The type of integrated sales made in the current year represents standing log sales. Standing log sales and its related unit price is made based on the expected yield of wood logs from the standing timber (i.e. fallen yield) whereas sales of standing timber is based on the standing yield of the plantation.
As the BVI Subsidiaries did not have any harvesting activities in the current year, this procedure was not performed.
[emphasis added]
D.Other Issues Relevant to
1.Fapiao and Tax Implications
[101]Fapiao are official tax receipts issued by a Tax Bureau in Mainland China for the purchase of goods or services. In exchange for payment to purchase forestry rights,
[102]The Chinese characters for fapiao have been translated to English as “invoice” in various documents in evidence in this hearing, but we have referred to them as fapiao throughout these Reasons.
[103]Fapiao are printed, administered and distributed by the Chinese Tax Bureau. Businesses are required to purchase fapiao from the Tax Bureau according to their business scope, and may provide fapiao to customers in exchange for goods or services. Each local office of the Tax Bureau has a quota for the number of fapiao it may issue, and, in turn, issues a set number of fapiao to each business in its jurisdiction. This quota system can result in a shortage of fapiao for a particular business or area.
[104]Mr. Murphy, an expert in Chinese business practices that include tax regulation, testified that although every fapiao has its own serial number and is not fungible, companies in Mainland China will sometimes borrow fapiao from another company in order to be able to provide them to customers. He testified he had seen this done in situations where a business did not have the fapiao to issue to a customer, but wanted a transaction to move forward. He explained that these businesses run the risk that the Tax Bureau may impose fines or penalties for loaning or borrowing fapiao.
[105]We heard expert evidence that different tax rates could apply to purchases of forestry assets in Mainland China, depending on the substance of the transaction. Land use rights were subject to a 5% Business Tax, whereas standing timber was subject to a 13%
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hearing as general fapiao, or VAT fapiao, respectively. Only businesses qualified as VAT general taxpayers were eligible to issue VAT fapiao. All other taxpayers were only able to issue general fapiao.
[106]Fapiao were also useful in obtaining approval from SAFE (discussed below) for the exchange of foreign currency to renminbi, something
[107]
2.State Administration of Foreign Exchange (SAFE)
[108]Three expert witnesses provided evidence with respect to SAFE, Dr. Peerenboom, Mr. Murphy and Mr. Liu. Because of strict government controls on foreign exchange, foreign currency cannot be freely brought into Mainland China. Approval must be obtained from SAFE, the regulatory body responsible for overseeing the conversion of foreign currency into renminbi. Although not specific to the forestry industry, SAFE played a notable role in Sino
[109]SAFE places strict restrictions on the use of funds approved for foreign exchange. As part of its regulation of foreign exchange, SAFE inspects and audits the authenticity and legality of the receipt of payments of foreign exchange and punishes violations of foreign exchange regulations. In investigations into the legality of a company’s foreign exchange transactions, SAFE could request information on transactions down the supply chain, and, as a result, companies being investigated, such as
[110]Dr. Peerenboom reported the global financial crisis and subsequent low interest rates led to an influx of “hot money” into emerging markets, including China. Mr. Murphy noted that the Chinese government has become increasingly concerned with this influx of “hot money”. Dr. Peerenboom stated this has resulted in closer monitoring of capital flows into Mainland China by SAFE. Mr. Murphy reported that additional restrictions on the settlement of foreign exchange into renminbi were implemented.
[111]Mr. Murphy stated these more stringent regulations restricted companies from converting foreign exchange funds to support activities related to their business scope, and required more substantial supporting documentation for a conversion of foreign funds to renminbi.
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[112]
[113]The Respondents submit it was because of SAFE’s monitoring and investigation that
“monitoring” of supplier bank accounts when it first came under scrutiny by SAFE and was forced to come up with an explanation for why it was controlling the bank accounts of its largest supplier, Yuda Wood. We consider this in our analysis of the allegations of
3.Company Registrations – SAIC Filings
[114]The regulatory body that oversees corporate filings is the State Administration for Industry and Commerce (or SAIC). Much of the evidence of the ownership, initial capitalization and officers of companies involved in these allegations has been provided in official SAIC filings.
[115]Registration of a company requires filings with the SAIC and the SAIC requires yearly filings to renew business licenses.
[116]According to Dr. Peerenboom, reliance on SAIC filings can be problematic because Mainland China’s system of corporate filings, independent audits and imposition of taxes is still at an early stage of development. He noted in his expert report that discrepancies between information in SAIC filings and a company’s books and records can be expected. Mr. Hyde, a former Sino
IV.
[117]Our analysis of Staff’s allegations requires an explanation of the business models that
A.The BVI Model
[118]The BVI Model was
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[119]The BVI subsidiaries could not hold bank accounts in Mainland China and therefore could not settle in cash their purchases and sales. They also could not bring in foreign currency for conversion to renminbi. Similarly, conversion from renminbi to foreign currency was limited. As a result, no cash flowed in or out of the
[120]The AR/AP
[121]All revenue booked by the BVI subsidiaries from the sale of standing timber was used to purchase additional standing timber. Through this process, all the money recorded in the BVI Model remained in Mainland China, and was never held directly by
[122]One consequence of the
Forest’s BVI subsidiaries did not deal directly with the tax liabilities that arose from standing timber sales. Instead, the AIs were responsible for remitting taxes to the Chinese tax authorities. However,
[123]Internal
…some AIs visited stated that they may not in fact make payments themselves as instructed by SF
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make payment on their behalf. Those fourth parties may then instruct “fifth” or “sixth” parties to make payment.
In this situation, the Suppliers receiving payment will sometimes instruct its own “fourth” parties to receive payment on its behalf. …
[124]We heard throughout the hearing that similar
[125]Notwithstanding the various parties involved, and the widespread cash flow difficulties experienced by companies in Mainland China, the payments made through the AR/AP
[126]
[127]The Independent Committee was unable to confirm the actual movement of money within the AR/AP
The IC Advisors have received copies of the
(Second IC Report at 53)
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[128]Staff submits the BVI Model and its
B.The WFOE Model
[129]In 2004, government restrictions on foreign ownership were relaxed and Sino- Forest was able to incorporate subsidiaries in Mainland China to conduct its standing timber business directly. Unlike the BVI subsidiaries, these Chinese subsidiaries, referred to as wholly
[130]Another advantage the WFOE Model had over the BVI Model was the ability to hold additional ownership rights for plantations in Mainland China. As discussed in more detail elsewhere in these Reasons, there are four rights associated with plantation ownership in Mainland China: (i) land ownership; (ii) land use rights;
(iii)timber ownership; and (iv) timber use rights. These rights are separate and need not be held by the same entity. However, there are limitations on the kinds of entities that may own certain rights, and the ways in which Forestry Bureaus provide proof of ownership of these four rights by different entities. Because they could own not only the timber, but also the right to use the land on which the timber was growing, WFOEs had a distinct advantage over BVI subsidiaries. WFOE subsidiaries, which owned the land use rights, would be able to
[131]Proof of forestry rights ownership in Mainland China was generally provided through the issuance of PRCs by local Forestry Bureau offices. Forestry Bureaus would not generally issue PRCs in respect of a company’s timber ownership alone
(i.e. where the company did not also own the land use rights, which BVIs could not do). However, we did see two examples of PRCs issued in situations where the land use and timber rights were separately owned.
[132]WFOE subsidiaries had another advantage over BVIs. Forestry Bureaus would issue PRCs to WFOE subsidiaries, but they were essentially impossible for Sino- Forest’s BVI subsidiaries to obtain. Instead,
[133]Accounting in the BVI Model and the WFOE Model was conducted totally separately. For transactions in the WFOE Model,
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software program, Kingdee. The Kingdee program would not permit the booking of transactions that were backdated to a previous quarter. In addition, in WFOEs, accounting was done at the WFOE subsidiary level. In contrast, in the BVI Model, accounting was booked through
C.Continued Use of the BVI Model and
[134]Even after the relaxation of regulations on
|
|
Standing Timber Asset Holdings |
Standing Timber Revenue |
|
|||
|
|
|
|
|
|
|
|
|
|
BVI Model |
WFOE Model |
% in |
|
WFOE Model |
% in |
|
|
BVI |
BVI Model (US $) |
BVI |
|||
|
|
(US $) |
(US $) |
(US $) |
|||
|
|
Model |
|
Model |
|||
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
2007 |
1,088,556,000 |
85,597,000 |
92.71% |
501,345,653,000 |
20,143,011,000 |
96.14% |
|
2008 |
1,479,548,000 |
173,758,000 |
89.49% |
644,900,557,000 |
40,503,807,000 |
94.09% |
|
2009 |
1,901,983,000 |
281,506,000 |
87.11% |
882,046,250,000 |
72,147,699,000 |
92.44% |
|
2010 |
2,475,515,000 |
647,002,000 |
79.28%7 |
1,326,032,633,000 |
75,138,908,000 |
94.64% |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
3,354,325,093,000 |
207,933,425,000 |
94.16% |
|
|
|
|
|
|
|
|
[135]From 2007 to 2010,
[136]We heard evidence
The
During the Material Time, the reserve increased from US $39,106,000 as of December 31, 2006 to US $156,941,000 as of December 31, 2010.
[137]
7This percentage reflects the acquisition of Mandra, a WFOE, in the first quarter of 2010. Excluding Mandra, this percentage for 2010 was 84%.
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revenue recorded for its standing timber business done through the BVI Model remained well over 90%. Second, it would move assets acquired through the BVI Model into the WFOE Model – the
[138]In 2008, 2009 and 2010,
[139]Mr. Hyde, a member of the
[140]
(Hearing Transcript, November 26, 2014 at 32).
[141]
-onshoring work needs to be done and client needs to pay for us to help them do it even if they are in denial that they can do it themselves
-the view that Sino can negotiate itself out of the “locked in profits” and “tax exposure issue” is not based on any actual evidence or supportable actions or testable.
[142]Notwithstanding E&Y’s concerns and suggested approaches to this problem, Allen
Chan appeared to believe he could resolve some of the tax issues by personally negotiating a deal with his contacts in the Chinese government. An E&Y Internal Memorandum dated July 23, 2010 notes the difficulties E&Y had in dealing with
Back in 2007, client said they wanted to fix/cap the BVI tax exposure. We assisted in this exercise but on the client side, there was always a business or technical problem whereby the particular plan was not desirable [it seemed very much that there were just too many challenges and issues such that none of the options we proposed would work]. Since then, they have made very little progress on this matter and the plantation’s book value has gone from approximately $1 billion to $1.9 billion at March 31, 2010. They have last year transacted a few “onshoring” transactions where the BVI
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sold the timber to an AI that onsold the timber to Sino WFOE’s for a small
[143]The same Internal Memorandum notes Allen Chan continued to disagree with
E&Y’s concerns about payment of the outstanding tax liability. It reports Chan expressed the position “he has government connections and can cut a deal”. E&Y expressed concern they had “not yet seen any evidence of his ability to cut a tax deal to clean up the BVI tax issue even after having been willing to sit down and work with him to get to that result” and that management based its position on a “gut feel” they could cut a deal on stated terms.
[144]The witnesses from E&Y confirmed
[145]Staff suggests the explanation for the lack of progress on the
[146]While the
V.ALLEN CHAN’S ROLE AT
[147]Allen Chan was born, educated and resided in Hong Kong. His first language is Cantonese. He obtained an undergraduate degree in sociology. In 1992, Allen Chan
[148]Messrs. Ardell, Hyde, Horsley, Ip and Hung testified Chan had extensive relationships with various levels of government including at the local and central
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levels. In 2007, Chan was appointed as Executive Council Member of Renmin University of China (the People’s University of China) for a
A.Testimony of Thomas Maradin
[149]Thomas Maradin described Chan as having ultimate
A.My
Q.As CEO you mean?
A.Yes. Yes.
Q.Continue, please.
A.And power from a standpoint of
power from a perspective of people below respecting his position. And so from my standpoint, you know, there's a great deal of respect in that culture to that position and the authority that he has.
(Hearing Transcript, October 29, 2014 at
[150]Mr. Maradin testified Chan’s
Q. And how was it determined who would be on this
Disclosure Committee? Who was the selector of the team?
A. I guess ultimately I sought Allen's approval in terms of the people on the Committee. I certainly gave him the advice as far as the functional areas, but Allen was let's say the approver or acknowledger of committee members.
(Hearing Transcript, October 29, 2014 at
[151]Mr. Maradin confirmed Chan acted as the ultimate and compensating control over
My report highlights the individual process, description of deficiency, applicable business unit, and individual evaluation and remediation points. In a number of cases you
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will note that a deficiency exists (“no evidence”, “no formal written policy”, “no formal
[emphasis added]
[152]The March 15 Report is incorrect in one respect. In practice, Chan did not sign purchase contracts. Chan
[153]When questioned about the March 15 Report, Mr. Maradin testified:
…a year before this I remember having conversations with
Fred [Clifford of Ernst & Young] about an ultimate control in terms of Allen reviewing and signing off on things, and so this is an accurate statement. And at the time, thinking, okay, Allen is reviewing these documents, receiving his authorization, so it is a compensating control. It doesn't eliminate the deficiency, but it's a strong evidence that somebody independent is signing the contracts.
(Hearing Transcript, October 29, 2014 at
For further clarity, Mr. Maradin confirmed that the ultimate and compensating control “would be Allen Chan’s signature” (Hearing Transcript, October 30, 2014 at
B.Testimony of William Ardell
[154]Mr. Ardell described Chan as the visionary and leader behind
…Mr. Chan was I think at that stage 57 years of age, he was a very key individual in the organization, and certainly, from what I saw or was aware of, there was not a backup plan for a company the size of
Q.And when you say he was a key individual in the company, what did you mean by that?
A.He was the visionary, he was the leader to the organization within, to the people within his organization, and as I understood it, he was the key man contact within the forestry industry in China.
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(Hearing Transcript, November 19, 2014 at
C.Testimony of James Hyde
[155]Mr. Hyde testified Chan attended meetings of the Audit Committee, and it was important to have Chan attend so he could answer questions the Audit Committee had on topics such as operations and company strategy. Chan was able to explain in broader detail some of the analysis that was being presented.
[156]Mr. Hyde viewed Chan as the person in management responsible for oversight of
Q. … So, first, if I could just ask, what was your understanding at the time that you were a member of the Audit Committee in terms of which members of management had which respective responsibilities over that structure?
A. In line management I'm not sure who all the various people were. We, quite frankly, looked to Mr. Chan as the overall person. Tends to be a very
(Hearing Transcript, November 5, 2014 at
[157]Mr. Hyde also testified:
Q.And between Mr. Horsley and Mr. Chan, who had more of an involvement in the operations of the company?
A.Mr. Chan definitely in the
(Hearing Transcript, November 5, 2014 at
[158]Mr. Hyde also testified Chan was the compensating control with respect to the identified internal control weakness of a lack of segregation of duties:
…we were told there was a compensating control that Mr. Chan reviewed all the settlement agreements and he signed
many of the
(Hearing Transcript, November 5, 2014 at
[159]Mr. Hyde testified although there were others involved, including Ip, Chan was signing the agreements and reviewing Hung’s work with respect to accounts receivable and accounts payable settlements. He testified this was viewed as a compensating control.
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[160]Mr. Hyde confirmed the Audit Committee took steps outside its regular, quarterly meetings to address the fact that the lack of segregation of duties was still an internal control weakness, which had not been resolved since 2007. Both Mr. Martin and Mr. Ardell, in their consecutive roles as Lead Director, approached Chan about this. When questioned why the Lead Director approached Chan about the remediation of this internal control weakness, Mr. Hyde testified:
Mr. Chan, as the chairman and chief executive officer, most senior person, that it was important to set the tone at the top. He was our most senior executive, and it was important to have
(Hearing Transcript, November 5, 2014 at
D.Testimony of David Horsley
[161]David Horsley testified if he wanted answers about Sino
Mr. Chan's, I would say, main strength was his
(Hearing Transcript, November 21, 2014 at
[162]Horsley testified Chan’s involvement in the operations of Sino
[163]Like others, Horsley confirmed Chan was
Q.And why did you feel that that was the ultimate in compensating control?
A.It was certainly something that had been discussed
at audit committees, the fact that Allen would
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(Hearing Transcript, November 25, 2014 at
[164]Horsley revised the March 15 Report prepared by Mr. Maradin to include the statement “the ultimate and compensating control is the CEO’s signature on the final transaction be it purchase or sale of standing timber, transfer of funds or payment for goods/services”. As noted previously, Chan signed only the sales contracts but
E.Testimony of Judson Martin
[165]Mr. Martin testified his initial impression of Chan’s role within
Martin also testified Chan’s practical contribution to Sino
[166]Mr. Martin testified Chan’s role with respect to the implementation of disclosure requirements under NI
F.Testimony of Fred Clifford
[167]Mr. Clifford testified that close to the end of the audit cycle, in March 2011, he met with Chan to ask how Chan got comfortable with the fraud risk at Sino- Forest. An internal E&Y memo prepared by Clifford in March 2011 described how
[168]Mr. Clifford also testified Chan talked about Albert Zhao, who was responsible for operations in the
He also talked about the two Alberts, being Albert Zhao and Albert Ip, running two large, you know, pieces of the business, and he would, I think, for lack of a better word, perhaps play them off against each other and compare and contrast what was happening between those two senior
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executives to see if there was something that, quite frankly, looked odd to him, that stood out as being an anomaly. He thought that, by doing that, he would identify areas where things were happening that could be fraudulent.
(Hearing Transcript, November 17, 2014 at
Mr. Clifford explained further, “He just was very comfortable that by comparing and contrasting those two operations, he could see anomalies and those anomalies he would follow up on.” (Hearing Transcript, November 17, 2014 at
[169]Mr. Clifford testified Chan was the common denominator in all purchase and sales transactions - he was in the middle. E&Y was well aware of how involved Chan was in the
[170]Mr. Clifford also testified that Chan represented to E&Y he had extensive relationships at the local and central government levels and in the business community. Chan took great comfort that if something was happening within
[171]Mr. Clifford also testified Chan was resistant to E&Y’s solution regarding the on - shoring project (moving assets from the BVI Model to the WFOE Model to address problems associated with a substantial and growing tax liability). Mr. Clifford testified one suggestion from E&Y was for Chan to seek a settlement with the tax authorities and crystallize the potential tax liability Sino
[172]In a separate proceeding, E&Y settled allegations brought by Staff regarding the audits of
G.Testimony of Dr. Randall Peerenboom
[173]Chan called Dr. Randall Peerenboom as an expert witness in Chinese law and cultural and business practices in China within a comparative and global context.
[174]On March 31, 2015, Dr. Peerenboom was asked:
Q.And just talking for a minute about Mr. Chan, I want to ask you about the role of CEO and senior management in a Chinese company. So in your experience, how would you characterize the relationship between the CEO and their senior management in the company with operations in China?
A.Well, in Chinese companies it's definitely the case that the CEO is the boss, the big boss. And so if they're at a negotiation, for example, maybe the senior management would be discussing a lot of the detailed issues, but when it came time to the final
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2017 ONSEC 27 (*)
a negotiation, that would be when the CEO or the boss steps in and decides those issues.
In terms of the operational issues, it varies to some extent, depending upon whether the manager is a more
(Hearing Transcript, March 31, 2015 at
[175]Dr. Peerenboom also testified on the significance of relationships with government in doing business in China. Dr. Peerenboom testified Chan’s participation with the Chinese National Forestry Industry Federation would be of benefit to
H.Evidence of Ip and Hung
[176]Both Ip and Hung testified Chan was closely involved in the review and approval of each purchase and sale of standing timber by
[177]Ip and Hung testified about Chan’s role as “ultimate and compensating control” as described in the March 15 Report. Ip agreed Chan carefully reviewed every purchase and sale of standing timber and any transfer of funds or payments for goods and services brought to him. Hung testified Chan signed every BVI standing timber sales contract and
[178]Hung testified he never had any signing authority and that even instructions to a bank, including transfers, required the signature of Chan and one of K.K. Poon, Ip, Albert Zhao or Chen Hua (responsible for finance at Sino
[179]Ip testified Chan told him the locations of the forest purchases should be kept secret. As a result, purchase contracts were vaguely worded and did not indicate specific plantation locations. Ip testified the descriptions of locations were general in order to keep them a secret from
[180]Ip testified he attended weekly Monday morning senior management meetings led by Chan (Monday Morning Meetings). Ip agreed it was a constant that Chan was always at the Monday Morning Meetings, which also included Xu Ni
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meetings but would attend when requested and would be at meetings when quarterly budgets were discussed. The Monday Morning Meetings were held in Hong Kong or Guangzhou throughout the Material Time and were conducted in Cantonese. Horsley and Maradin did not attend. Chan was provided with oral updates that included detailed information about the progress of Sino
[181]Ip confirmed there was no documentation or written records of the Monday Morning Meetings. Ip testified the purpose was to update on the work done the previous week and discuss
[182]Ip confirmed Chan would review the profit margin to make a final decision on the sales transaction. Ip testified Chan was the last person to sign each sales contract. Ip confirmed Chan signed the approval for the purchases which preceded the actual purchase contract.
[183]Ip testified he had signing authority under HK $1,000,000 and went to Chan for approval of larger expenditures. Hung stated he never had any signing authority and even instructions to a bank required a signature from Chan and one of four other senior employees, which included Ip.
[184]Hung testified he determined the sales budget by reviewing a spreadsheet of BVI standing timber holdings which he maintained. This spreadsheet included information about the area, volume, location, purchase price and year of planting. Hung testified he would discuss plantations with Chan and Albert Zhao, and Chan would tell Hung what the expected revenue would be.
[185]Hung agreed Chan would know about any changes to purchase contracts because in order to make the purchase, Hung would need to obtain a new purchase requisition form which required Chan’s approval.
[186]Hung also testified the concept of Master Framework Agreement (MFA) came from Chan and Chan explained the concept as locking in a supplier who would either provide standing timber directly or get other suppliers to sell
[187]Hung confirmed, before a BVI sales contract was sent to a customer for signature, he would forward the contract to Albert Zhao for review and would also obtain an oral approval from Chan on each sales transaction. Hung confirmed Chan was the last person to sign every sales contract.
I.Conclusion
[188]Chan’s written submissions open with four statements:
1.Mr. Chan’s conduct must be assessed by reference to a reasonably competent Chief Executive Officer acting in similar circumstances at the time. His conduct cannot be measured to a standard of perfection.
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[189]We agree Chan’s conduct cannot be measured to a standard of perfection. As will be made clear in these Reasons, Chan’s conduct does not meet the standard of a reasonably competent Chief Executive Officer acting in similar circumstances at the time. Notwithstanding the board of directors, Chan was the driver steering
2.As Chief Executive Officer of
[190]We disagree. We find Chan was in the business. In addition to deciding its purpose, its direction, its strategy and its goals, he was also deeply involved in the
3.His conduct must be considered in the unique circumstances of this case.
[191]We disagree. No matter what business
Chan’s responsibility to ensure that
4.Mr. Chan was born, raised and educated in Hong Kong. He had no prior financial, accounting, risk, capital markets/M&A or public company/corporate governance education, skills, or experience. He surrounded himself with North American experts to ensure that the public disclosure complied with Ontario securities law. He reported to a highly qualified board of directors who were experts in North American public company governance requirements. The
[192]We agree there is no evidence the Board was unhappy with Chan’s performance prior to June 2, 2011. Mr. Ardell, Lead Director and Chair of the Independent Committee, testified his belief in Allen Chan changed as events unfolded following the Muddy Waters Report.
[193]Chan’s role in the alleged frauds is discussed in more detail elsewhere in these
Reasons.
VI. ANALYSIS OF THE STANDING TIMBER FRAUD ALLEGATIONS
A.The Standing Timber Fraud Allegations
[194]In the Standing Timber Fraud Allegations, Staff alleges the Respondents engaged in deceitful and dishonest courses of conduct that resulted in the fraudulent
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overstatement of assets and revenue derived from the purchase and sale of standing timber, putting the pecuniary interests of Investors at risk contrary to Ontario securities law and contrary to the public interest. Staff alleges three elements of the standing timber fraud, each of which Staff alleges cons titute fraud:
a.undisclosed control of companies purportedly at arm’s length to Sino - Forest;
b.a deceitful documentation process; and
c.internal control weaknesses or failures.
Staff cites four examples of alleged fraud: (i) the Dacheng Transactions; (ii) the 450 Transactions; (iii) the Gengma #1 Transactions; and (iv) the Gengma #2 Transactions.
[195]Staff alleges differing involvement by the Respondents in each of the three elements of the standing timber fraud and the four fraud examples. We review the three elements and four alleged fraud examples, in turn, and consider the
Respondents’ individual involvement in each.
[196]Staff asks us to find each of the Respondents breached subsection 126.1(b) of the Securities Act as a result of their involvement in the Standing Timber Fraud Allegations, and that Chan, Ip, Hung, Ho and Yeung, in any case, authorized, permitted or acquiesced in
B.Undisclosed Control Allegations
1.Positions of the Parties
(a)Staff
[197]The first of the three alleged elements of what Staff has termed the Standing Timber Fraud is
[198]Staff alleges
[199]Staff submits
[200]Staff specifically submits
∙Huaihua City Yuda Wood Co., Ltd. (Yuda Wood);
∙Guangxi Hezhou City Kun’an Forestry Co., Ltd. (Kun’an);
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2017 ONSEC 27 (*)
∙Guangxi Rongshui Taiyuan Wood Co. (Taiyuan);
∙Dongkou Shuanglian Wood Co., Ltd. (Dongkou); and
∙Dao County Juncheng Forestry Development Co., Ltd. (Juncheng).
[201]Staff submits the following were related parties:
∙Yunnan Shun’xuan Forestry Co., Ltd. (Shun’xuan);
∙Guangxi Dacheng Timber Co., Ltd. (Dacheng);
∙Guangxi Hezhou City Yuangao Forestry Development Co., Ltd. (Yuangao); and
∙Guangxi Rongshui Meishan Wood Products Factory (Meishan).8
[202]Staff refers to these and other companies that were counterparties to transactions carried out using
[203]In particular, Staff alleges
[204]A central player, whose involvement in many of these companies is interwoven, is Huang Ran, who will be discussed below.
(b)Respondents
[205]The Respondents submit Staff has failed to provide evidence to explain why the concept of control or influence over customers or suppliers matters. They submit the issue with respect to the BVI Network of companies is not control, but value: if
[206]The Respondents submit, while Staff did not introduce any expert valuation evidence, Staff is instead asking the Panel to draw adverse inferences of control and value based on circumstantial evidence that is quite remote from any concept of valuation.
[207]The Respondents submit E&Y, which reviewed every contract in the BVI Model, in its audits never raised any concerns about the volume of purchases from a particular supplier, or its economic dependence on
8These companies and others involved in this matter were Chinese companies that do not have official English company names. Different English translations have been provided for a number of these companies. For instance, the words “timber,” “forestry,” and “wood” have variously been provided as translations for the same Chinese character, and translations variously omit or include location information in the title of a company name such as the city, county or province in which it is located.
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verify” that
[208]The Respondents contend the record supports the proposition that contracts of purchase and sale were conducted at fair value and that Sino
[209]The Respondents stress “context is king” and submit the effect of
[210]Chan further submits there is no evidence he had any knowledge of these companies’ alleged control by, or relation to,
2.Differences in Translation of Various Terms
[211]There has been much debate between Staff and the Respondents whether certain Chinese terms have been translated accurately. Many of the documents in evidence in this hearing were originally drafted in Chinese and have been translated into English. The Respondents and Staff have offered various versions of, and expert evidence on, translations of terms. The fact that literal translation versus idiomatic translation from the original Chinese may result in different interpretations adds to the complexity of understanding the evidence in this case.
[212]For example, the Respondents submit the Chinese characters romanized as guanli ren, translated in some documentary evidence as “manager,” do not refer to someone acting as a business manager, within the common North American meaning of the term. Rather, they submit the more appropriate translation would be someone who takes care of something, as an intermediary or problem solver. They submit another Chinese term would have been used to indicate someone holding the kind of management function of an executive within a company.
[213]Another term, translated as “follower”, was also used on company tables that included references to Huang Ran, Li Hua and Gao Fajun (all of whom are involved in companies named in the allegations of undisclosed control). The Respondents submit a contextual interpretation indicates these people were being referred to as intermediaries.
[214]One frequently contested translation was that of the Chinese characters romanized as wai wei gong si. Staff submits the translation of this term as
“peripheral company” provided in evidence is correct. The Respondents refer to the evidence of Dr. Robin Huang who was qualified to provide expert evidence in the four Chinese characters romanized as wai wei gong si. He agreed that the four Chinese characters could be translated as “peripheral companies” but stated that this term did not convey in English the Chinese meaning. Instead, Dr. Huang stated the term referred to an important business partner in a group of corporate entities, one that is arm’s length to other corporate entities in that group. In
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determine the full flavour of the term wai wei gong si, you would need to look at the context in which it is used, and different people might have different views on the meaning of wai wei gong si, depending on the context. The Respondents submit, although “peripheral company” may be a literal translation of the characters, the more appropriate translation, which was provided in at least one instance by a third party translation service, is “outside company”, a reference to companies independent of
[215]The Respondents submit “cooperative companies” refers not to collusion but, as Ho described in his affidavit, to those companies with which
(originally in Chinese) entitled “List of Funds that Co
∙Kun’an (which the Panel finds below was related to
∙Taiyuan (which the Panel finds was controlled by
∙Meishan (which the Panel finds was related to
∙Yuangao (which the Panel finds was related to
∙Yongzhou City Maoxiang Forestry Development Co. Ltd. (which played a prominent role in the alleged fraud relating to the 450 Transactions).
Moreover, there was one entry in this document referring to a transfer of funds between Taiyuan and Kun’an, and another entry between Kun’an and Guangxi Chihui Forestry Co., Ltd. Guangxi Chihui Forestry Co. Ltd. was 80% owned by Huang Ran, who the Panel finds below was
[216]Given the extensive connections between these companies and Sino
[217]We agree with the Respondents that when dealing with the fundamental issue of control, it is tenuous to rely on translations that may have several different meanings, such as manager, follower or
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[218]We had multiple versions of emails in email chains in evidence where the translations of specific words or phrases differed. However, the meaning of the message in the various English versions of the document was consistent. We generally have confidence in the quality of translations, despite the few disputes raised by the parties. There were over 900 exhibits in evidence that were originally in Chinese. These documents varied in length, but many were multiple pages.
[219]In conclusion, the Panel has not interpreted single words in isolation during the hearing, nor in our decision. We have looked at the context and at the numerous examples when each term is used in various emails in order to draw any conclusion as to the appropriate translation in the circumstances.
3.Independent Committee Investigation into Suppliers and AIs
[220]The Independent Committee advisors visited AIs and suppliers in order to confirm transactions, access source documents to link AI recorded payments to suppliers to
[221]Mr. Hyde testified the results of the interviews with AIs and suppliers were described as “mediocre at best” (Hearing Transcript, November 6, 2014 at 77:5). It had been very difficult to obtain interviews; management took more than two months to disclose basic details, did not provide complete names of contacts required for comprehensive analysis, or did not provide Chinese names. Because of cultural differences, it was very difficult to get past the “pleasantries and tea”
(Hearing Transcript, November 6, 2014 at 77). The advisors had difficulty getting a complete list of AIs, suppliers and their contact information from management, specifically Ip. The advisors requested documentation from management, the AIs and the suppliers that would support the transactions that Sino
[222]In the Second IC Report, the Independent Committee stated management also did not disclose all the relationships between
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4.
(a)Did
i.Yuda Wood
[223]Yuda Wood was the largest supplier to
Creation of Yuda Wood
[224]Yuda Wood was 100% owned by Hong Kong Sonic Jita (HK Sonic Jita). HK Sonic Jita was incorporated on July 15, 1993 as Combine (Far East) Limited, and changed its name to Sonic Jita Engineering on August 1, 1997. From July 15, 1993 to March 10, 1997, ADS Capital Limited Corp., Kai Kit (K.K.) Poon, and Danny Wu Wai Leung each owned
Chan’s mother and another company owned by Chan’s best friend, Alex Chau Chi Piu. Chan was a director of HK Sonic Jita (named at this time Combine (Far East) Limited) and CEO of
[225]From March 10, 1997 to July 28, 1998,
[226]A
lists corporate information for over 40
[227]
9We note this document was last modified in 2002 when Yosanda Chiang was working at
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Sonic Jita. Ms. Shao, Staff investigator, explained that corporate “chops” are seals used in China. One company may have various chops for different approvals – for instance, a general company chop, a legal representative chop, a finance department chop and a contract chop. The invoice for the corporate secretarial services for HK Sonic Jita was sent to Ip by a
[228]Ip, Senior
[229]The Respondents gave explanations why HK Sonic Jita shareholders were also employees of
∙differing names for Beijing and Hong Kong companies, both called Sonic Jita: Yeung and Ip gave evidence that the individuals were employees of Beijing Sonic Jita, a separate company from HK Sonic Jita that did contract work for
∙foreign exchange restrictions: Yeung gave evidence that paying Sonic Jita was slow and cumbersome because of the difficulties caused by China’s foreign exchange regulations and system of fapiao. Since it was much easier and faster to get SAFE approval for regular payments like rent and payroll than for engineering or construction services, the Beijing Sonic Jita employees were put on
∙lack of capital at
[230]These explanations do not help the Panel.
[231]Yeung’s evidence is that in February 2006,
[232]An indication of
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[233]
[234]The Respondents submit
[235]Yeung stated that within a few days of signing the Ansu Factory purchase agreement on March 29, 2006, he became certain that Yuda Wood was not going to be a
[236]It is not disputed that Huang Ran requested Yeung’s help in registering Yuda Wood. Subsequently, a
[237]Yeung testified that, at the time of Yuda Wood’s incorporation, he was doing a lot of work, was not feeling well psychologically and was working at a location far away from the city. This location was known as the “ghost” or “haunted house”, a location shared by Yuda Wood and
[238]We find Yuda Wood was capitalized by
[239]The Respondents provide explanations for the involvement of Sino
[240]Yeung stated in his affidavit that at the precise moment he sent Ip the email
“Hunan Yuda registration was completed. We could remit max USD 1.05M to its
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A/C”, he must have been confused and either thought Yuda Wood was going to be a
[241]We find Yeung’s explanation in his affidavit and testimony not credible. First , he stated in his affidavit that approximately three weeks earlier, he became certain Yuda Wood was not going to be a
[242]
[243]Huang Ran stated in his 2011 interview during the Independent Committee investigation that Ho controlled one of Yuda Wood’s bank accounts.
[244]Between November 2008 and October 2010, Yuda Wood made six payments to Gengma Dai and Wa Tribe Autonomous County Forestry Co., Ltd. (Gengma Dai), another supplier, totaling RMB 30.3 million from these Guangzhou accounts. Ip and Ho approved these payments and Sino
[245]The Respondents maintain
[246]The first attempt to explain the monitoring of accounts as a way to exert influence over suppliers was an email sent in connection with SAFE’s
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investigation of
[247]Ultimately, only the two Guangzhou Yuda Wood bank accounts were truly “monitored” although the Panel finds the role played by
[248]Ho’s testimony is inconsistent: unlike what he said in his affidavit, he was not the prime mover behind the concept of monitoring supplier bank accounts – this was going on before he joined
[249]Therefore, we find it more likely than not that the monitoring explanation was concocted for the SAFE investigation in 2011. Moreover, Ho’s explanation that
[250]The Respondents provide great detail in their submissions and called extensive expert evidence regarding “guanxi”, the business culture in Mainland China and the culture of close cooperation among Chinese companies. Guanxi is discussed more extensively in paragraphs [347] to [350]; briefly however, it relates to trust, communication and loyalty in all aspects of Chinese life. The requirement to monitor a supplier’s bank accounts and the necessity to have leverage to enforce expectations appear to the Panel to be inconsistent with the concept of
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guanxi, a concept the Respondents rely on to explain
[251]The issue of guanxi is not relevant as we have found this monitoring/leverage explanation was only concocted for the SAFE investigation in 2011. The control over Yuda Wood’s bank accounts was just one aspect of
[252]
[253]On April 13, 2011, a
[254]This email is instructive in two ways: first, if Yuda Wood was independent, the
[255]On May 10, 2011, a
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[256]“Bohu” refers to
[257]The May 15, 2011 email clearly indicates
[258]This Yuda
[259]
[260]In June 2006, in email correspondence among Yeung, Ip and others, it is recommended Yuda Wood apply for a loan for
[261]Mr. Henderson testified that during the Independent Committee investigation Chan was shown this email and attachment. Mr. Henderson testified Chan’s response to the Independent Committee advisors was: “He [Chan] said it was all in the beginning” (Hearing Transcript, December 5, 2014 at
Forest’s ability to use Yuda Wood to apply for a loan, or explain the phrase
“100% under our control”.
[262]When Ip was shown this email and its attachment during his interview by Staff during the investigation in this matter, he replied: “I don’t know what 100
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percent control means. In what extent? In what aspect?” (Hearing Transcript, December 5, 2014 at
[263]Mr. Pomeroy testified that when Yeung was shown this email and attachment during his interview in 2011, Yeung stated: “Those are what the words say, but that’s not what it means.” Mr. Pomeroy testified Yeung “dismissed it out of hand, and indicated that, ‘Although the words say that we, Sino
(Hearing Transcript, December 9, 2014 at
[264]Later, Yeung explained in his affidavit, dated August 23, 2015, he used the phrase “100% under our control” because he had retained Yuda Wood’s chops and could control the proceeds from Yuda Wood’s loan. The Panel rejects Yeung’s explanation and Ip’s professed lack of understanding and interprets the phrase “100% under our control” literally: Yuda Wood was 100% under
[265]The difference between the purchase transactions with Yuda Wood recorded by
Yuda Wood were fictitious and therefore there was no real revenue to report to SAIC.
[266]
Time and, in particular, in 2007 when they shared land lines in the same “ghost house”.
[267]Further evidence of Yuda Wood’s lack of independence is the fact that Yuda Wood’s Accounting Manager was not able to respond to audit confirmation letters without
[268]The Respondents submit the Independent Committee was satisfied Huang Ran was not an employee of
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[269]Based on the foregoing, we find Yuda Wood was controlled by Sino
∙the myriad former and current employees of
∙the involvement of Ip, Yeung, Ho and other
∙the fact that
∙the control of Yuda Wood’s Guangzhou bank accounts by
∙the documents evidencing a proposal that
∙Yuda Wood's lack of knowledge of the details of transactions that had purportedly already occurred between Yuda Wood and
[270]For these reasons, the Panel finds
ii.Kun’an
[271]Kun’an was a supplier to
Degang and Tian Jianguo were former
[272]In 2009,
[273]An email on September 29, 2009 shows that
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and another
[274]In this same email, Yeung told Huang Ran that Ip had instructed Kun’an should have two bank accounts and that two seals for each account should be kept, one of each with Yang Jun (who was responsible for Kun’an’s finances) and the others with a supposed competitor of Kun’an’s and
[275]Yeung ends the email by telling Huang Ran to “build up Kun’an as if it is a new company”, yet by this time,
[276]In a reply email from a
[277]An attachment to an email dated April 20, 2011 copied to Ip and Ho shows that a subsidiary of
[278]Huang Ran’s Kun’an business card shows his title is General Manager. He is listed on
[279]Further connecting Huang Ran and Kun’an to
[280]The Respondents submit
Kun’an to express
[281]Staff submits the purpose of the demand letter to
[282]Based on the detailed email from Yeung described above, the interwoven connections between Kun’an and former
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exercised significant influence over Kun’an and that Kun’an was a related party to
iii.Taiyuan
[283]Taiyuan was a supplier to
[284]The Respondents submit
[285]In February 2006 Huang Ran became a 50% shareholder of Taiyuan by acquiring
Shen Siguo’s shares for no consideration and also became its Legal
Representative. In November 2006, Huang Ran acquired the remaining 50% from Chen Jinxing, also for no consideration. Ip testified Huang Ran repaid Sino - Forest with particle board but there was no evidence to corroborate his testimony. Ip did not know when this repayment was made and also indicated it was “repaid through offset and recovered” (Hearing Transcript, May 27, 2015 at
[286]From June 1, 2006 until at least November 2006, Huang Ran was both a shareholder of Taiyuan and on
Letters, copied to Ip and Ho, Huang Ran is listed as “Follower” with respect to
Taiyuan.
[287]On December 1, 2006, Gao Fajun was appointed Taiyuan’s Supervisor under Chinese company law. Gao Fajun was an employee of Sino
[288]Ho testified that Ip had been monitoring Taiyuan’s bank account prior to 2007.
[289]We find
[290]The Panel finds
iv.Dongkou
[291]Dongkou was a
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interested in acquiring Dongkou’s wood processing factory and standing timber business and investigated the company.
[292]Du Aiguo was a
[293]In 2008, Dongkou was
RMB 867,708,084 (approximately US $125 million). No cash was received with respect to any of these sales; rather, the AR/AP
[294]A 2007 Project Funding Schedule for
Dongkou and three third party suppliers: Guangxi Hezhou City Shengdong Forestry Development Co., Ltd., Gengma Dai1 0 and Yongshun Shunfa Agriculture and Forestry Information Consulting Co., Ltd. Also included on this schedule is the Yunnan Master Framework Agreement between
[295]On January 12, 2007, a
[296]On February 3, 2007, a
[297]Another contract, between Dongkou and Guangxi Hezhou City Shendong Forestry Development Co., Ltd. was emailed by Ip to a
1 0 The Project Funding Schedule identifies the seller as “Yunnan Gengma County Forestry Co., Ltd.”, which Ip testified was another name for Gengma Dai. Although Gengma Dai is identified as “Gengma Dai and Wa Tribes Autonomous County Forestry Co., Ltd., Yunnan”
elsewhere in the Project Funding Schedule, the evidence is clear that the Dongkou contract was with Gengma Dai.
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[298]None of these contracts were signed or chopped.
[299]The Respondents submit
[300]We reject the Respondents’ argument that
[301]In addition, the phone number listed for Dongkou in a contract with Gengma Dai is the same as a cell phone number of a
[302]Dongkou was
[303]Based on the cumulative weight of the evidence, we reject the Respondents’ explanation and find that
(b)Other companies Staff alleges are related to
[304]Staff submits Juncheng, Shun’xuan, Dacheng, Yuangao and Meishan are also related and worked in collusion with, or were influenced by, Sino
i.Juncheng
[305]Juncheng was a
[306]In total,
[307]In
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had previously been employed with
[308]Yang Jun, who was also connected to Yuda Wood, Kun’an and Yuangao, worked for Huang Ran and was a former
[309]Two conclusions can be drawn from this email. First,
[310]Both Ip and Ho are copied on a March 2011 internal
Confirmation Letters to each listed “Related Entity”. Huang Ran and Yang Jun are listed in this report as “followers” for Juncheng. Huang Ran is also listed on this document as a “follower” for Taiyuan, Kun’an and Meishan. The Respondents submit that a contextual interpretation of the term indicates the entities are being referred to as “intermediaries”. Whatever the English translation, in this context, it can only be negative. We reject the Respondents’ submission. This email and attachment refer to
[311]Huang Ran also provided Juncheng’s bank account information, including cash balances, to Ip in March 2011.
[312]Based on these facts, the Panel finds
ii.Shun’xuan
[313]Shun’xuan was a supplier to
[314]Ip and Ho are copied on the April 20, 2011 email (previously referred to in our analysis of Kun’an) between
Unit(s)”, and that contains the instruction “… the term “periphery” should not appear in emails or documents/forms”. Shun’xuan is included in the attached charts of payments between
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[315]The attachment indicates a subsidiary of
[316]An email sent May 9, 2011 to Ip and Ho, among others, shows that
[317]The Panel finds Shun’xuan is a related party for the following reasons: Kun’an was used by
iii.Dacheng
[318]Dacheng, a supplier to
[319]There is limited evidence of a
iv.Yuangao
[320]Yuangao was a supplier to
[321]Huang Ran was a 39% shareholder of Yuangao.
[322]On July 16, 2010, Ho was sent an email titled “FW: The Yuangao Company’s jointly managed account information”, which refers to Ip having arranged Yuangao’s bank account. The
[323]A March 4, 2011 email from Huang Ran to Ip outlining the “situation of funds for the periphery companies is as follows” lists Yuangao, among other “periphery companies”. Whether “periphery companies” or “outside companies” is the correct translation is not most critical in this email. What is important is the context of this email. It lists various suppliers’ and customers’ (some of which may be competitors to
[324]Based on this evidence, the Panel finds Yuangao is related to Sino
v.Meishan
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[325]Meishan was a customer in the WFOE Model that was brought to Sino
[326]Gao Fajun, while a
[327]The March 2011 email from Huang Ran to Ip that provides bank account information for suppliers and customers lists Meishan among the “periphery companies”. As noted above in our analysis of Yuangao, what is important in this email is that the bank account details for Meishan and other purportedly independent companies were provided to
[328]The Panel finds Meishan is related to
(c)Company Caretaker List
[329]One document obtained during Staff’s investigation whose significance was contested was the Company Caretaker List.
[330]The Company Caretaker List was a
Chiang’s computer. It does not indicate the date the spreadsheet was actually created. It is titled “nominee managers/information of managed companies” and lists more than 120 companies. The Respondents dispute how some words have been translated.
[331]The following are among the 120 companies listed:
∙Bohu,
∙Dacheng,
∙Meishan,
∙Taiyuan,
∙Kun’an,
∙Guangxi Chihui Forestry Co., Ltd.,
∙Gaoyao City Xinqi Forestry Development Co., Ltd. and Guangxi Pingle Haosen Forestry Development Co., Ltd. (referred to in our analysis of the 450 Transactions),
∙Jiangxi Province Senchangtai Forestry Co. Ltd. (referred to in our analysis of the Gengma #1 Transactions),
∙Yongzhou City Maoxiang Forestry Development Co. Ltd. (referred to in our analysis of the allegations about deceitful documentation and the 450 Transactions), and
∙Renshi (China) Real Estate Development Ltd. (referred to in our analysis of the Greenheart allegations).
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[332]The document lists the following individuals, among others: Huang Ran, Pauline Chan (Chan’s sister), Marco Lam (a
Chan during his interview by Staff in connection with this matter), Lok Ho Ting (involved in the Greenheart Transactions), Li Hua (legal representative of Bohu), Lei Guangyu (involved in the Greenheart Transactions), and George Ho.
[333]It is not clear who created this document. Ms. Chiang testified John Zeng asked her to print out a copy from a USB drive that he gave her while he was waiting to meet with Chan. She testified that she printed out one copy and gave it to Mr. Zeng.
[334]Chan submits there is no evidence that Mr. Zeng discussed this List with Chan during their meeting that day, or on any other day. Chan further submits there is no evidence that Chan saw this List during the Material Time.
[335]It is clear Chan was aware of the Company Caretaker List. Mr. Martin tes tified he saw the List after
December 3, 2014 at
[336]It is reasonable to infer Mr. Zeng discussed this List with Chan, at the meeting on the day he asked Ms. Chiang to print it out. Why else would he need the List, the contents of which related entirely to
[337]We reject Chan’s submission. There is evidence Chan was well aware of the
Company Caretaker List and Mr. Zeng discussed it with him.
[338]Ip, Ho, Hung and Yeung submit they did not see this List before this proceeding commenced and have no knowledge about its origins. The Respondents challenge the translation of “manager” within the title in the traditional English meaning. Rather, they say it refers to someone who “follows up on matters”, is an intermediary or liaison officer. They submit that to rely on a List that is inadequately translated is a far too tenuous basis on which to conclude Sino- Forest controlled its suppliers.
[339]The Company Caretaker List includes companies that we find above, for other reasons, were controlled by or related to
(d)Huang Ran
[340]Huang Ran figures prominently in
∙ Yuda Wood (supplier)
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∙Gaoyao City Xinqi Forestry Development Co., Ltd. (customer)
∙Meishan (customer)
∙Taiyuan (supplier)
∙Guangxi Pingle Haosen Forestry Development Co. Ltd. (customer and supplier)
∙Kun’an (supplier)
∙Guangxi Chihui Forestry Co. Ltd. (supplier)
∙Jiangxi Province Senchangtai Forestry Co. Ltd. (supplier)
∙Yongzhou City Maoxiang Forestry Development Co. Ltd. (supplier)
∙Yuangao (supplier)
∙Dacheng (supplier)
[341]These companies are located in the four bordering provinces of Hunan, Jiangxi, Guangxi and Guangdong. As has been noted previously, the Respondents take issue with the translations of the words used in these documents to describe
Huang Ran’s role. Putting the issue of specific translations aside, these documents show that Huang Ran was involved with many suppliers and customers purported to be operating at arm’s length to Sino
[342]The evidence shows Huang Ran participated in internal
[343]The Respondents submit that because of obstacles, including tensions between residents of Mainland China and Hong Kong, and difficulties in conducting business between Hong Kong and Mainland China, including those related to the language differences of Mandarin and Cantonese speakers, Huang Ran was used as an intermediary to bridge the gap in guanxi, language and culture. If true, this would mean Huang Ran’s influence spanned the four provinces in which these companies did business.
[344]We did not hear direct testimony from Huang Ran and must draw inferences based on the evidence presented, including numerous emails.
[345]When interviewed in September 2011 by the advisors to the Independent Committee, Huang Ran declined to disclose the names of the supporters behind Yuda Wood, whether himself or others. Huang Ran was also recorded as majority owner in three other
[346]We find Yuda Wood, Taiyuan and Kun’an were controlled by, or related to, Sino - Forest through Huang Ran as its nominee. Huang Ran facilitated the control or
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significant influence
5.Guanxi
[347]The Respondents provided extensive expert evidence on the concept of guanxi in a cultural and business context. Mr. Martin testified that guanxi relates to a level of cooperation that is essential to business and personal relationships in China.
Guanxi is the concept of drawing on connections in order to secure favours and reciprocal obligations, is based on intricate and pervasive relational networks,
and can be distinguished from the Western concept of networking (Yadong Luo, Guanxi and Business, 2d ed (Singapore: World Scientific Publishing Co. Ptd. Ltd., 2007) at 2). Dr. Peerenboom described guanxi as being a reference to ethical relationships based on communication, trust and loyalty built over time. It refers to relationships between people, primarily, not companies and is a form of human capital. Dr. Peerenboom, who provided expert evidence on Chinese law, culture and business, likens guanxi to concentric circles, with the sense of obligation higher the closer one is situated in the circles to the centre. While guanxi is not meant to facilitate illegal business transactions, he testified that it could lead to someone doing something illegal on behalf of someone else.
[348]The Respondents submit the prevalence of guanxi explains the close cooperation with suppliers and customers and is not evidence of control or influence. They submit that, in the rural locations in which
[349]While the submission regarding access to trees is disconcerting because it calls into question the enforceability of contract law, the close relationship that Sino - Forest had with many of its suppliers and customers goes far beyond guanxi. The evidence shows
You know, this is a very unusual type of information for
details of your purchase and sales agreements and all and so forth, yes. It's not generally the normal course of business.
(Hearing Transcript, April 8, 2015 at
[350]The Panel is cognizant of cultural differences that companies encounter globally; however,
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principles. For the purposes of our analysis, Ontario securities law is paramount and overrides any explanations for illegal conduct being excusable in the name of guanxi, however it is defined.
6.Conclusion: The Real Issue is Control and Value
[351]Staff alleges
[352]The question of control is directly related to value, existence and ownership. In the BVI Model, because there were no cash records or bank statements to verify transactions, significant weight was placed by E&Y during their audit process on the Audit Confirmation Letters. The auditors relied on these for independent verification of
[353]After the Muddy Waters Report, when Fred Clifford of E&Y learned that the payments made in the AR/AP
Transcript, November 17, 2014 at
[354]Further, if suppliers and customers were related to Sino
Confirmation Letters were, according to Mr. Clifford, “not really audit worthy evidence” (Hearing Transcript – November 17, 2014 at 130). Mr. Clifford testified the Audit Confirmation Letters were documents E&Y would produce and retain custody of, would separately forward to suppliers and customers and would retain to get assurance about the nature and validity of these transactions. Mr. Clifford called these letters key and foundational to the audit process. The auditors sent these letters directly to suppliers and customers and believed they were receiving the letters directly back as well. However, the evidence shows
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[355]E&Y received direct confirmation in management representation letters from
(Hearing Transcript – November 17, 2014 at 34). They were critical and without them, the auditor would not release its audit opinion. In these management representation letters, management confirmed the information provided was complete, there were no related parties that were not disclosed and the offsets were genuine and complete. The auditor required management to represent: (1) the transactions are real; (2) they happened; and (3) they were between third parties without any mutual interest among them. Each year this management letter was signed by
[356]The Respondents submit the real issue is not control but value, and criticize Staff for not providing expert accounting evidence as to why the concept of control over suppliers or customers actually matters. To the Panel, the “why” is self- evident, and was explained very comprehensively by Mr. Clifford.
[357]The Panel finds the lack of independence of purportedly arm’s length customers and suppliers has been well established. This directly calls into question the true economic substance of transactions between
7.The Roles of Chan, Ip, Hung, Ho and Yeung
[358]We find Chan knew of, and was involved in,
∙Between 1993 and 1997, Chan, Chan’s mother and his best friend owned the company that had a
∙A loose document on his executive assistant’s computer that listed corporate information for
∙Chan was also involved in the monitoring of Yuda Wood’s accounts. Ho’s evidence was that he discussed getting leverage over suppliers by monitoring their bank accounts with Chan, and could not recall whether this was his idea or whether it came up in discussions with Chan.
∙Chan was copied on two emails regarding an increase in tax owed by Yuda
Wood and adjusting Yuda Wood’s cost base on a purchase from another supplier, which evidence
∙Chan was also copied on every email in the
∙When shown the document that states Yuda Wood was “100% under our control” during the Independent Committee investigation, Chan’s response indicates he was aware
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∙Chan approved the advance of
[359]Chan was involved in selecting the corporate name for Kun’an, another Sino - Forest supplier in the BVI Model, which we find was related to Sino
[360]Chan was well aware of the contents of the Company Caretaker List, which we find makes it more likely than not Chan was aware
[361]We find Ip was involved in, and therefore knew of,
∙He was involved in the business operations of Yuda Wood’s parent company, HK Sonic Jita.
∙Ip oversaw the changing shareholder structure of HK Sonic Jita and was provided with updates as corporate changes were made.
∙Ip was kept informed about the capitalization of Yuda Wood by Sino - Forest.
∙Ip was sent draft documents for Yuda Wood’s purchase of the Ansu
Factory.
∙Along with Ho, Ip approved six payments to Gengma Dai from the Yuda Wood bank accounts controlled by
∙Ip was sent the document that states Yuda Wood is “100% under our control”.
∙Ip directed Ho to resolve Yuda Wood’s income tax issues.
∙Ip was involved in adjusting Yuda Wood’s cost base on a purchase from another supplier.
[362]We find Ip was aware of
∙He was copied on emails from Yeung, which indicate the significant influence
∙He instructed that Kun’an should have two bank accounts and two seals.
∙Along with Ho, he was copied on an email that shows a Sino
[363]We find Ip was also involved in
∙Huang Ran reported to Ip on the operations and financial condition of Taiyuan.
∙Ip had been monitoring Taiyuan’s bank account since before 2007.
∙He agreed that
[364]We find Ip was also involved in
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for suppliers and customers of
[365]Ip was copied on an internal
[366]We find Hung was less involved in
Forest’s involvement with the supposedly independent Audit Confirmation Letter process. He was forwarded an email from an employee of Juncheng to a Sino- Forest employee in which Juncheng is described as a peripheral company and the
[367]We find Ho was involved in
[368]Ho was copied on an email that indicated a
[369]Ho was copied on an internal
Letters, in which Huang Ran and Yang Jun are listed as “followers” for supposedly independent companies listed under the heading “related entity”.
We concluded that
[370] We find Yeung was very involved in
∙He held Yuda Wood’s corporate chops on behalf of
∙Yeung signed the Ansu Factory purchase agreement in the name of Yuda Wood, prior to Yuda Wood’s incorporation.
∙It is not disputed that Huang Ran requested Yeung’s help in registering Yuda Wood, and subsequently a
Wood as a corporation, under Yeung’s direction.
∙Finally, Yeung sent out the document regarding Yuda Wood that states
“its operating authority is 100% under our control”.
[371]We find Yeung was also involved in
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and that it was to be built up so that “it looks like a company with substance”. Yeung also told Huang Ran to “build up Kun’an as if it is a new company”. By the time of these emails from Yeung,
C.Deceitful Documentation Allegations
1.Positions of the Parties
(a)Staff
[372]The second element of the Standing Timber Fraud Allegations by Staff is a deceitful documentation process. Staff alleges
[373]Staff alleges the documentation processes for both Sino
[374]Staff alleges BVI purchase contracts and their three attachments were fundamentally flawed in the following ways:
a.since the BVI subsidiaries could not obtain PRCs (Forestry Rights Certificates) from the Chinese Forestry Bureau,
b.
Forest’s public financial disclosure;
c.although the purchase contracts referred to attached letters of authorization and resolutions of the villagers (Villagers’ Resolutions)
(sometimes translated as “farmers authorizations”), these documents were not attached, and there is no evidence that ownership of the standing timber was ever properly transferred to
d.the attached reports on a survey conducted for the plantation being purchased (the Survey Reports) were prepared by one survey company, and drafts of the Survey Reports were, in some cases, located on the computer of a
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[375]Staff submits this flawed purchase documentation does not constitute proof of ownership and does not identify the precise location of the standing timber being purchased such that its existence could be readily verified and independently valued.
[376]With respect to the sales contracts, Staff alleges they were similarly created and executed in the quarter after the date on which
[377]Staff alleges
(b)Respondents
[378]Chan denies
[379]Ip, Hung and Ho admit
[380]Hung and Ip submit they were forthcoming about the fact the written contracts were prepared at the end of the quarter or early in the following quarter. They submit
[381]The Respondents submit the BVI AR/AP
[382]In addition, Chan submits, as CEO, he relied on K.K. Poon and the Operations Department for their forestry education, skills and expertise and, in particular, to interface with the Chinese domestic companies and people necessary to conduct the
[383]Chan submits Mr. Poon established
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responsible for managing all
[384]Chan submits he similarly relied on Albert Ip and Albert Zhao, who took over Mr.
Poon’s responsibilities for BVI standing timber purchases and sales. Chan submits Mr. Zhao was responsible for negotiating sales with the AIs and, additionally, liaising with local governments, and Ip was responsible for the general supervision and management of the
[385]Chan submits his role in
2.BVI Purchase Documentation
[386]Staff alleges the BVI purchase contracts and their three attachments were fundamentally flawed.
[387]Mr. Horsley, Mr. Clifford and the Independent Committee all believed the purchase contracts and the Forestry Bureau Confirmations were the primary evidence of
(a)Purchase Contracts
[388]
[389]Purchase contracts contained a “Subject of Acquisition” clause which provided little detail about the asset being purchased. For example, a BVI purchase contract from October 2010 provides the following limited amount of detail about the asset that is the subject of the transaction:
Tree Species: Yunnan pine,
Location: Lijiang City
Area: 102,449.90 mu (6,829.99 hectares)
Timber Stock: 810,792.17 m3
Proprietorship: Collective proprietor
Plantation area measurements are generally expressed in “mu”, a Chinese measurement of land. 15 mu is roughly equivalent to one hectare. Harvested timber is generally priced by volume and measured in cubic meters. The stock volume in a purchase contract for standing timber would be an estimate of the yield upon harvesting.
[390]BVI purchase contracts also included provisions for obtaining harvesting permits and logging the timber, and the right of first refusal on the transfer of forestland after harvest. They also specified that the rights being transferred were standing timber rights.
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[391]
[392]Each
a.Survey Report;
b.Villagers’ Resolutions; and
c.Forestry Rights Certificate (i.e., PRC) or other proof of ownership to verify the ownership of such timber.
[393]Each purchase contract referred to Villagers’ Resolutions and PRCs as attachments. Ip, Xu Ni
Villagers’ Resolution attached to any BVI standing timber purchase contracts.
The Second IC Report states none of the BVI contracts had either a PRC or a Villagers’ Resolution attached. Following the release of the Muddy Waters Report, the Independent Committee asked
[394]In Staff’s review of the BVI purchase contracts during the investigation into this matter, Staff was unable to find any attachment (b) or (c), above. Ms. Shao testified that these were never provided by
BVI purchase contract and never saw a PRC for a BVI standing timber purchase
[395]The Respondents submit
Villagers’ Resolutions as attachments was on the advice of ext ernal counsel. She stated, however, that she had never seen these attachments for purchases in the BVI Model. She agreed if attachments were missing, there would be problems “to understand the ownership of title, if the timberland exists, and where those trees are”. Ms. Xu Ni stated she raised these issues about attachments to purchase contracts with Chan and the Operations Department.
[396]Prior to Q2 2010, K.K. Poon signed every BVI purchase contract on behalf of
[397]Mr. Clifford explained the process he followed in E&Y’s review of the purchase contracts for the audits of
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in Chinese, were explained to him by an E&Y Chartered Accountant on the audit team who was fluent in that language. Mr. Clifford testified he was not aware two of the attachments contemplated in the purchase contracts were not in fact attached, and did not recall whether he was aware that these attachments were required. After reviewing the Second IC Report, Mr. Clifford was “disappointed in the fact that, you know, evidence that was supposed to be there was not attached to those contracts” (Hearing Transcript, November 17, 2014 at 94:21- 23).
(b)Forestry Bureau Confirmations and PRCs
i.Forestry Bureau Confirmations
[398]We first consider one of the three documents meant to be attached to purchase contracts, Forestry Rights Certificates (i.e., PRCs) or other proof of ownership.
[399]Official government PRCs were never issued as proof of ownership for Sino -
Forest’s purchases in the BVI Model. Ip and Xu Ni stated PRCs could not be obtained for standing timber ownership alone. Hyde and Ip further testified that BVIs, as foreign companies, could not own land use rights . As discussed elsewhere in these Reasons, eligibility of foreign companies to obtain PRCs in different provinces and counties varied during the Material Time, as did Forestry Bureau practices with respect to the registration of separate ownership of standing timber and land use rights. We heard evidence changes to the legal regime were contemplated that would permit the registration of standing timber alone; this practice had not been implemented by the Forestry Bureaus in the regions where
[400]In circumstances where
To: Guangxi Dacheng Wood Co., Ltd.
CC:
We have received the "Timber Acquisition Contract" ("Contract") (see the attached detailed list of contracts) submitted to our office by your company. After examination,
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we agree to your company's transfer of the relevant eucalyptus, pinewood, and
With regard to your application for processing the change of timber ownership, we are temporarily not able to process the registration of the change in the relevant timber ownership to the transferee,
At the same time, our office confirms that, upon the maturity of the eucalyptus, pinewood and
This serves as our certification.
The Forestry Bureau Confirmation was sealed with the chop of the issuing Forestry Bureau. Listed on a second page was the name of the seller, purchaser, area in hectares, stock volume in cubic metres and the date the contract was signed, which was also the same date as on the Confirmation. Forestry Bureau Confirmations issued during the Material Time consistently stated, in effect, the local Forestry Bureau had not yet fully implemented changes to the forestry registration regime but would issue PRCs at some future time. The message did not change during this
[401]Ip testified Forestry Bureau Confirmations were sought at the request of Sino -
Forest’s Legal Department. He explained industry practice was not to issue PRCs unless the transfer of land use rights was involved and it was uncommon to request some other form of proof of ownership from Forestry Bureaus. Rather,
Forestry Bureaus obliged the request from the “Canadian side” and agreed to issue Forestry Bureau Confirmations as evidence of standing timber ownership. Ip explained the requirement for Forestry Bureau Confirmations as being a unique requirement for
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It is a cultural difference between the East and the West. In China, in the forestry industry, it was very straightforward. You buy, you sell. And the PRC is only issued where land is involved.
For
–in order to evidence ownership, the confirmation letter had to be issued, and therefore the suppliers had to arrange with the forestry bureau to issue this confirmation letter.
And, in fact, sometimes I would be laughed at. They would say, jokingly, “You want to buy these vegetables growing in the fields? Would you request the farmer to issue an ownership right before you will buy these vegetables from the fields?” They would say that.
(Hearing Transcript, September 16, 2015 at
[402]Signed Forestry Bureau Confirmations were supplied to, and relied on by, Sino-
Forest’s auditors. Josephine Man of E&Y testified that, based on discussions with
[403]Mr. Clifford testified he understood Forestry Bureau Confirmations to be official government documents that were only issued after the purchaser and vendor delivered the purchase agreement to the Forestry Bureau, along with supporting documentation that could, in fact, be the PRC. He understood the Forestry Bureau would complete its due diligence with respect to that transaction and would then issue the Forestry Bureau Confirmation, which was satisfactory evidence of title.
[404]Josephine Man testified she understood the Forestry Bureau Confirmations were prepared and issued by the Forestry Bureau. Ms. Man further testified the terms “Forest Rights Certificate” (i.e., PRC) and Forestry Bureau Confirmation were used interchangeably by the E&Y audit team in documents that referenced checking to ensure
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[405]The Respondents submit the Forestry Bureau Confirmation together with the purchase contract are sufficient proof of the transfer of ownership of forestry rights.
[406]During the hearing, we learned the Forestry Bureau Confirmation was originally created by
[407]In contrast to the process for issuance of PRCs, according to Ip, the Forestry Bureau did not require the presence of the seller and purchaser for the issuance of Forestry Bureau Confirmations. Rather, Ip explained it was the supplier’s responsibility to have the Confirmations issued, and Sino
[408]The Forestry Bureau Confirmations were standard in format and stated the Forestry Bureau had reviewed the purchase contract, approved the contract arrangement and confirmed that BVIs were entitled to harvest, transport and sell timber. The term regarding harvesting contradicts evidence we heard from Mr. Liu that an owner of standing timber requires a PRC, or the assistance of a PRC holder, to obtain a harvesting permit.
[409]The sample Forestry Bureau Confirmation at paragraph [400], above, states the
Forestry Bureau is “temporarily not able to process the registration”. This is misleading, as it implies the Forestry Bureau would be able to issue a PRC to a BVI at some point in the future. This is untrue – a PRC would not be issued to a BVI.
[410]The Forestry Bureau Confirmation also states the Forestry Bureau agrees to issue PRCs to BVIs and to register the timber ownership “according to the
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uniform timetable of the city government”. This term – that the Forestry Bureau will issue a PRC to the BVI – is false and calls into question the authenticity of the document itself, as Forestry Bureaus would have been aware that foreign companies, such as BVIs, could not obtain PRCs. No evidence was presented that there was a “uniform timetable” to issue PRCs to BVIs.
[411]Mr. Henderson testified the primary objective from the onset of the Independent Committee investigation was to reconfirm the original Forestry Bureau Confirmations, as they were the primary piece of information supporting title to
Senior Management expressed strong concerns about approaching the forestry bureaus to reconfirm existing confirmations obtained by the Company. Reasons for these concerns included:
(i)such confirmations were not standard forestry bureau documents, contained statements that could embarrass the forestry bureau officials (see (iii) and
(iv)below), and were issued as a favour to the Company;
(ii)SF had been asked to keep the existence of such documents confidential, so if any party other than SF was to seek reconfirmation of them, the forestry bureaus would likely deny having issued them;
(iii)the forestry bureaus may have exceeded their authority in issuing such confirmations, especially as they related to harvesting and transportation rights, and therefore the officials could risk sanctions if they reconfirmed the earlier documents;
(iv)references contained in the existing confirmations may contradict the position of the Chinese Central Government and thus cause embarrassment to officials, since many of the forestry reforms may not have been implemented; and
(v)the relationships developed by SF with the forestry bureaus would be jeopardized by this process.
[412]The Report on Process to Date set forth 18 factors which affected these visits and the confirmation process, including:
∙management did not provide a comprehensive list of plantation assets reconciled to its financial statements until June 23, 2011;
∙shortly after the Muddy Waters Report, management caused all Forestry Bureau Confirmations to be relocated from their various locations in the
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confirming some rights. The confirmations were not returned to Forestry Bureaus, but were sighted by Independent Committee advisors in the offices of
∙Forestry Bureau officials were not required to meet with the advisors;
∙prior to August 29, 2011, the Advisors were not allowed to ask any questions relating to existing Forestry Bureau Confirmations. The new Forestry Bureau Confirmations that were issued simply confirmed that
∙the time made available for meetings with Forestry Bureaus was limited and the Independent Committee advisors were not permitted to ask certain questions;
∙certain Forestry Bureaus either deferred or denied advisors access to their plantation rights registries;
∙in some instances, the new Forestry Bureau Confirmations would not be issued on Forestry Bureau letterhead, which was inconsistent with prior practices and in one instance, the new Confirmation was not issued by the Forestry Bureau but by the “social institution legal person”; and
∙at one Forestry Bureau meeting, management represented an individual to be Forestry Bureau First Vice Chief, when in fact this person was no longer in that position and had been paid by Sino - Forest for several months prior to the visit to act as a consultant. In another visit, the Independent Committee advisors learned that the former Vice Chief of the Forestry Bureau was assigned since 2008 to work with
[413]The Independent Committee was unable to obtain insight into the Forestry
Bureaus’ process for issuing Confirmations. The internal authorization process is unclear, as the Confirmations were chopped by the Forestry Bureaus but the name of the authorizing Forestry Bureau official did not appear on the document.
[414]The due diligence process is also unclear, especially given the apparently short turnaround time in which the Forestry Bureau Confirmations were issued. Evidence of 17 Forestry Bureau Confirmations prepared by
[415]However, the evidence suggests the process for confirming or transferring ownership was both cumbersome and complex. As of January 12, 2011, Sino- Forest had prepared unsigned, unchopped draft purchase contracts and Forestry Bureau Confirmations. For the 17 BVI standing timber acquisitions in Q4 2010,
∙draft purchase contracts would have been sent to five different suppliers in Mainland China to be signed (and/or chopped);
∙these contracts would then be sent back to
1 1 There is some discrepancy about where BVI purchase and sales contracts were physically signed. Management representation letters provided to E&Y and
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∙the signed contracts and draft Forestry Bureau Confirmations would then be sent to the five suppliers who sold standing timber to
∙after a due diligence process, which according to the Second IC Report and confirmed by Ip, would include Forestry Bureau officials reviewing contracts and upstream PRCs, an
∙the 13 Forestry Bureaus would return the contracts and chopped Confirmations to the five suppliers; and
∙finally, by February 14, 2011, the five suppliers would return the contracts and chopped Confirmations for the 17 purchases to Sino- Forest.
According to
[416]The Forestry Bureaus were located in 13 different counties, in remote locations, described by Chan’s counsel as
Transcript, April 27, 2016 at
Forestry Bureaus’ due diligence for Confirmations was equivalent to the process that occurred when issuing PRCs. When the Independent Committee advisors sought to have new Forestry Bureau Confirmations issued following the release of the allegations in the Muddy Waters Report, they were told by a Forestry Bureau
[417]However, the Independent Committee advisors established Forestry Bureaus did not keep track of standing
was important the contracts be signed in Hong Kong, and not Mainland China, so there would be no risk of creating a permanent establishment in Mainland China relating to the BVI business.
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[418]Examples of the dubious reliability of Forestry Bureau Confirmations are found in the Gengma #1 Transactions and the Gengma #2 Transactions, analyzed elsewhere in these Reasons. In the Gengma #1 Transactions, a Forestry Bureau Confirmation purports to confirm the transfer of standing timber from Yuda Wood to a
[419]E&Y, in its annual due diligence audit process, never visited a Forestry Bureau. An internal E&Y memorandum dated July 26, 2010 refers to a rumour from a business contact of a retired E&Y partner who raised concerns about the authenticity of sales and purchase transactions with authorized intermediaries. As a result, E&Y had contemplated visiting the Forestry Bureaus during the 2010 audit as part of the increased rigour of audit procedures around Sino
[420]Initially, the Independent Committee had been under the (mistaken) impression that the Forestry Bureau Confirmations had been independently obtained by the suppliers. Mr. Henderson testified the Independent Committee advisors initially did not think there would be any problem in obtaining reconfirmation as they had no reason to believe there was any issue in doing so. In the end, the Independent Committee did not reconfirm existing Forestry Bureau Confirmations, as they concluded this would be disruptive to Sino
Forest BVI subsidiary “shall have the rights to harvest, transport and sell the aforementioned mature timber according to the law”. The original Forestry
Bureau Confirmations purport to confirm rights to the timber Sino
[421]Mr. Henderson of PwC testified he discussed the Forestry Bureau visits with Chan. The Independent Committee advisors were instructed by the Independent Committee not to make direct contact with Forestry Bureau officials as management had cited strong concerns such contact would negatively impact
Committee advisors required management’s assistance in organizing Forestry
Bureau visits. However, they encountered various problems, some of which are
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detailed here. First, the Forestry Bureau Confirmations had been relocated from
[422]The Independent Committee advisors ultimately visited nine Forestry Bureaus. However, they were not provided with contact information for the individuals with whom they met, as they requested. Although the Independent Committee advisors planned to meet with multiple senior individuals, in five instances, they met only one individual, which, according to the Independent Committee advisors, increased the risk the individual may be impersonated. Two Forestry Bureau officials were on
[423]The Forestry Bureau Confirmations were drafted by Sino
ii. Comparison of PRCs and Forestry Bureau Confirmations
[424]PRCs provided specific information on the location of the forestry assets, often to the county level, along with any colloquial name. They also provided descriptions of each compartment’s boundaries to the four cardinal directions. As an example, one of the PRCs relating to the Gengma #1 Transactions includes the following location information for a plantation acquired by
∙Situated at: Upper Xinhua Group, Nanmounong Village Committee, Gengma Town
∙Colloquial Name: Yanbabashan
∙Forest Compartment: 9, 49
∙
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∙To the Four Cardinal Directions
oEast: To Village level highway as the boundary
oSouth: To the land of Lower Xinhua as the boundary
oWest: To the boundary with Lower Xinhua collective forest o North: To the land of Yang Laosi family
[425]The forest compartment and
[426]No location details similar to those in PRCs are provided for plantations whose ownership is evidenced by Forestry Bureau Confirmations. The information provided in Forestry Bureau Confirmations, as described in paragraph [400], was merely a brief summary of some key data (i.e., seller name, purchaser name, area, stock volume and contract date) taken directly from the purchase contract.
[427]Another distinguishing feature of Forestry Bureau Confirmations is they do not include the name of the Forestry Bureau official who chopped them. In contrast, forestry regulations required PRCs be issued by qualified persons and that those persons be identified on the PRC.
[428]We heard expert evidence from Mr. Hao and Mr. Liu on forestry regulation and registration of forestry ownership in Mainland China.
[429]Mr. Hao explained forestry reform in China began with amendments to the Forestry Act in 1998 when China began to implement a new registration system, whereby the legal proof of ownership of forestry rights is provided by the issuance of PRCs. Forestry plantation ownership in Mainland China is reviewed in greater detail elsewhere in these Reasons in our discussion of
[430]The due diligence process undertaken to issue a PRC required the confirmation of land boundaries and a
[431]Jinrong Liu, a lawyer licensed to practice Mainland Chinese law, was qualified as an expert in the hearing in areas that include whether a BVI entity may hold a PRC. He testified the owner of standing timber must register that ownership via a PRC, as well as any change in ownership. Mr. Liu explained the difference between a contractual right and an ownership right. In the case of a standing timber transfer, while a contract may be valid against the parties, the ownership and property rights cannot be transferred until the ownership is registered. Therefore, even if all the conditions of a purchase contract are satisfied, the transfer of ownership is not effected until registration is completed. This means , in the absence of registration, a purchaser of standing timber does not own the standing timber and therefore cannot mortgage the standing timber, obtain a harvesting permit without the assistance of the registered owner, or transfer
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(i.e., sell) the standing timber.
[432]Ownership is registered through a PRC. Mr. Liu testified about the difference between a valid contract and a registered right. With a valid contract, a purchaser can enforce its rights against the other contracting party but not third parties. With a registered right, a purchaser can enforce its rights against all parties. A Forestry Bureau Confirmation is not a registered right.
[433]The Panel heard conflicting evidence as to whether or not a Forestry Bureau would issue a PRC for standing timber only, that is, without land use rights. This is further discussed elsewhere in these Reasons in our discussion of
[434]The Panel finds the Forestry Bureau Confirmations are of no use in establishing
iii.Legal Opinions
[435]The Respondents submit legal opinions from external counsel affirmed Sino- Forest had title to standing timber purchased in the BVI Model by virtue of a contract and a Forestry Bureau Confirmation. Staff submits the legal opinions are, with one exception, very general; they do not provide sufficient context and none indicate
[436]The March 2008 legal opinion from Jingtian & Gongcheng Attorneys at Law (Jingtian), obtained by
Your Company
In this legal opinion letter, Our Firm has expressed our legal opinions only on the basis of the relevant facts confirmed by Your Company as well as Our Firm’s understanding of such facts and comprehension of the relevant laws and regulations.
It is clear from this disclaimer Jingtian is relying on the documents that Sino- Forest provided them, including the Forestry Bureau Confirmation, which states
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the Forestry Bureau is temporarily unable to issue a PRC since the "county is in the process of developing the work concerning the reissue of new forest rights certificates [PRCs]” and that PRCs will be issued to the BVI subsidiaries “according to the uniform time”. Based on the information provided by Sino- Forest, Jingtian’s opinion letter states the PRCs may be issued to the BVI subsidiaries after they have legally signed the acquisition contract (a statement we find to be incorrect). Further, the legal opinion does not reference oral agreements or the fact the Forestry Bureau Confirmations are backdated. The opinion also states it has not reviewed three of the four attachments to the contract: a second report by the survey company, the Villagers’ Resolutions or the PRC “or other documents of ownership proof”.
[437]Jingtian’s opinion letter further states that
[438]Jingtian also stated after the BVI subsidiaries have a legally signed acquisition contract with the supplier and processed the required approval formalities as well as obtained a PRC, their lawful rights over the acquired forests can be proved as such. Jingtian further stated if the old version of the PRC cannot be processed, the BVI can apply for a letter of confirmation as valid proof of ownership of standing timber. We have no evidence as to whether or not Jingtian knew or should have known BVIs could not obtain PRCs, but it appears Jingtian was under the impression that BVIs could obtain them.
[439]In a December 2006 Commerce & Finance Law Offices (C&F) opinion in evidence, which is in draft form and unsigned, C&F states BVIs’ rights to log, transport and sell standing timber are subject to the BVIs obtaining the authorizations and/or consents from the original owners of the plantations. This is consistent with Mr. Liu’s testimony that without registration of standing timber ownership, a purchaser does not own the timber and could not mortgage, harvest or sell the timber without the assistance of the registered owner. As we have noted elsewhere, these authorizations (i.e., Villagers’ Resolutions) were never attached to BVI purchase contracts. This condition was not included in any later opinion letter by either C&F or Jingtian. Mr. Clifford testified this point was never raised in any due diligence calls with underwriters and this condition was inconsistent with his understanding of the contract process.
[440]In their June 2009 opinion, C&F also assumed BVIs could obtain PRCs. It appears these two major Mainland China law firms believed
[441]In addition to the Jun He opinion discussed below, we have reviewed 11 opinion letters from two law firms (Jingtian and C&F) provided between 2006 and 2010 in connection with various underwritings. The substance and wording of each of the 11 opinion letters were remarkably similar – essentially boilerplate. Each reviewed a standard purchase contract, a Survey Report and a Forestry Bureau
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Confirmation. We have already addressed the incorrect facts within the Confirmation letters.
[442]Jun He Law Offices (Jun He) was Chinese counsel retained as advisors by the Independent Committee. In closing submissions, counsel for Ip, Hung, Ho and Yeung stated that:
…whatever ambiguity or whatever questions we may have about the Jingtian opinion or the forestry bureau confirmation letter, Jun He and the Independent Committee with full knowledge of all of that still said these forestry bureau confirmation letters are helpful, they’re going to give us a measure of comfort because the forestry bureau is the adjudicator of first instance.
…
The forestry bureau confirmation letter gets us to a
(Hearing Transcript, May 4, 2016 at
[443]One of the assumptions of Jun He’s opinion letter to the Independent Committee was that each party to the Forestry Bureau Confirmation had the necessary capacity, power and authority to execute, deliver and perform its obligations. Yet, as the Independent Committee indicated, the Forestry Bureaus may have exceeded their authority by issuing these Confirmations to Sino
Jun He’s letter confirms the purchase contracts in the BVI Model are legally binding on the parties to the contract. Mr. Liu confirmed the contracts could be used to enforce rights against the contracting parties, but not against third parties. Last, Jun He stated a BVI purchase contract with only a Forestry Bureau
Confirmation would be void without a PRC or a Villagers’ Resolution. Sino
[444]The legal opinions of Jingtian and C&F were based on the assumption that Sino- Forest provided complete and genuine disclosure of all relevant documents and facts, as is evidenced by the disclaimers in their letters. We find
[445]The Respondents submit Staff’s allegation regarding the availability of PRCs is a new allegation. They argue Staff only raised this allegation in its closing submissions, and they were deprived of, among other things, the opportunity to
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points to specific references in the Statement of Allegations that explicitly reference
[446]
[447]Xu Ni raised problems of missing key documents with Chan, specifically, with respect to ownership of title, existence of timberland and location of trees. Given his strong understanding of the forestry business and industry in China, his close connections to government and his intimate involvement in the process for every purchase of standing timber, we find Chan was fully aware Sino
[448]We find Chan, Ip and
[449]Given the fact Forestry Bureau Confirmations did not provide registration of ownership of standing timber, the questionable due diligence process undertaken by Forestry Bureaus and the lack of any specific location information included in the Forestry Bureaus Confirmations, the Panel finds the disclosure relating to Forestry Bureau Confirmations as proof of legal ownership to be deceitful. We find the Forestry Bureau Confirmations do not establish Sino
(c)Villagers’ Resolutions
[450]Villagers’ Resolutions are explained in the Second IC Report. It notes if forestry land is owned by a village collective, the validity of each standing timber purchase contract is subject to the authorization of that village collective, which takes the form of a Villagers’ Resolution.
[451]No examples of Villagers’ Resolutions were submitted in evidence. As noted above, Ms. Man testified she did not recall ever having seen a Villagers’
Resolution attached to any BVI standing timber purchase contract.
[452]Xu Ni also testified she had never seen a Villagers’ Resolution attached to any contract, despite the fact every purchase contract listed one as an attachment .
[453]Hung testified he did not know the importance of Villagers’ Resolutions:
Q.Just again on the issue of farmers' authorizations, did you yourself have any insight as to whether or not these documents were important for purchases of standing timber?
A.I do not know.
Q.So you don't know whether they were important or unimportant?
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A.Because I was not involved in the process I do not know whether it's important.
Q.Do you know whether or not they were referenced as attachments to purchase contracts?
A.I know.
Q.And these were purchase contracts that you directed their creation of?
A.Yes.
(Hearing Transcript, October 23, 2015 at
[454]We find Hung’s response incredible. Hung was a process owner for the purchase documentation process which we describe elsewhere in these Reasons . The Villagers’ Resolution was a key missing element of the purchase documentation.
(d)Locating the Standing Timber
[455]Neither the BVI purchase contracts nor their attachments enabled one to locate the standing timber assets
[456]Part of the Independent Committee’s asset verification process was intended to locate specific plantations owned by
[457]One of the main objectives of the Independent Committee investigation was to locate the plantations in order to help prove existence, ownership and value of
[458]Ip admitted a plantation could not be located using solely a purchase contract and a Survey Report. The Independent Committee arrived at the same conclusion. Ip explained when
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testified Chan instructed: “We should keep secret the location of the forest purchase, not letting other people know because we discovered that wherever
i.Maps
[459]Ip testified that
[460]Mr. Clifford of E&Y testified he understood
[461]Mr. Hao testified there is a legal restriction on maps of a certain scale. In the forestry industry, only maps to the legal scale may be held. Mr. Hao acknowledged that, in his experience, maps were attached to contracts.
[462]The Second IC Report concluded:
Management has explained that it reviews maps that allow them to locate the properties but does not retain them. The IC has not been able to verify this explanation and notes the Plantation Rights Certificates in the Company’s possession in respect of WFOE timber transactions have detailed location descriptions. The IC Advisors were able to verify that most Mandra and SW
Mr. Hyde confirmed the Independent Committee was told other forestry companies in China similarly do not retain maps, which were considered state secrets, for fear this practice could subject them to criminal sanctions.
[463]The Respondents submit Pöyry reviewed plantations annually and never had any issues regarding the adequacy of the maps provided. Pöyry reviewed less than 1% of the area that
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important to note that Pöyry did not review contracts, PRCs, Forestry Bureau Confirmations or Survey Reports and did not address ownership of the assets. Rather, Pöyry’s assumption was that title to forest assets was in accordance with data provided by
[464]Following the release of the Muddy Waters Report, the Independent Committee undertook a proof of concept exercise. The Independent Committee selected two compartments to test, which were successfully located using maps provided by
[465]Following the initial proof of concept exercise, a broader asset verification test was implemented. This test was discontinued at the request of Sino
ii.Survey Reports
[466]
RMB 24,000. From Ip’s testimony, it did not appear that his responsibilities changed after November 2008. Lu Qiding retained Zhanjiang Southern to prepare Survey Reports, and he oversaw survey preparations and survey company field visits. Further, Qi Shuxiong, a former director of two Sino
[467]Survey Reports were prepared in batches after
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include specific location descriptions necessary to locate the plantation being purchased. Evidence shows
[468]It is significant the compartment numbers identifying the land that was the subject of the Zhanjiang Southern Survey Reports were specific to Sino
[469]When asked whether
According to my understanding, after the survey, some of the compartments were changed and there were changes, therefore, to the numbering of the compartments. From what I understand, when doing the survey work, the survey company would get the maps from the supplier, from the forestry bureau, and the survey company will, according to the maps, carry out the work, and the compartments at times will be changed and given new numbers after that.
(Hearing Transcript, October 7, 2015 at
[470]When asked whether he was aware the compartment numbers in the PRCs did not match those in the Survey Reports, Ip said: “It was not brought to my attention. … It is possible that the survey companies would rearrange the compartment numbers” (Hearing Transcript, October 7, 2015 at
Reports were the only ones in evidence that provided compartment numbers for land in respect of purported BVI purchases that did not correspond to compartment numbers at the Forestry Bureaus.
[471]The lack of specific location identifiers in the Zhanjiang Southern Survey Reports does not appear to be consistent with industry standards. Mr. Hao testified he would expect a Survey Report to specify the location of assets, with references to the village name and the plantation’s boundaries to the four cardinal
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directions. He also testified it was important for a survey company to be an independent source of verification.
[472]The Respondents deny having any improper role in creating and reverse- engineering Survey Reports. They also deny having any knowledge that Lu Qiding was a shareholder of Zhanjiang Southern. Lu Qiding advised Sino
[473]Neither Survey Reports nor maps in the BVI Model during the Material Time provided sufficient information to locate the trees owned by Sino
(e)Timing and Scope of the Purchase Documentation Process
[474]
i.The BVI Model
[475]The BVI Model is described in detail elsewhere in these Reasons in our discussion of
[476]The BVI Model was opaque because there was no cash audit trail. BVI companies could not have bank accounts in Mainland China. Currency controls in China restricted payments of cash by Chinese companies to BVI companies. As a result, the BVI accounts receivable and payable were all settled through offset payments, the authenticity of which could not be verified because there was no evidence of cash changing hands for any of the transactions (further explained below). There were no maps attached to, and no specific locations described in, the contracts, the Forestry Bureau Confirmations or the Survey Reports. Finally, the BVI Model involved a concentration of duties among a small group of senior management, including Chan, Ip, Poon, Hung, Lu Qiding and Mr. Zhao (Senior
[477]The BVI Model was malleable because the entire model existed entirely on manual spreadsheets created and maintained by Hung, which could be edited at any point in time and could accommodate the backdating of contracts . This method of
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purchase contracts were prepared at or after the end of the quarter when the purchase was made and recorded in the financial records of Sino
[478]The Panel finds the BVI Model was opaque and malleable and enabled the Respondents to perpetrate fraud, as we conclude elsewhere in these Reasons.
[479]Hung was at the centre of the BVI documentation process and was a key player in the concealment of
[480]The documentation process for BVI purchase contracts was generally unchanged throughout the Material Time. To illustrate the process, we have reviewed the evidence Staff submitted for Q4 2010 and Q3 2009 and highlight certain noteworthy facts. These examples provide clear evidence Sino
ii.Q4 2010
[481]We reviewed the process documentation for the Q4 2010 transactions, which began a few days prior to the
[482]On January 4, 2011, the Resource Department sent Hung a spreadsheet of purchases without dates, prices or names of the BVI subsidiary making the purchase or the supplier. When questioned as to why this information was missing, despite the fact it all would have been available at the time of purchase, Hung could not provide an explanation. Hung then added this missing information, as well as the sequential numbering of transactions. Hung testified he received this missing information from Ip during the course of the quarter, which he would have recorded on sticky notes. Purchase contracts for Q4 2010 had not yet been prepared at this time in January 2011, after the end of Q4.
[483]Throughout January 2011, changes were repeatedly made to details of purchases in order to meet certain volume targets. The first summary table sent
to Hung on January 4, 2011, lists 14 purchases with a stock volume of 9,174,846.98 m3 . On January 6, 2011, an employee of
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Department sent Ip an email with a revised summary table. The email states: “700,000 cubic metres have been added according to your instruction.” The revised table lists an additional two purchases, for a total stock volume of 9,910,086.56 m3 . Hung explained he had recorded more purchases on his sticky notes than those in the original summary table provided, and he asked Ip to have employees from the Resource Department check their records.
[484]On January 7, 2011, the same employee from the Resource Department sent
Hung an email attaching a further revised summary table that records an increase in total stock volume by 800,000 m3 and asking Hung to provide the
“contracting parties, amounts, etc., so that the timber acquisition documents can be completed.” We note the Resource Department is asking Hung for information it should already have.
[485]The Respondents submit there is some confusion regarding the translation of this email which makes it unreliable. Ip testified he understood the employee to be asking for the contract format or template, not the parties to the contract. However, the Resource Department had no need for contract templates as these were prepared by Hung’s department. Hung testified the employee knew the missing purchase information and was merely being sarcastic, or “ironic,” as Hung had notified Ip of the Resource Department’s error with respect to the missing recorded purchases. In reading this last email in conjunction with the previous emails, we reject Ip’s and Hung’s explanations.
[486]An attachment to an email dated January 9, 2011 lists 17 purchases in five provinces for a total stock volume of 9,972,230.53 m3 . This contrasts with the
first summary table that lists 14 purchase contracts with a total stock volume of 9,174,846.98 m3 . At this stage, Kenny Wong, Hung’s subordinate, inserted the information from the latest spreadsheet into standard template purchase contracts by doing a “mail merge”.
[487]On that same date, contract numbers were added sequentially to the final iteration of the table. The sequential numbering of the purchases listed in the table was designed to be a control feature. As each purchase was made, it would be added to the table and assigned a number in sequence, chronologically. This was important from a
[488]On January 11, 2011, an email from another employee of Sino
Forestry Bureaus, which according to Kenny Wong, was less “troublesome.”
Kenny Wong never prepared a Confirmation for a provincial level Forestry Bureau. The comment in the January 11 email regarding the Survey Reports being “currently under preparation” contradicts
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which indicate the Survey Reports needed to be completed before the stock volume could be determined.
[489]On January 12, 2011, an email to Hung and others includes attachments showing the purchase contracts, purchase requisition forms (approval forms to enter into these contracts) and Forestry Bureau Confirmations were prepared after the
[490]On January 13, 2011, Mr. Horsley advised Chan in an email most source documents for Q4 2010 purchases were still outstanding. Ten minutes later,
Chan forwarded Mr. Horsley’s email to Ip and Hung without adding any commentary, which indicates to the Panel Chan was aware of the Deceitful Documentation Process. Had Chan not been aware of the Deceitful Documentation Process, it is reasonable to assume he would have added some commentary asking why there was a delay before forwarding the email to Ip and Hung. As we discuss further below, we find Chan was involved in the Deceitful Documentation Process. Although Hung had the unsigned versions of purchase requisition forms, purchase contracts and Survey Reports at the time of
Horsley’s email, he did not forward them to Horsley.
[491]Purchase contracts remained unsigned as late as February 1, 2011. Chan signed all purchase requisition forms for Q4 2010 between January 17 and February 1, 2011.
[492]A February 24, 2011 email indicates three sets of contracts needed to be replaced “[a]ccording to the instruction of the leaders” and that Survey Reports and the relevant timber acquisition documents also needed to be replaced to reflect locations which had been changed. Hung agreed changing the location of standing timber is a significant change in a contract (particularly for these contracts, which represented RMB 436 million of assets) and is a matter that would have been reported to him. When asked if this error would have been discovered during the Forestry Bureau’s due diligence process for determining ownership, Hung replied:
The details as to what the forestry bureau base on, I do not know. From my knowledge, they would have to confirm that the ownership of the plantation had been transferred.
…
I really do not know about the details and specifics regarding this.
(Hearing Transcript, October 28, 2015 at
This discrepancy, which went undiscovered by the Forestry Bureau during the due diligence of RMB 436 million of standing timber assets, casts further doubt on the authenticity and value of Forestry Bureau Confirmations in establishing ownership.
[493]Changes were made to these Survey Reports in the quarter after purchase contracts were signed and settled and two quarters after the oral agreements so
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as to ensure the details in the Survey Reports aligned with those in the purchase contracts. Four out of 17 Survey Reports were revised after January 24, 2011 and another three were revised after April 8, 2011, which is several weeks after the filing on SEDAR on March 15, 2011 of
[494]For the three Survey Reports revised after April 8, 2011, reflecting a value of RMB 436 million, the change in locations could not have been reflected in the 2010
[495]The Panel finds at least some Survey Reports were
iii.Q3 2009
[496]The evidence related to the Q3 2009 purchase documentation process focuses on two purchases from a company called Yongzhou City Maoxiang Forestry Development Co. Ltd. (Maoxiang). The documentation indicates the dates of these two purchase contracts for just under RMB 400 million were changed from July 24 and July 30, 2009, to dates on or after August 7, 2009, because Maoxiang was not incorporated until August 7, 2009. An attachment to an email dated October 6, 2009 indicates purchase contracts were initially dated July 24 and July 30, 2009 and were settled through
[497]Upon discovering Maoxiang was not yet established, Ip asked Hung to have the payments rescinded. Ip’s understanding of this process was that it would involve a third company Maoxiang directed to receive payments on its behalf. This third company may, in turn, have directed a fourth or fifth company to receive payments; this has been referred to as the “daisy chain of cash”. When questioned about this process, Ip testified, “[t]here are things that I do not know concerning the actual operation of the arrangements” (Hearing Transcript,
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September 14, 2015 at
[498]When Hung was asked how
2015 at
The AIs only told me that they will ask Maoxiang to return the money. As to when they were able to recover all of the money, they didn’t tell me. They only told me that they have paid a certain company, into certain accounts, and that the money should come back from this company. That’s all they said.
(Hearing Transcript, October 27, 2015 at
[499]Hung did not mention the intricate “daisy chain of cash,” which would have required rescission of payments. When Staff suggested to Hung he was making up evidence as he went along regarding the dates of payment and receipt, Hung denied this. We reject Hung’s evidence regarding the payment chronology as not credible.
[500]Emails indicate Survey Reports were prepared at the same time as the purchase contracts and after Hung’s spreadsheet of purchase details was finalized.
Purchase requisition forms were backdated to before the date of the purchase contracts to give the impression the purchases were approved before entering into the contracts. The Forestry Bureau Confirmations were backdated to the date of the purchase contract, which purportedly was the date of the oral agreement. The Q3 2009 documentation process was similar to the Q4 2010 process described above. This example also supports Staff’s position the BVI
Model was opaque and malleable.
iv.Process Documents
[501]Staff submits that
[502]The process documentation described the processes purportedly followed by
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Hung were process owners for the standing timber purchase process and Hung was the process owner for the sale and
[503]The process owners were the sources for the detailed
[504]E&Y made any revisions received from the process owners. The final versions were sent to Mr. Maradin. After he consulted with the process owners annually these documents were updated by Mr. Maradin.
[505]Initial versions of these documents were finalized in February 2009; subsequent versions were substantially similar.
[506]E&Y used these process descriptions as input for their audit process and to identify internal controls, or lack thereof. Mr. Clifford testified that as part of the audit process, these documents helped E&Y gain an understanding of
[507]The Audit Committee reviewed the process documents as part of their oversight role. The process descriptions helped the Committee to understand what management was doing, and to ensure management had sufficient resources to meet the requirements of NI
[508]The evidence, as described throughout these Reasons, shows the process documentation for purchases, sales and
[509]The purchase process document described a chronological process, initiated by the Resource Department, which began with a preliminary survey of the identified plantation, followed by the preparation of the purchase requisition form, which was signed by Ip and approved by Chan. The Resource Department then prepared an application for a full scale survey, which was approved by Ip. Ip would have received approval from Chan to perform a full scale survey of the target standing timber plantation. The BVI purchase process document describes a process whereby
[510]Hung was asked about the purchase process description:
Q.And I believe you've told us earlier that during this purchase process you would receive information from Mr. Ip that an oral agreement or handshake agreement had taken place with a supplier.
Do you recall that as a step in the purchase of BVI standing timber?
A.Yes.
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Q.I'm going to suggest to you, sir, that we don't see any reference to oral agreements or handshake agreements within this process description for the purchases of plantations.
A.We don't see it here.
Q.But you would agree with me this would be a very important part of the purchase of standing timber plantations; correct?
A.I agree.
Q.Because that is the date, I believe, that you thought the purchase agreement would be effective; correct?
A.Yes.
Q.Can you provide any explanation as to why there was no mention of this oral agreement or handshake in this process control?
A.First of all, the draft of this process description was not prepared by me. I told Tom [Maradin] everything I knew about this process. And after that, I also told Josephine Man of E&Y, and they did the first draft. After that, the finalized process document was completed and put into use.
And after that, every year I would go back to the process description to find out whether there were any changes or differences, and I do not know what is relatively more important in the process description. I would leave this decision to Tom and Josephine Man.
Q.But weren't Tom and Josephine Man looking to you to describe the process of purchasing standing timber and the details, the important details of that process?
A.Well, I had told them about the process, and there were others who had told them about the process.
(Hearing Transcript, October 23, 2015 at
[511]We find the actual purchase process did not occur as set out in the process documents. We have received overwhelming evidence showing virtually all steps in the purchase process began after the period in which the purchases were recorded. Thus, the purchase process description was incorrect. As well, it was incomplete. It did not address how confirmations were prepared, it did not
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mention sticky notes, batching, oral agreements, handshake agreements or the
[512]Ip and Hung were the process owners for the process descriptions in the BVI Model and annually confirmed their accuracy. Chan reviewed at least first versions of these process descriptions. E&Y relied on the process descriptions during their audits of
v.Backdating of Purchase Documentation
[513]The Respondents submit the timing of contract preparation was well known within
Lu Qiding, well, I would liken him to a monkey running around in the mountains looking for forests, and he and his team at quarter end will have to come back to the office in time to prepare the paperwork.
(Hearing Transcript, September 11, 2015 at
[514]The Respondents submit although the written purchase contracts were backdated, they reflected oral agreements entered into on the date reflected in the final written contract. The legal enforceability of oral contracts in Mainland China was an issue raised in the hearing. Gavin Hao, an expert in the Chinese forestry industry, testified, based on his experience, “a contract with a villager is not very much different from a piece of blank paper” (Hearing Transcript, April
28, 2015 at
[515]Assuming one accepts the Respondents’ submission that an oral agreement was a valid contract for revenue recognition at the time of the handshake, significant changes to the original terms would invalidate the original oral agreement, according to the expert evidence on Chinese law.
[516]Jinrong Liu testified that under Chinese law, oral agreements are valid and enforceable, but a written contract is required to register the transfer of ownership and obtain a PRC. To be valid, an oral contract would generally include the names of the parties, the targeted matter, quantity, quality, price or
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remuneration, time, place and mode of fulfillment, liability for breach of contract and dispute mechanism.
[517]As we discuss elsewhere in these Reasons, we saw evidence of changes to names of the parties, the location of the timber, quantity, quality (tree species), and price from the time of the oral agreement to the time of the executed written contract. Thus, the oral agreement would not be valid and recording the assets based on the oral agreement would be misleading.
[518]Mr. Liu explained that a buyer with a written contract, but no registration (a PRC) would not defeat a claim of a purchase from a registered owner; a buyer who has not registered cannot mortgage the standing timber, nor can the buyer obtain a harvesting permit without the assistance of the registered owner. And while legally a buyer who has not registered cannot transfer the standing timber, in practice this can be done, as long as the registered owner accompanies the
[519]A written contract without registration allows the buyer to enforce his or her rights against the other contracting party, but not against third parties, whereas a contract and registration allows a buyer to enforce his or her rights against all parties. Registration demonstrates ownership.
[520]Mr. Liu stated in his expert report a purchase agreement may become effective when duly entered into by the parties. Upon cross
[521]He further testified parties to an oral agreement cannot back out of the deal just because the agreement has not yet been put in writing. He clarified, however, this is not true in cases where the oral agreement and the written agreement differ – for example, if the parties or the terms of the agreement change.
[522]Even if they were based on earlier oral agreements,
2015 at
(Hearing Transcript, May 6, 2015 at
[523]The Respondents submit the practice of backdating written contracts to the date of the oral agreement was in fact appropriate because it reflected the date of the actual contractual obligation to purchase. Oral agreements may be an accepted practice in China; however, if volumes and locations, among other key contract terms, changed well into the subsequent quarter, then the original handshake
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agreement would no longer be valid. It follows, then, those contracts would reflect terms and details that differ from those which had been agreed to at the time of the handshake deal.
(f)Conclusion on Purchase Documentation
[524]The Respondents’ description of the purchase process, based on handshakes, phone calls and sticky notes involving billions of renminbi, is simply not believable.
[525]We find the purchase contracts and their three key attachments were fundamentally flawed. The Forestry Bureau Confirmations do not establish Sino -
Forest’s ownership of standing timber in the BVI Model. Standing timber locations could not be located based on the contract, Forestry Bureau Confirmation or Survey Report. The Survey Reports were prepared by one survey company in the quarter after the purchase took place, and we saw examples of
3.BVI Sales Documentation
(a)Sales Contracts
[526]The sales contracts and sales process are described in the Second IC Report:
∙the BVIs sold standing timber through sales contracts. These contracts were signed between BVIs and AIs, Mainland
∙notwithstanding its role as “agent,” the sales contracts stipulate that the AI is directly liable for paying
∙in reality the sales contracts are
(Second IC Report at 51)
[527]The documentation process for the BVI sales contracts was generally unchanged during the Material Time. To illustrate the documentation process, we have
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reviewed the evidence Staff submitted for Q4 2010 and highlight certain noteworthy facts. These examples provide clear evidence Sino
[528]The initial document evidencing
(b)Timing and Scope of the Sales Documentation Process
[529]Similar to the purchase documentation,
i.Q4 2010
[530]
[531]Similar to the purchase process, Hung testified he received the details of sales transactions throughout the quarter and would record them on sticky notes, which he then transferred to a spreadsheet. Hung began the sales documentation process for Q4 2010 by sending a spreadsheet containing information necessary to prepare the sales contracts to Kenny Wong in an email
dated January 3, 2011. The attached sales summary lists 73 sales in three provinces with a stock volume of 6,608,265.25 m3 and a total sales price of RMB 3,604,252,380. Of that total, RMB 2,978,388,099 (or 83%) represented sales of logs, which we now know to be simply uncut trees. The original purchase dates, purchase contract numbers, locations (province level), species, area, and yields are identified for each sale. The sales contract dates, prices and customers are identified for each sale; however, no sales contract numbers are indicated. No sales contracts had yet been prepared as at January 3, 2011.
[532]None of the sales contracts included a village name, which means the plantation location could not be sufficiently identified. For example, in a sales contract between
[533]On January 13, 2011, Mr. Horsley advised Chan most source documentation for the BVI and WFOE Q4 2010 period was outstanding, including sales contracts and acknowledgment of receipts of logs. Mr. Horsley requested Chan ask Hung,
Ip and Albert Zhao “to get the info in asap”. Ten minutes later, Chan forwarded Mr. Horsley’s request to Ip and Hung (but notably not to Mr. Zhao, who was responsible for BVI standing timber sales), without adding any commentary. Similar to the purchase documentation process, Chan was clearly aware that the sales documentation process was batched and backdated.
[534]On January 14, 2011, Hung produced a revised sales summary, which was identical to the sales summary from January 3, except for the addition of the contract numbers and revised contract dates. Hung testified contract numbers are meaningful, as they show the order of contracts according to the dates of the
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contracts. This is consistent with Mr. Maradin’s testimony. Therefore, this reordering to reflect revised dates with corresponding contract numbers destroys any relevance of the sequential ordering. Kenny Wong’s transcript evidence shows he would drop the information from the spreadsheet into standard template sales contracts by doing a “mail merge”, similar to the purchase process.
[535]On January 18, 2011, the dates of the Confirmations of Sales Situations (documents provided to
the actual sales quantity” and indicates harvesting is complete with quantity of
108,443.61 m3 . This statement is misleading as the trees remained uncut, but it implies, with a precision to two decimal places, that timber has been harvested.
[536]Kenny Wong emailed Hung regarding this date problem on October 14, 2010. He stated: “For the log sales contract[s], since I still havent confirm [sic] the date for the ‘confirmation’ w/ you, I have just put 9/30 … .” Mistakenly, they had all been sent to the Finance Department. He goes on to state that he “can still ‘re- do’ the ‘confirmation’” (so as not to raise E&Y’s concern) but that later contracts should “be changed to standing timber sales contracts to avoid the issue with the ‘confirmation’”. When asked why
[537]The October 14, 2010 email also raises the issue of dating Confirmations of Sales Situation late in August 2010 such that E&Y would not accept them for the cut - off date of August 31 (the
ii.Sales Documentation Process
[538]Evidence shows all of the documentation to substantiate sales transactions actually took place were prepared by
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supporting documents were batched, backdated and signed after
[539]Hung knew the sales contracts were prepared and signed after the end of the quarter, and, as a member of
Forest’s revenue recognition policy did not disclose this practice.
[540]
[541]Mr. Hyde testified Chan explained the company never ascribed any value to the right of first refusal as the legal regime had not changed to permit a BVI to lease land. This explanation contradicts Ip’s testimony, that the right could be transferred to a WFOE. Mr. Hyde further testified Chan explained, in many cases,
[542]Both Ip and Hung stated they did not keep track of any harvesting done by Sino- Forest or its customers.
[543]If
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purchase contract since at least 2004. We find Ip’s and Chan’s explanations not credible.
iii.Process Documents
[544]The sales process description, for which Hung was a process owner, described a chronological process in which sales contracts, harvesting agreements and Confirmations of Sales Situation were signed. It stated that by the end of each quarter, the accounting department would obtain from Hung all the sequential indexed sales contracts. This did not occur: for the quarter ended December 31, 2010, for example, evidence shows an email dated January 3, 2011 from Hung to Kenny Wong, attaching a spreadsheet for Q4 2010 timber sales. The spreadsheet lists 73 sales but no contract numbers have been assigned. The sequential numbering of contracts had not occurred by
[545]Hung admitted the sales process description made no reference to the preparation of contracts in a batch.
[546]We find the sales process documents were inaccurate, incomplete and did not represent what actually occurred. There is no mention of batching or oral agreements. There is no mention Hung recorded on sticky notes sales information he received via phone calls from
[547]Hung’s response is not credible: he did not start preparing contracts during the quarter but prepared them in batches after the quarter.
(c)Misleading the Commission Regarding Revenue Recognition
[548]Staff alleges, during the Material Time, in its correspondence to Staff, Sino - Forest misled the Commission about its revenue recognition practice.
[549]In November 2005, prior to the Material Time, the Commission sent
Revenue from the sale of standing timber is recognized when the significant risks and reward of ownership have been transferred to the buyer which occurs when the contract is entered into…The Corporation confirms that it believes the significant risks and rewards of ownership to be transferred to the customer at the time the relevant sales agreement is signed…The Corporation does not recognize revenue from standing timber sales unless a sales agreement has been executed by both parties.
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…
If requested, we assist the buyer in applying for logging and transportation permits…the Corporation has not historically experienced any difficulty with its buyers’ ability to secure the necessary permits.
[550]The Commission made another enquiry regarding
The Corporation confirms that it believes the significant risks and rewards of ownership are considered to be transferred to the customer at the time the relevant sales agreement is signed…The Corporation does not recognize revenue from standing timber unless a sales agreement has been executed by both the Corporation and the buyer.
[551]
[552]Mr. Horsley, as CFO, signed both letters.
[553]We have previously found sales contracts were signed by Chan in the quarter following the dates on the BVI sales contracts, contrary to the statements made to the Commission, as illustrated above. Moreover, the statement regarding the absence of difficulty in securing harvesting permits is misleading. Evidence shows
[554]Both statements in 2005 and 2008 to the Commission were misleading: revenue was recognized in the quarter before a sales contract was executed and harvesting permits would have been impossible to obtain with only a Forestry Bureau Confirmation.
[555]Mr. Maradin testified he was responsible for drafting this section of the letters responding to the Commission in 2005 and 2008. He testified these sections of both letters were substantially the same. Mr. Maradin had reached out to others in
Transcript, October 31, 2014 at 98).
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[556]The Panel finds Chan read the 2005
[557]The Panel finds
(d)Conclusion on Sales Documentation
[558]The sales contract process was fundamentally flawed. We find
4.The
[559]In the BVI Model, because BVI subsidiaries could not have bank accounts in Mainland China,
In effect,
[560]The Second IC Report describes the AR/AP
∙written instructions from a BVI with accounts receivable from an AI for that AI to make payment to a particular Supplier as payment for a new timber purchase by that same BVI or another BVI. These written instructions feature the name of the BVI at
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the top and are dated, signed and stamped and set out the amount to be paid;
∙written notification from SF to the Supplier that payment is being made through the AI via
∙written confirmation from the AI that payment has been made to the Supplier as requested by the instructing BVI. This written confirmation features the name of the AI and is undated and stamped and sets out the amount and date of payment; and
∙written confirmation from the Supplier to the instructing BVI and paying AI that payment has been received from the AI. This written confirmation features the name of the Supplier and is dated, stamped and sets out the amount and date of payment received.
The
The IC Advisors have received copies of the
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not in fact make payment themselves as instructed by SF but would instead arrange for other parties (“fourth parties”) to make payment on their behalf. Those fourth parties may then instruct “fifth” or “sixth” parties to make payment. [emphasis added]
(Second IC Report at
[561]
[562]It is significant a receivable was only settled through the purchase of more standing timber rather than with the receipt of cash, which is how revenue is ultimately realized. It is the payment to a supplier for yet more standing timber that triggers any movement of money, which, as described above, the Independent Committee advisors were unable to trace or confirm. This is the feedback loop which trapped any BVI money in Mainland China and forced Sino - Forest to continually buy more trees in its BVI Model in order to show E&Y that accounts receivable from sales were ever settled.
[563]As we have seen in the Q3 2009 analysis of
[564]Staff reviewed
∙total purchases amounted to RMB 7.98 billion and were settled through
∙RMB 7.48 billion of these payables were settled before the corresponding standing timber purchase contracts were prepared.
Therefore,
[565]Staff prepared a chronological summary of the Q4 2010 set
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purchase, which is the date of the oral agreement, according to the Respondents. Further, all documentation purporting to evidence the settlement of the standing timber purchases in Q4 2010 was prepared by Sino
[566]Hung orchestrated and oversaw the entire AR/AP
[567]Hung’s Affidavit evidence states he asked Chan about
[568]Ip contradicts the evidence he provided during his examinations in August 2011. At that time, he stated Hung would release payments to suppliers after the agreement to purchase was signed. During the hearing, Ip testified he asked Hung to arrange payments to suppliers before having a written purchase contract in place, much less a signed contract.
[569]Ip testified the risk associated with making payments in the absence of a signed contract was not great: “[W]hat was most important in doing a deal was the handshake, the credibility. So even if you have a signed contract, the person can very well go back on his word on the contract” (Hearing Transcript, September
14, 2015 at
[570]Ip emphasized the importance of relationships and trust. This also contradicts the Respondents’ evidence the monitoring of suppliers’ bank accounts was a necessary means in which to effect some leverage over them.
[571]Hung could not explain why customers were willing to pay the full amount owing before the 270 days allowed under the contract terms. In the BVI Model during the Material Time,
Chinese businesses often experienced severe cash flow problems. This perfect record also contrasts sharply with
[572]The AR/AP
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third, fourth or fifth parties involved in the “daisy chain of cash”. There was no mention that payments of hundreds of millions of RMB were made on the basis of oral agreements, without signed contracts.
[573]We find the AR/AP
[574]We find the AR/AP
5.Who Knew What When
[575]The Respondents submit they disclosed their process accurately to Mr. Maradin, Horsley, the Board and the Audit Committee, and it was up to them to decide how to characterize the facts they were given. The Respondents submit it was not up to them to
[576]The Respondents submit, although Horsley denies any knowledge of the contracts being signed after the
[577]The Respondents also submit Mr. Maradin and the members of the Audit Committee were aware, or should have been aware, of this practice. There is no evidence the Audit Committee was aware of this. Mr. Hyde testified it was “new news” to them (and Mr. Maradin) after the Muddy Waters Report.
[578]Mr. Hyde testified, prior to the Muddy Waters Report, he understood changes in land reform meant PRCs could be issued to BVIs, but not all levels of government had implemented the reforms. As a result, Sino
November 5, 2014 at
[579]Mr. Hyde testified, before the Muddy Waters Report, he was unaware a key attachment (Villagers’ Resolutions) to purchase contracts was never attached. Subsequently, Chan and Horsley told him Villagers ’ Resolutions were reviewed, but not retained, as part of the due diligence process. The missing attachment had not been reported to the Audit Committee before the Muddy Waters Report by the auditors or by lawyers during the due diligence process for underwritings.
[580]Mr. Hyde testified, before the Muddy Waters Report, Chan explained the lack of maps to him as due to “Beijing secrecy requirements” (Hearing Transcript,
November 5, 2014 at 178:11). The Second IC Report notes there was no centralized system to connect compartment numbers on maps to specific
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locations. Mr. Hyde testified that level of detail was not available to the Audit Committee, as the Committee did not review source documents. He said the Audit Committee relied on advisors who were doing site visits, and legal and accounting advisors who were reviewing contracts. No concerns related to the lack of location specificity were brought to the Audit Committee’s attention.
[581]Regarding
Absolute shock. It was completely inconsistent with the understanding we had…I know the OSC had asked on two different occasions about revenue recognition … and the information that was responded to the Commission was that contracts were signed – well, revenue was recognized when the contracts were signed, so it was completely inconsistent with the concept of signing contracts after the
(Hearing Transcript, November 6, 2014 at
[582]The Audit Committee, as a matter of practice during their in camera sessions with E&Y, asked if E&Y had any concerns with
[583]Mr. Ardell, who was also on the Audit Committee, testified he was unaware, before the Muddy Waters Report, there was no internal audit function at Sino- Forest or that Chan signed all sales contracts.
[584]There is evidence the Audit Committee was aware contracts were batched and signed once a quarter. It appears to us the Committee assumed the contracts were signed during the quarter in which revenue was recognized. It further appears to us, however, from Mr. Hyde’s testimony as Chair of the Audit
Committee and his role on the Independent Committee, the Audit Committee was not aware of the scope of the
[585]While the Respondents may be entitled to rely on those at
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6.The Roles of Chan, Ip, Hung and Ho
[586]Chan submits there were no red flags for Chan that should have alerted him to potential issues in
[587]Dr. Peerenboom testified the following, among other practices, are generally- accepted business practices. He later clarified, on cross
∙the use of multiple BVI companies;
∙the absence of attachments referenced in the contract;
∙the use of contracts which did not identify the specific location of the purchased timber; and
∙the reliance on comfort letters (in the case of
[588]In Dr. Peerenboom’s opinion, a reasonably competent CEO, born and educated in
Hong Kong with a deep knowledge of Chinese culture and business practices, would not view these business practices as red flags.
[589]Under
Forest’s business practices and the BVI and WFOE Models was limited. For example, he was not aware whether BVIs could have bank accounts in Mainland China, nor was he aware whether
AIs, he stated “I’m a bit confused as to what’s going on” (Hearing Transcript, April 2, 2015 at 103:24).
[590]While his expert opinion was the use of BVIs is common in Mainland China, he was not aware of any other company using the BVI model in the manner Sino - Forest used it. He then explained the use of BVIs is common as holding companies for investment purposes but he was not aware of any other company using the BVI structure as an operating company, as Sino
[591]Dr. Peerenboom testified as a general rule, comfort letters (here, Forestry Bureau Confirmations) are difficult to obtain. In rural areas, where
[592]Regarding missing attachments to contracts, Dr. Peerenboom stated it was very common in practice. He then went on to say common is not necessarily the same thing as generally accepted and Staff’s questioning had forced him “to think more carefully about what is the relationship between ‘generally accepted’ and ‘common’” and he would have to go back and be more specific which practices were generally acceptable (Hearing Transcript, April 8, 2015 at 124:16- 18).
[593]He then went on to state “generally accepted” practices are those accepted or permissible within the relevant context, but did not necessarily mean they are
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common or frequent: “So in that context, there's a distinction between absolute or even relative frequency and a practice being generally accepted” (Hearing Transcript, November 8, 2014 at
[594]Dr. Peerenboom testified the significance of a missing attachment depends on further contextualization and the determination of what type of significance:
Q.So sticking with that same point, you would agree that if the missing attachment is intended to identify the asset being purchased, that is a significant issue if it's missing?
A.I'm unable to answer that question.
…
Q.You would agree that if the missing attachment is intended to demonstrate that the seller of the asset owns the asset being sold, that is a significant issue?
A.Again, I'm unable to answer that.
(Hearing Transcript, April 8, 2015 at
[595]With so many qualifications to the term “generally accepted” and the blurred distinction among the terms “common”, “permissible” and “accepted”, the Panel finds Dr. Peerenboom’s evidence of little value.
[596]We find there were many red flags at
∙the use of multiple BVI companies, not just as holding companies, but as operating companies in Mainland China;
∙the absence of key attachments referenced in the contract which would evidence ownership;
∙the use of contracts that did not identify the specific location of the purchased timber, and which were not supported by any additional documentation enabling one to locate the plantations; and
∙the reliance on Forestry Bureau Confirmations, which contained incorrect information about future issuances of PRCs .
We find Chan, a reasonably competent CEO, born and educated in an advanced modern financial centre such as Hong Kong, was aware or should have been aware these were red flags.
[597]Chan and Hung were educated in Hong Kong and Ip was educated in Canada. Hong Kong is an advanced modern financial centre and the quality of its corporate governance regime is regarded as on par with, or above, Canada’s.
[598]When asked to clarify Chan’s role in the BVI purchase process, Ip replied:
Allen Chan would be the person to give the final approval in forest purchase. As for K.K. Poon, he would follow up upon
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the final approval; that is, he [Poon] would follow up. After the final approval had been given by Allen Chan, he [Poon] would go through the documents and sign on the contract.
(Hearing Transcript, September 11, 2015 at
[599]Chan submits he relied on K.K. Poon’s review of purchase contracts and survey reports because Chan was not a forestry expert. This is inconsistent with Chan’s conduct. He
[600]Chan indicated to Mr. Clifford, in managing fraud risk, he was seeing all the purchase and sale contracts, was signing off on the contracts, decided which entity would acquire the standing timber, was signing cheques and was seeing each transaction. As noted previously, a March 2011 internal E&Y memorandum notes “Allen [Chan] is very involved in the day to day operations. He reviews cheques and key transactions as they occur. He also has an intimate knowledge of the business and would be able to spot anomalies as they occur”. Mr. Clifford described Chan as having “a great degree of visibility around what the company was doing at any moment in time”, and testified Chan took “great comfort from the fact that he was seeing these transactions one by one and could spot something that was an anomaly” (Hearing Transcript, November 17, 2014 at
[601]Chan and Ip had weekly meetings, at which Chan would indicate whether he had any objections to proposed purchases. Chan had final say on every purchase at the time the contract was signed. Chan knew when changes were made to purchase contracts in the quarter following the quarter in which they were recorded. Hung testified he would need to obtain a new purchase requisition form, which required Chan’s approval. Hung checked with Chan for authorization to pay suppliers when there was no written contract in place. Chan understood the documentation process and Horsley contacted him directly when documentation was late. He was a knowledgeable, experienced, sophisticated and
[602]Xu Ni stated in her interview she discussed the deficiencies in the purchase contract templates with Chan; he was aware of the deficiencies in the purchase contract templates, specifically that contracts listed Villagers’ Resolutions and
PRCs as attachments although these documents were never attached to the purchase contracts. Chan knew
[603]Chan submits he relied on the Board of Directors, the Audit Committee, Horsley, Mr. Maradin and financial and legal advisors, who were all far more sophisticated than he was in the public disclosure obligations required by Ontario securities laws. The Panel agrees Chan was entitled to rely on these individuals, but reliance on others must be reasonable and must start with honest and complete disclosure of the facts. Chan did not truthfully or completely disclose the facts to those parties on whom he claimed to rely.
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[604]Chan submits his “frontline” role at
[605]Because
[606]Ip, as head of
[607]Both Chan and Ip knew
PRCs, there is no record of the location of the standing timber
[608]Chan and Hung knew that receivables and payables were settled prior to the existence of written signed contracts. Chan, Ip and Hung knew documents were prepared in batches and backdated and that process documents, relied upon by E&Y, were deceitful.
[609]Hung,
Yet throughout his testimony, Hung was evasive about his knowledge of the revenue recognition policy and testified he would need an accountant to help him understand the policy. The Panel finds Hung had sufficient education to understand
[610]Hung was a member of the Disclosure Committee since 2005.
Senior Officers in fulfilling their responsibility for oversight of the completeness, accuracy and timeliness of the disclosures made by the Corporation [Sino-
Forest]”. Further, the Disclosure Committee’s policy statement states: “The
Corporation
Corporation’s operations” [emphasis added].
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[611]Hung signed
[612]In addition to his CFA designation, Hung obtained an undergraduate degree in mathematics from the University of Hong Kong, a Master of Finance from the City University of Hong Kong and a Master of Business Administration from Hong
Kong Chinese University. We reject Hung’s submission he did not understand
[613]Hung was the central figure in, and controlled, the Deceitful Documentation Process. He knew payments were made before written contracts were prepared. He knew at a minimum to check with Mr. Horsley as to whether the documentation process and practices were acceptable; with Hung’s education and experience, questions to Mr. Horsley, Mr. Maradin or the Audit Committee would have been the minimum expected of him, as a senior officer of Sino - Forest.
[614]We find Chan, Ip and Hung are all accountable for their roles in the Deceitful Documentation Process.
7.Conclusion
[615]
[616]The process documents described a very different process. Transactions were described as being processed during the quarter sequentially and chronologically. There was no mention of batching and backdating or payments in advance of contracts being prepared or signed. Although, according to the Respondents’ description of the process, oral agreements were the most critical event that initiated the entire purchase transaction, there was no mention of oral agreements or handshakes in the process documents. There was also no mention the AR/AP
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both the supplier and the AI sides, which implied up to 12 parties could be involved in one settlement.
[617]We have found:
∙PRCs could not and would not be issued to
∙PRCs and Forestry Bureau Confirmations are not equivalent.
∙Forestry Bureau Confirmations were not official documents, were not issued pursuant to a legislative mandate or published policy and were not documents of title that could be relied upon in the event of a dispute in a court of law. They are of no use in establishing Sino- Forest’s ownership in the event of any dispute with third parties over ownership of forestry rights, a frequent occurrence in Mainland China. Forestry Bureau Confirmations do not establish
∙The geographic distances, the many steps involved to get the contracts prepared and signed, and the Forestry Bureau Confirmations issued, make it more likely than not that the Forestry Bureau’s process for confirming ownership simply did not happen.
∙When new form Confirmations were issued by Forestry Bureaus during the Independent Committee investigation, they only confirmed the existence of a purchase contract and not ownership of the standing timber. The fact that these differed from the original Forestry Bureau Confirmations, which confirmed additional rights, calls into question what due diligence the Forestry Bureau conducted before chopping the original Confirmations.
∙
∙Chan, Ip and
∙Neither the Survey Reports nor maps provided sufficient information to locate the trees owned by
∙The BVI Model was opaque and malleable and enabled the Respondents to perpetrate fraud, as we find elsewhere in these Reasons.
∙Hung was the central and crucial figure in the Deceitful Documentation Process.
∙Changes to fundamental aspects of purchase contracts and supporting documents occurred long after the dates of the oral agreements and after the quarter in which
∙The process descriptions failed to accurately describe the processes for the purchase, sale and set off process for Standing Timber in the BVI
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Model. They were almost entirely inaccurate. Ip and Hung were the process owners for these process descriptions and annually confirmed their accuracy.
∙Virtually all steps in the purchase process began after the quarter in which the purchases were recorded.
∙The purchase contracts and their three key attachments were fundamentally flawed:
o As noted above, Forestry Bureau Confirmations do not establish
o Villagers’ Resolutions and PRCs were never attached to BVI purchase contracts.
o Survey Reports were prepared in the quarter after
o Standing timber locations could not be located based on these documents.
∙
∙The sales process documents were inaccurate, incomplete and did not represent what actually occurred.
∙
∙The dating of documents used in the AR/AP
∙The AR/AP
∙The AR/AP
∙There were many red flags that Chan, a reasonably competent CEO, born and educated in an advanced modern financial center such as Hong Kong, should have been aware of.
[618]The process actually followed by
∙
∙
∙Locations of the assets purportedly purchased could not be ascertained; and
∙Forestry Bureau Confirmations were not legal proof of ownership.
As a result,
[619]Virtually all purchase, sales and
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result of the flawed sales documentation is that Sino
[620]We find
[621]The Panel finds
[622]We do not find Ho authorized, permitted or acquiesced in the Deceitful Documentation Process. The evidence does not support a finding that he was involved.
D.Undisclosed Internal Control Weaknesses or Failures Allegations
[623]The third element of the Standing Timber Fraud alleged by Staff is undisclosed internal control weaknesses or failures at
1.Positions of the Parties
(a)Staff
[624]Staff alleges
[625]Staff also alleges
[626]Staff submits
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[627]Staff submits, as the leader and prime mover of
[628]Staff submits Chan and
(b)Chan
[629]Chan submits
Chan, did not conceal Hung’s role or the extent of the
[630]Chan specifically submits
[631]Chan also submits the Respondents did not conceal the size of the BVI Model. In
Chan’s submission, the facts that
(c)Hung
[632]Hung submits the Audit Committee was given material dealing with internal control deficiencies which indicated that the ultimate compensating control on sales contracts was Chan, who signed all sales contracts. Hung submits Mr. Maradin, who was the
[633]Hung submits the remediation of significant deficiencies in internal controls was arguably a matter which warranted close attention by the Audit Committee. Hung further submits the Audit Committee had received a series of reports from Mr. Maradin about the nature of the significant deficiencies including ways of correcting them, and this was an issue of some focus for the Audit Committee.
[634]Hung submits Mr. Maradin prepared internal control reports for the Audit Committee, which highlighted the oral nature of communications with respect to the notification of customers and suppliers about setoff payment arrangements. Hung submits the Respondents were transparent with Mr. Maradin and others in
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[635]Hung submits his method of recording information by hand, then transferring the information into an Excel spreadsheet was substantially faster, more respectful to the person who was providing the information over the phone and more
[636]Hung submits the only evidence about training the Respondents on issues in Ontario capital markets involved mention of a manual Mr. Maradin had prepared about internal controls and a
[637]Hung also submits it would be unrealistic to expect him to correct the control deficiency arising from the concentration of duties, because he was carrying out duties asked of him by his superiors. Hung submits a change in his job functions was a decision to be made by his superiors and Sino
2.Disclosure Requirements under NI
[638]In order to fully understand and appreciate the importance of undisclosed internal control weaknesses by a reporting issuer, it is useful to look at the requirements under Ontario securities law, which give direction and guidance to reporting issuers on how to structure and disclose their internal controls.
[639]NI
[640]Under Part 3 of NI
[641]Section 3.2 of NI
…if a
(a)a description of the material weakness;
(b)the impact of the material weakness on the issuer’s financial reporting and its ICFR; and
(c)the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.
[642]In
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financial reporting and the preparation of financial statements in accordance with accounting standards.
[643]In identifying risks,
[644]Subparagraph 6.6(3) of
[645]Paragraph 6.7 of
[646]Subparagraph 6.11(a) of
3.Were there Undisclosed Internal Control Weakness?
(a)Identification of Weaknesses
[647]In
a.“segregation of duties,”
b.
c.“completeness and accuracy and timeliness of the period close process including reviewing and monitoring recording of reoccurring and non- reoccurring of journal entries and translation of foreign currency transactions and subsidiary company results,” and
d.“information systems are subject to general control deficiencies including lack of effective controls over spreadsheets”
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[648]These four material weaknesses were also disclosed in each of its first three quarterly MD&A 2007 interim filings. In its 2007 annual MD&A, Sino
[649]In its 2008 annual MD&A,
(b)The Lack of Segregation of Duties
[650]
The success of the Company's vision and strategy of acquiring and selling forestry plantations and access to a
Horsley testified the “senior management” being referred to here was Chan, Albert Ip, Albert Zhao and Hung.
[651]The same description of the lack of segregation of duties material weakness appears in both
[652]Notwithstanding this was the only remaining material internal control weakness not remediated, Mr. Maradin testified it was “the most important” (Hearing Transcript, October 29, 2014 at 68:16). Mr. Maradin testified he received “very little support” from senior management with respect to remediating this material weakness (Hearing Transcript, October 29, 2014 at 68:2).
[653]Mr. Maradin testified he had limited support from the Audit Committee in 2008. Mr. Maradin testified this lack of support from the Audit Committee changed by 2010, by which time the Audit Committee had become more concerned.
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[654]In an email dated November 18, 2007, Horsley writes to Chan about the importance of being able to certify that the processes, systems and internal controls of
[655]Mr. Martin testified, in reference to his comment, it was important for a company to demonstrate it could meet regulatory guidelines; this was “top of mind after the Enron days” (Hearing Transcript, December 1, 2014 at
(Mr. Martin had previously been a Senior Vice President and CFO of a reporting issuer, where he had oversight over internal control matters.) Mr. Martin described Chan’s role in relation to the implementation of NI
[656]Mr. Maradin testified the lack of segregation of duties was identified in 2006 and 2007 during the creation of process documentation for BVI transactions. He explained the lack of segregation of duties consisted of Hung managing the documentation for the purchase and sale of standing timber and the AR/AP Set - Off Process. Mr. Maradin testified Hung had a significant role in terms of recording BVI timber purchases and sales, reporting the information to the Sino- Forest accounting department, and providing all supporting documentation. Mr. Maradin also testified Hung was the individual responsible for the settlement of accounts payable and receivable in the BVI Model.
[657]The failure to segregate duties was the most important material weakness and was identified as the concentration of duties with Hung. Mr. Hyde tes tified this material weakness was related to “the settlement agreements, on one person being responsible for many aspects of producing the settlement agreements among the AIs and suppliers” and that person was Hung (Hearing Transcript, November 5, 2014 at
[658]Hung submits the Respondents were transparent with Mr. Maradin and others in
[659]We find the concentration of duties in Hung was neither reflected in
2010. The same person – Hung – was responsible for recording purchases and sales and for the AR/AP
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[660]Mr. Clifford of E&Y testified that the problem with the lack of segregation of duties was that “it’s a small group of individuals that are involved in the contract negotiation and settlement process. So more specifically, it’s Allen, and Allen
Chan and Albert Ip and Alfred Hung in terms of that process by which they purchase, they sell, and they net settle” (Hearing Transcript, November 17, 2014 at
[661]In a letter dated October 28, 2010 from E&Y to the Audit Committee, E&Y indicated that “all information for the settlement arrangement is solely kept by one senior member of management in the Hong Kong office”, whom Mr. Martin confirmed was Hung.
[662]
“senior management plays a significant role in maintaining customer relationships, negotiating and finalizing the purchase and sale of planation fibre contracts and the settlement of accounts”. The real significance of the lack of segregation of duties weakness was also concealed given that the scope of the BVI Model, which accounted for approximately 70% of Sino
[663]Hung submits even someone not mathematically astute would have been able to determine the approximate revenue in the BVI Model fairly easily. He submits one could do this by working from the increase in Sino
(c)The failure to remediate the lack of segregation of duties
[664]Throughout the Material Time, efforts were made to remediate this internal control weakness. In 2005,
[665]Hung submits the only evidence about any training for the Respondents in Ontario public markets issues involved mention of a manual that Mr. Maradin prepared about internal controls, which was not entered into evidence, and one day of training in the fall of 2007 at the Gold Coast Hotel in Hong Kong. Mr. Maradin testified his first task when he went to Hong Kong was “understanding the company more” and “doing a training manual because I thought it was very important to make sure that people understood what was required, what was required from a
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a public company” (Hearing Transcript, October 29, 2014 at
[666]Chan submits
[667]Mr. Maradin testified, by March 2007, he had drafted policies and procedures in respect of internal controls, and asked Chan, Horsley, Ip and Hung for comments on these policies and procedures.
[668]Mr. Maradin testified E&Y became auditors of
[669]He testified he was frustrated with the lack of progress in remediation and in documenting the processes. He was also frustrated with the lack of assistance from staff. Staff that had been assigned to him in Hong Kong would be assigned to do other things when he returned to Canada. This would slow down the documentation of processes.
[670]Chan submits
[671]An email dated May 8, 2008 from Mr. Hyde to Mr. Martin, which was then forwarded to Horsley, indicates “I don’t have a sense of moving forward from a financial reporting perspective” and “[i]nternal control remains behind. We expressed concern and need for better and more frequent reporting. It did not happen. We have a new report but my sense is we should have a third party conduct a review of the state of affairs. We need to turn the heat way up…” Mr.
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Maradin continued to raise this internal control weakness. It was never remediated.
[672]Mr. Hyde and Mr. Martin testified Horsley and Chan told them one of the problems in remediating this material weakness, namely Hung’s role, was that
Hung was a senior member of management and dividing up his role was going to cause challenges in dealing with some of the suppliers and AIs due to the nature of the relationships. They were told Horsley and Chan were working to figure out a way to divide Hung’s role that would not jeopardize those relationships or Hung’s position in
[673]At a March 15, 2009 Audit Committee meeting, Mr. Maradin presented his Report on 2008 Internal Control Certification Project (referred previously in these
Reasons in our discussion of Allen Chan’s role at Sino
AR/AP
Mr. Maradin testified he recommended that Hung’s responsibilities needed to be broken up and reassigned to separate individuals. He testified there needed to be a realignment or restricting of responsibilities, however, “at some point in time [he] realized that that wasn’t going to change” (Hearing Transcript, October 29, 2014 at
(Hearing Transcript, October 29, 2014 at 163:5). Mr. Maradin testified he assumed Horsley was told this in conversations with Chan.
[674]Chan could have easily adopted Mr. Maradin’s suggestion to break up Hung’s responsibility among separate individuals. Mr. Maradin proposed an alternative compensating control of having Eric Chan, the Assistant
[675]Mr. Maradin testified he had a high level of frustration in 2009. Cooperation from senior management in Hong Kong regarding remediation of this internal control weakness was low.
[676]Mr. Hyde testified the Audit Committee did not push the remediation of this weakness from 2007 to 2009 for two reasons: first, they discussed it with E&Y, which was familiar with this weakness yet could provide an audit opinion; second, the Audit Committee was told by Horsley that Chan was a compensating control in that he reviewed all the settlement agreements and signed the purchase and sale agreements (we note that Chan did not sign all purchase contracts, but approved all purchases). Mr. Hyde testified Chan confirmed he was the compensating control for the whole process. Mr. Martin testified ultimately “reliance is placed upon [Chan’s] signature as ultimate approval and knowledge of all of the transactions” (Hearing Transcript, December 1, 2014 at
Board, “It gave us great comfort, therefore, that he [Chan] was reviewing and approving. That’s a great compensation, or excuse me, compensating control in my opinion and in our opinion” (Hearing Transcript, December 5, 2014 at 54:24-
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55:5). As a result of this misplaced comfort, the Board appears to have tolerated this lack of remediation longer than they should have.
[677]The internal controls over financial reporting formed part of the objectives in determining the bonus criteria at
[678]In a letter dated August 6, 2009, included in the materials for an Audit Committee meeting held on August 9, 2009 as well as in a similar letter dated October 28, 2010 that was included in the materials for an Audit Committee meeting held on November 9, 2010, E&Y indicates, although they are not able to provide assurance on internal controls or to identify any or all weaknesses that may exist, they nevertheless identified and summarized certain suggestions to improve
[679]Mr. Maradin testified in 2010 he was managing the internal controls group, among other management tasks.
[680]Materials provided for an Audit Committee meeting held on March 14, 2011, as part of an update by Mr. Maradin on remediation of significant deficiencies, indicate there is no evidence of review in the entire AR/AP Set
[681]Chan submits
4.The Roles of Chan and Hung
[682]We find the concentration of duties in Hung could have been easily remedied. Mr.
Maradin testified, during one meeting of the Audit Committee “in the later stages”, Chan acknowledged to the Audit Committee he had not been as supportive in terms of Mr. Maradin getting his job done. We find, as the CEO who
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should set the tone at the top, Chan did not address the lack of segregation of duties. We find Chan was aware of this internal control weakness and its significance as early as 2006, was reminded of it every quarter at every Audit Committee meeting and yet failed to remediate it in the following years.
[683]In relation to NI
…Mr. Chan’s role was the tone at the top, the
(Hearing Transcript, December 1, 2014 at
Mr. Martin testified the implementation of NI
[684]As a result of the decision by the Audit Committee that more was required to remediate the internal control issues that were outstanding, Mr. Ardell sent the following email to Chan on April 3, 2011:
Good morning Allen
I am including with this note copies of the Internal Controls‐‐ ‐Certification status for your review.
During the recent year end audit committee meeting as well as the 'closed session', there was discussion concerning the fact that there are still a number of outstanding areas that require attention and resolution. There is recognition and appreciation that significant improvements have been achieved, however with the ever increasing impact of governance requirements the company needs to be focused on further reduction of the outstanding shortfalls. In particular we do not want the value of the shares affected by 'perceived weaknesses'.
There are a number of initiatives identified for 2011 which will further improve the overall internal controls and reduce the number outstanding certification issues which if achieved will improve our overall position
In my experience the success of achieving these objectives only occurs when the CEO makes it clear to various constituencies that these improvements must occur. I have also found it to be effective when tied in to performance bonuses.
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In any case would like to talk to you about it sometime in the next few days so I can report back to the committee. [emphasis added]
Chan never responded to Mr. Ardell.
[685]Chan submits the Respondents did not conceal Hung’s role or the extent of the
[686]Chan submits the concentration of authority in Hung’s role in the AR/AP Set
Peerenboom’s evidence in support of that submission. We reject Chan’s submission for reasons discussed below.
[687]Dr. Peerenboom testified it is typical in Chinese companies to have concentration of authority and it is one of the features of the way Chinese companies do business. However, he was not aware of the specifics of the concentration of duties at
[688]We find that Chan could easily have remediated the lack of segregation of duties, but did not. Chan lied to Mr. Martin and Mr. Hyde when he claimed remediating the concentration of control would jeopardize relationships with suppliers and AIs. The lack of segregation of duties and the concentration of control facilitated the course of conduct and operation of the BVI Model.
[689]Hung was a member of the Disclosure Committee, which was formed at Sino - Forest as part of its disclosure controls and procedures to assist senior officers in fulfilling their responsibility for oversight of the completeness, accuracy and timeliness of the disclosures made by
[690]We find Hung knew the significance of this internal control weakness, specifically the concentration of duties and lack of segregation. However, Chan, and not Hung, had the ability to easily remediate this weakness. Although Hung cannot be held responsible for Chan’s failure to remediate the weakness that resulted from his position, Hung went along with Chan’s failure to remediate the segregation of duties issue.
5.Conclusion
[691]We find
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[692]We find
E.Four Examples of Alleged Fraudulent Transactions
[693]Staff alleges during the Material Time, the Respondents engaged in significant fraudulent transactions related to
a.transactions involving the
b.transactions involving the purchase and sale of approximately 450,000 m3 of standing timber (the 450 Transactions);
c.the purported purchase and sale of a plantation in Gengma County, Yunnan Province (the Gengma #1 Transactions); and
d.the purported purchase and sale of a second plantation in Gengma County, Yunnan Province (the Gengma #2 Transactions).
[694]Staff alleges, in these transactions,
1.Dacheng Transactions
[695]The first example of alleged fraudulent conduct is the Dacheng Transactions.
[696]These allegations involve the reported purchase of the same 58,920.3 mu of standing timber consisting of areas of 9,100.5 mu, 33,093.3 mu and 16,780.5 mu in Hezhou City, Guangxi Province from three suppliers by
[697]There are five sets of executed and unexecuted purchase contracts associated with the Dacheng Transactions. The first is Dacheng’s purchase from Yuangao for RMB 13.68 million on November 17, 2008. The second, third and fourth sets reflect the purchase by
[698]
[699]These purchase and sale transactions are collectively referred to as the Dacheng Transactions.
(a)Positions of the Parties
i.Staff
[700]Staff alleges through the Dacheng Transactions, Sino
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approximately US $30 million. Staff alleges it did so by duplicating the same assets in the records of two
[701]Staff also submits
13.68million, and not for the RMB 47.7 million price recorded by Sino
[702]Staff alleges
ii.Respondents
[703]The Respondents submit
[704]The Respondents claim Staff raised a new allegation in their closing submissions
– that the value of the assets held in the WFOE Model was overstated. We address this issue in our analysis below.
(b)The BVI Purchase and Sale
[705]Between April and September 2008,
three separate contracts with three different suppliers, for an area totalling 58,920.3 mu, with a stock volume of 539,516.37 m3 , for a total purchase price of RMB 205,016,220.60 (approximately US $30 million). Survey Reports were prepared by Zhanjiang Southern, a company in which Lu Qiding, the head of the
[706]The first contract for 9,100.5 mu in Qingshui Village, Gonghui Town, Pinggui District, is dated April 18, 2008 but was prepared sometime after July 16, 2008. This practice of backdating contracts to the date of the oral agreement is discussed elsewhere in these Reasons in our discussion of the Deceitful Documentation Process. The second contract for 33,039.3 mu in Hejie Town, Babu District is dated July 18, 2008, and the third contract for 16,780.5 mu in Sanqi and Dujiang Villages, Huangdong Township, Babu District, is dated September 11, 2008. The latter two contracts were prepared sometime after
October 6, 2008. These three location descriptions will be referred to as Dacheng Location A.1 2
1 2 The Respondents submit not all sets of standing timber that have the same general location description are the same assets. Rather, they submit the same descriptors were used to identify different stands of trees in the same general area. For ease of reference, we use “Dacheng Location A” to refer to all standing timber with the same general location
descriptions. We deal with the Respondents’ submissions about whether these refer to the same or different locations in our analysis that follows.
134
2017 ONSEC 27 (*)
[707]The details of the three recorded BVI contracts at Dacheng Location A are set out in the chart below:
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Recorded BVI Contracts – Dacheng Location A |
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Ji’nan |
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Qingshui Village, |
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April 18, |
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Hongjuyan |
9,100.5 |
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84,634.65 |
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32,161,167.00 |
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Gonghui Town, |
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Tradings |
Co., |
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Pinggui District, |
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Hezhou City |
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July 18, |
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Zhanjiang |
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Hejie Town, |
ONSEC |
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Bohu Wood |
33,039.3 |
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310,569.42 |
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118,016,379.60 |
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Co., Ltd. |
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Taizhou |
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Sanqi & Dujiang |
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11, 2008 |
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Gaogang |
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Jeilin |
16,780.5 |
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144,312.30 |
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54,838,674.00 |
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58,920.3 |
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539,516.37 |
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205,016,220.60 |
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[708]Accounts payable arising from the three contracts were all settled through the AR/AP
[709]On July 22, 2009,
[710]In 2010,
[711]Following the Muddy Waters Report, the Independent Committee advisors attempted to visit two of the three customers in these BVI sales transactions who purportedly purchased the standing timber. Neither customer could be located.
[712]The receivables arising from this sale were purportedly settled between August 12 and 18, 2009 by payments from customers to two Sino
135
(c)The WFOE Contracts
[713]In addition to the BVI contracts described above, the Dacheng allegations involve two sets of three separate purchase contracts that Sino
[714]The dates, parties, area, stock volume and purchase price are identical in the two sets of WFOE contracts, but the description of their locations differ. In the Executed Original WFOE Contracts, the location descriptions are identical to those in the BVI contracts (Dacheng Location A). The Recorded WFOE Contracts contain different location descriptions, described below as Dacheng Location B.
[715]Staff submits both sets of WFOE contracts deal with the same assets as the BVI contracts, notwithstanding their differences in stock volume and purchase price, and, in the case of the Recorded WFOE Contracts, location descriptions. Staff submits the blatant duplication of assets in the BVI contracts and the Executed Original WFOE Contracts was discovered by
i.The Original WFOE Contracts – Dacheng Location A
[716]The Executed Original WFOE Contracts were executed, but never recorded by
Executed Original WFOE Contracts – Dacheng Location A
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Qingshui Village, |
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Dacheng |
9,100.5 |
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57,961.2 |
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October 25, |
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Dacheng |
33,039.3 |
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October 25, |
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16,780.5 |
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25,225.2 |
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58,920.3 |
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125,557.6 |
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47,711,888 |
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[717]Three internal survey reports were prepared (for plantations at Dacheng Location A) by the
136
2017 ONSEC 27 (*)
[718]While both the BVI contracts and the Executed Original WFOE Contracts describe an area of 58,920.30 mu, it is noteworthy to contrast the stock volume in the
BVI contracts with that in the Executed Original WFOE Contracts; the BVI contracts state the stock volume as 539,516.37 m3 and the Original WFOE Contracts state it as 125,557.6 m3 . The resulting purchase costs were RMB 205,016,220.60 in the BVI contracts and RMB 47,711,888.00 in the Executed Original WFOE Contracts. The Respondents submit the substantial difference in stock volume is a reflection of the fact that the properties in the Executed Original WFOE Contracts, though in the same general area as those in the BVI contracts, are different plantations. In Staff’s submission, these locations were in fact the same.
Draft Purchase Contract between
[719]Staff submits the counterparty to the WFOE purchase transaction was originally supposed to be a different supplier, Yuangao, which we found was related to
[720]In an email dated August 22, 2008 regarding the planned purchase of 9,100.5 mu of China fir timber at Qingshui Village, Gonghui Town, Pinggui District (the same as one of the three plantations at Dacheng Location A), Ip was asked for instruction on whether Yuangao should sign a contract with Yuda Wood (a supplier we found was controlled by
[721]The draft contract between
9,100.5 mu dated April 18, 2008, except for the stock volume and price, which are 84,634.65 m3 and RMB 32,161,167, respectively. The BVI contract price was more than four times higher than in this draft contract between Sino
[722]In his testimony, Ip explained the initial proposed low price of RMB 7,680,000 in the contract between
137
2017 ONSEC 27 (*)
this same price of RMB 7,680,000, yet Dacheng did not jointly develop the forestland or harvest with Yuangao. Neither of these contracts (between Sino- Panel (Jianghua) and Yuangao and between Dacheng and Yuangao) reference joint development.
Dacheng’s Purchase from Yuangao
[723]A
RMB 22,025,256. Ip’s testimony lacks credibility.
[724]A funds flow analysis using Dacheng’s accounting records created by Sino
with Yuangao at Dacheng Location A in its books for a total area of 58,918.8 mu, stock volume of 125,557.6 m3 (virtually the same as the Executed Original WFOE contract) and a purchase price of RMB 13,680,000. The date on the three contracts between Yuangao and Dacheng is November 17, 2008, which is after the Executed Original WFOE Contracts dated October 25, 2008, in which Sino - Panel (Hezhou) purportedly purchased the same assets from Dacheng for RMB 47,711,888.
[725]Staff submits this
The Panel makes no finding with respect to this aspect of Staff’s submission.
Draft Original WFOE Contracts between Dacheng and
[726]The first drafts of the Original WFOE Contracts with Dacheng were prepared around November 24, 2008, and show a total purchase price of RMB 13,680,000 . This indicates
1 3 Further discussion of the discrepancies in this document are addressed below.
138
2017 ONSEC 27 (*)
Location A show a total price of RMB 47,711,888 and were prepared after November 24, 2008, but dated October 25, 2008. The details of Draft Original WFOE Contracts are set out in the following chart:
Draft Original WFOE Contracts – Dacheng Location A
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Contract |
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Purchase |
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Location |
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Purchaser |
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[not stated] |
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Dacheng |
9,100.5 |
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57,961.2 |
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7,680,000 |
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Dacheng |
33,039.3 |
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42,371.2 |
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3,500,000 |
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Dacheng |
16,780.5 |
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25,225.2 |
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2,500,000 |
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58,920.3 |
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125,557.6 |
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[727]Ip testified the
[728]Further evidence supporting Staff’s submission Sino
[729]An attachment to an email dated April 27, 2009 links Dacheng, Yuangao, Suri- Wood and
ii.The Recorded WFOE Contracts – Dacheng Location B
[730]In January 2009, the duplication of assets purchased through the BVI contracts and the Executed Original WFOE Contracts was discovered and communicated to Ip and Ho. Both Ip and Ho acknowledged in their testimony that employees in the Finance and Resource Departments believed there was a duplication of the standing timber assets and that there was some confusion with the documentation.
[731]The Respondents submit there was no duplication of assets but rather the two sets of locations described in both the BVI contracts and Executed Original WFOE
139
2017 ONSEC 27 (*)
Contracts as Dacheng Location A refer to different stands of trees in the same general location. The Respondents further submit even if there had been duplication, it has no bearing because it was corrected by replacing the Executed Original WFOE Contracts, never recorded in
[732]Staff submits the Executed Original WFOE Contracts remained on
[733]The details of the three Recorded WFOE Contracts at Dacheng Location B are as follows:
Recorded WFOE Contracts – Dacheng Location B
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Purchase |
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October 25, |
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Dacheng |
9,100.5 |
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57,961.2 |
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22,025,256 |
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Beituo Township, |
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33,039.3 |
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16,101,056 |
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October 25, |
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16,780.5 |
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9,585,576 |
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58,920.3 |
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125,557.6 |
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47,711,888 |
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[734]The Respondents submit the reason the Executed Original WFOE Contracts were replaced with the Recorded WFOE Contracts at Dacheng Location B was that
[735]Ip testified the erroneous belief the assets were duplicated was because the
Finance Department was “very irresponsible” and “did not spend the time to look deeply into the contracts”. However, Ip did not explain how his own Resource Department made the same error regarding duplication. There was no evidence he attempted to rectify his employees’ mistakes.
[736]In fact, the Resource Department took the blame for this duplication. A March 22, 2010 email to Yeung and copied to Ho and Ip (among others) includes an attachment dated January 31, 2010, in which an employee in the Resource
Department states: “It is because
140
2017 ONSEC 27 (*)
prepare purchase contracts, and therefore causing the duplicate; it is our error”. Despite this clear recognition of responsibility, as well as multiple emails which discuss ways to resolve the duplication, Ip provided no evidence of any attempt on his part to correct what he testified was an error. His explanation this was a result of irresponsible errors by the Finance Department is inconsistent with contemporaneous evidence and lacks credibility.
[737]Ho testified “the issue was being dealt with … in this email by Mr. Lu and indicated that there are no additional costs to
7, 2015 at
2015 at
Transcript, December 7, 2015 at
[738]In an email dated April 27, 2009 from a
[739]Several emails between the Resource and Finance Departments clearly indicate the forestland was duplicated. An attachment to an email to Ho dated January 5,
2009, was entitled “List of forests that must be replaced, due to duplications with the BVI forests”. Included on the list are the forests at Dacheng Location A. Another attachment to an email sent to Yeung and copied to Ho and Ip on March
22, 2010, states: “The areas of Hezhou’s … forests (9,100 mu, 33,039 mu and 16,780 mu) and the areas of the Suri forests are the same ….”. The Finance and Resource Departments agreed to resolve the issue by changing the forest locations and selling the assets that were recorded by the BVI subsidiary.
[740]The new contracts between
…This can be done. That is, in the mountains they can come up with exactly this amount – say, for instance, 9,100.5 mu amount – by recharting the plantation area, keeping some of the areas, not delivering to us, and delivering only the specified amount of mu; say 9,100.5. Yes, they can do that.
141
2017 ONSEC 27 (*)
Q.So if I understand your explanation correctly, it is that Dacheng would carve up existing compartments to reach exactly to the tenth of a mu the area of contract set 2? Is that right?
A.It’s very simple. They can put together the big and the small compartments or – sorry, they can put together the compartments and the
(Hearing Transcript, October 6, 2016 at
Again, Zhanjiang Southern prepared the survey report for the purchases recorded at Dacheng Location B.
[741]Ip, in his testimony, could not credibly explain the anomaly. He further testified:
“Well, I have to say that the Resources Department had done a trick here. …
[T]he Resources Department took measurement of some of the trees and said that they were more or less the same in terms of stock volume as the original one, … [b]ut in fact they were covering up something … ”. Ip stated the Resource Department picked similar looking trees, measured them and got a close number. However, he could not then explain how a later Zhanjiang Southern survey had the exact same measurements for the replacement WFOE locations at Dacheng Location B as the earlier internal survey report prepared for the
Executed Original WFOE Contracts at Dacheng Location A. We reject Ip’s explanation regarding the identical area and stock volume.
[742]The same attachment to the March 22, 2010 email states: “Sino
[companies], total of 440,000 mu … because there are no contracts …
Dacheng plantation at Dacheng Location B was Dacheng’s purchase from
Yuangao at Dacheng Location A. The two purchases are compared in a chart, which notes: “The forest location per contract(s) between Sino and Dacheng is different from the forest location per contract(s) between Dacheng and Yuangao company”.
[743]Subsequent emails (originally in Chinese) in April and June 2010 relating to this duplication issue refer to kong lin forests, which has been translated as “non- existent forests,” “empty forests” and “fake forests”. Ho gave evidence that the Chinese term kong lin was used by
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with respect to which the documentation was incomplete” (fapiao, PRC, contract between a supplier and
[744]A further email to Ho dated November 22, 2010 states millions of renminbi of foreign exchange conversions had not been used by Ip to buy forests in the end and “so all of the forests do not exist.” The email then specifically refers to the WFOE contracts at Dacheng Location B when it states that the “47 million in forests between the Hezhou company and Dacheng company that Simon [Yeung] mentioned also do not exist”.
[745]An attachment to a May 4, 2011 email to Ho and copied to Ip states the forest locations in the Recorded WFOE Contracts (Dacheng Location B) differ from the forest locations in the contracts between Dacheng and Yuangao (Dacheng Location A), indicating there was no underlying
[746]When questioned about the apparent ability of Dacheng to sell the standing timber to
Ip stated suppliers would often “move the date of the contract … ”. No evidence regarding when Yuangao purchased the plantation was provided to support the latter explanation; as such, the Panel places no weight on it.
[747]Further information provided on various charts and in tables exchanged between the Resource and Finance Departments to rectify the duplication supports the submission contracts recorded as being for Dacheng Location B reflect the actual assets
[748]Unexecuted versions of Confirmations purportedly issued by the Forestry Bureau do nothing to support the Respondents’ explanation. The Forestry Bureau Confirmations refer to eucalyptus, pinewood and mixed wood and number of mu. There is no reference to stock volume. There is no reference to any specific location, other than Hezhou City. They are dated October 25, 2008, but could not have been created until after January 5, 2009. They are useless in confirming ownership of any assets. Ip confirmed Sino
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(d)Pricing and Payments in the Dacheng Transactions
[749]We have reviewed evidence of five sets of executed and unexecuted purchase contracts associated with the Dacheng Transactions. The first is Dacheng’s purchase from Yuangao for RMB 13.68 million. Dacheng obtained fapiao from Yuangao for RMB 13.68 million. Second, we reviewed early drafts of the Executed Original WFOE Contracts (the Draft Original WFOE Contracts) which propose a purchase price of RMB 13.68 million. Third, we reviewed the Executed Original WFOE Contracts between
[750]We find all five sets of contracts refer to the same plantation at Dacheng Location A.
[751]The evidence indicates
…
The 47 million in forests between the Hezhou company and
Dacheng company that Simon mentioned also do not exist;
13.68million of this money was given to Guyuangao [Gu Yuangao, the principal of Yuangao], and the remaining 34 million was recovered as AR. …
[752]As noted previously in these Reasons, there was never any independent confirmation of payments settled through offsets and their authenticity is therefore questionable. Better evidence of true value of transactions is provided by direct payments. The entire payment for the BVI contracts was settled through offsets. The only evidence of direct payment in the Dacheng Transactions is the RMB 47.7 million paid by the WFOE
[753]The Respondents submit the full RMB 47,711,888 was paid, relying on findings from SAFE’s investigation that suggest there was no fraud with respect to certain foreign exchange funds for which
SAFE investigation, we do not rely on SAFE’s findings in respect of the legitimacy of any conversion of foreign funds as a basis for our findings.
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(e)Conclusion
[754]We find the two sets of recorded contracts (one in the BVI Model and one in the WFOE Model) deal with the same assets at Dacheng Location A and are the same assets Dacheng purchased from Yuangao. The Recorded WFOE Contracts purported to be at Dacheng Location B list different species of trees in a different location, but both the area and the stock volume remain exactly the same as those in Dacheng Location A to the tenth of a decimal place. We reject the submission these could be different plantations and tree species with exactly identical areas and yield.
[755]The only evidence before us regarding the transactions in the BVI Model, are three contracts for standing timber, all of which were settled through offset payments. The standing timber was purportedly sold to three customers; however, Independent Committee advisors could not locate two of those customers who purportedly purchased the standing timber. Settlement of the BVI accounts receivable included offset payments to Maoxiang, a player in the 450 Transactions we find were fraudulent elsewhere in these Reasons, and
Kun’an, a company the Panel has found was related to Sino
[756]Unlike the BVI Model, there is more convincing evidence of consideration in the WFOE Model. We find
[757]We find the BVI purchase was fictitious and inflated the assets on Sino
(f)The Roles of Chan, Ip and Ho in the Dacheng Transactions
[758]We find from the numerous emails we reviewed that Ip and Ho were directly and deeply involved in the Dacheng fraud from the beginning – sometime in 2008. They were clearly aware of the duplicate assets by the first quarter of 2009. Both were directly sent or copied on emails with precise details. There is no evidence either Ip or Ho tried to correct any errors or misconceptions. Rather, they participated in orchestrating a scheme which deceived investors about the value of assets held by
[759]There is insufficient evidence to find Chan was aware of the Dacheng Transactions at the time they occurred.
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2.450 Transactions
(a)Introduction
[760]The second example of alleged fraudulent conduct perpetrated within the
Standing Timber Fraud Allegations is the 450 Transactions. These allegations involve the purported purchase and sale of 450,000 m3 of standing timber by three
∙
∙
∙
[761]These three subsidiaries purported to enter into purchase contracts with the
[762]This standing timber was purportedly sold through sales contracts dated later that month to three companies, Gaoyao City Xinqi Forestry Development Co, Ltd.
(Xinqi), Guangxi Pingle Haosen Forestry Development Co., Ltd. (Haosen) and Meishan (discussed elsewhere in these Reasons in our analysis of the allegations of undisclosed control). These sales totalled RMB 232,716,590.82 (approximately US $33 million) for an apparent profit of approximately RMB 50.2 million (approximately US $7.1 million) for
[763]These purchase and sale transactions are collectively referred to as the 450 Transactions.
(b)Positions of the Parties
i.Staff
[764]Staff alleges sales contracts between the
result, Staff alleges
[765]The alleged fraud is premised on the submission the circular flow of funds in the 450 Transactions brings the substance of the transactions into question. Although the
[766]Staff alleges
1 4 Total sales revenue from the 450 Transactions was US $33 million. However, the VAT - exclusive revenue recorded by
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ii.Respondents
[767]The Respondents submit the 450 Transactions were valid business transactions whose structure was driven by bona fide business purposes and whose accounts receivable were similarly collected using a structure driven by bona fide business purposes. The Respondents submit despite allegations documents were fraudulently created to deceive E&Y or Horsley, no evidence was introduced to establish either was deceived.
[768]In response to Staff’s allegations about the “circular flow of funds,” the
Respondents submit this structure captures legitimate financing transactions and ignores uncontradicted evidence about business structures commonly used in China to resolve the collection of accounts receivable.
(c)Structuring the 450 Transactions
[769]According to Yeung, the genesis of the 450 Transactions, as communicated to him by Ip, was Chan’s desire to have a significant transaction in Q4 2009. The
Panel makes no finding on whether any desire of Chan’s was the catalyst for the
450 Transactions. However, as described in our analysis below, Chan was closely involved in determining the price at which the standing timber was sold, determining the target gross profit and the settlement of the receivables in the 450 Transactions.
[770]On the purchase side, the three
[771]Although recorded as revenue for Q4 2009, the purchase and sales contracts were not prepared nor signed until Q1 2010. As a result, Staff allege revenue was improperly recorded in Q4 2009.
[772]Internal
[773]Accounts receivable and accounts payable from the 450 Transactions were still outstanding well into 2010 and early 2011. The collection of accounts receivable and the settlement of accounts payable is the focus of the flow of funds . The Panel must decide if this circular flow of funds brought the substance of the transactions into questions, or whether it was for bona fide business purposes.
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(d)Documentation for the 450 Transactions
i. The Purchase Contracts and Supporting Documents
[774]A series of emails sent by Yeung, dated December 19, 21 and 31, 2009, refer to a meeting which took place on December 18, 2009 in
[775]According to Yeung’s email of December 21, 2009, the supplier to Sino
[776]After December 2009, Yuangao was substituted for Maoxiang as supplier in the purchase transaction. Emails between
“the initial documents such as the forest purchase contracts and survey
reports … need to be amended … the other party to the forest purchase contract should be changed from the Maoxiang company to the Yuangao company”. The Yuangao contract was “to be used for Sino’s external disclosure” but the “actual forest purchase contract is still to be signed between Yuangao company and
Maoxiang company” (January 5, 2010 email from A. Shi to Yeung, copied to Ho,
Ip and others using
[777]In the end,
[778]Evidence shows changes to the purchasing parties on the
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[779]Thus, the parties to the 450 Transactions were still in flux after mid
[780]Similarly, documentation which supported the purchase contracts was also created after the recorded dates of purchase. Although the survey reports prepared by Zhanjiang Southern (the external survey company 10% owned by Lu Qiding) were dated September 21, 23 and 24, 2009, details of stock volume and yield per species were still being finalized in January 2010.
[781]The email chain regarding document preparation for the 450 Transactions begins on December 21, 2009 with instructions from Yeung to various Sino
[782]The email chain supports Staff’s submission the transaction had been reverse- engineered.
[783]Several statements within this email chain indicate Sino
∙“This can…avoid many possible and unnecessary troubles from EY’s side”;
∙“From EY’s point of view, significant differences should not exist for the data concerned. If the difference is significant, it is necessary to think in advance how a reasonable explanation can be provided to EY”; and
∙“The suggestion is that the m3 figure is not to be included in the invoice, only the quantity of mu is to be included (as the actual m3 figure is too different from the contract figure, it is necessary to operate in this way to avoid risk)”.
[784]The Forestry Bureau Confirmations which provide evidence of
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earliest. We note
[785]The Forestry Bureau Confirmations in the 450 Transactions refer only to county and province level location descriptions. There is no information sufficiently specific in the Forestry Bureau Confirmations that would permit anyone to connect the contract area to a specific location.
[786]The Forestry Bureau Confirmations stated the Forestry Bureau reviewed signed contracts between
ii.The Sales Contracts
[787]As with the purchase contracts, Staff submits the terms of sale in the 450 Transactions were
[788]
[789]The sales contracts refer to an estimated number of cubic meters of timber sold. The final sales price was to be determined later, based on the yield after harvest, as set out in the Harvesting/Sales Confirmation to be provided to Sino
[790]The sales contracts and supporting documentation were prepared in late 2009 and early 2010, along the same timelines as the purchase documentation. Changes to the identities of both the seller and purchaser and the price in the sales transactions were made in tandem, as described below.
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iii.Changes to the Terms of the 450 Transactions in Late 2009 and Early 2010
[791]The terms of the 450 Transactions changed after the recorded purchase and sales dates in October 2009. Based on a schedule set out in an email from Yeung on December 21, 2009, purchase contracts were to be prepared by December 24, and sales contracts by December 28, 2009, all well after the dates on which the transactions were recorded by
2009.
[792]According to Yeung, the original plan was to have the timber yield be 65% (456,300 cubic metres) and the selling price RMB 500 per cubic metre, for a gross margin of 20%. On December 22, 2009 the original sales price was increased to RMB 510 per cubic metre so that a profit margin of 22% could be achieved based on an invoice issued by Yuangao and accumulated losses on the books of
[793]Also on December 22, 2009, one of the
[794]The supplier was changed from Maoxiang to Yuangao as of January 4, 2010, months after the oral purchase agreement purportedly occurred.
[795]Thus from the time of the purported handshake deals in October, three significant terms had changed: the supplier, from Maoxiang to Yuangao; one of the buyers, from
[796]As discussed elsewhere in these Reasons, significant changes to the original agreed terms, such as these, would invalidate the original oral agreement, assuming one accepts the Respondents’ submission that an oral ag reement is a valid contract for revenue recognition.
[797]On December 23, 2009 draft sales contracts were circulated to Yeung and other
[798]
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[799]In addition to changes in the contract terms, details for stock volume and yield per species in the survey reports were still being finalized in January 2010. In fact, a January 5, 2010 email to Ip, Ho, Yeung and others states: “To be consistent with the sale price of 510 Yuan/m3, the initial documents such as the contract and the survey report containing tree species, area, volume, yield and tree diameters will be adjusted accordingly…”. When asked how the proportion of tree species or tree diameters could change, Ho could not give a credible response:
Q.But if you're selling the same forest, how do you change the percentage of pine in the forest? Can you explain that to me?
A.Well, my understanding was when they were negotiating the contract, they were
So I guess that's where
Q.That would also go for changing the size of the tree, right, when we talk about individual timber specifications?
A.Well, they do have, you know, suggestions here and there because they might have ideas that they want to, you know, ensure that there is some kind of a reasonable explanation to the average price that's being calculated. But like I said before, the suggestions may or may not be used, depending on the situation, so might have just put it here for discussion purposes.
Q.When you say it could be slightly changed, what do you mean by "slight change" in proportion of individual tree species?
A.Well, like I said before, there was an average price of 500 to 513 on each of the three confirmations, if I remember correctly. So moving from 500 to 510, there was a slight change of the percentage of increase of the average price as compared to the total.
…
Q.But what did you mean by a "slight change" in the proportion of tree species? Like, let's say 30 percent of a forest was pine. What would be a slight change in that proportion?
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A.Well, I would not be able to answer that question because it depends on the estimate that the customer and
Ithink what I'm just trying to answer you is in general, you know, what he's trying to suggest here as in the species. It depends on, you know, further information from Operations to come up with whether they actually looked at
Q.But you'd agree with me Operations can't move trees physically into one forest and out of another forest; correct?
A.Well, my understanding was these were estimates from both parties, the
Q.I guess my question is, again, your Operations group in
A.Correct.
(Hearing Transcript, December 2, 2015 at
[800]In the Survey Report for the 63,508.7 mu plantation purchased by
[801]Further emails to Yeung, Ho and Ip in late December 2009 and early January 2010 suggested including the area in mu but not the volume on the invoice to
“avoid risk” because the “actual m3 figure is too much different from the contract figure”. Another email of January 5, 2010 suggested the contract between Yuangao and the
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purchase contract is still to be signed between Yuangao company and Maoxiang company”.
[802]In an email dated June 23, 2010, a
“purely an accounting maneuvre [sic]” and that Yuangao did not “seem to have gained actual profit from it”. Ho suggested during cross
[803]In early November 2010, a
Transactions. From the General Manager’s response, it is apparent he was neither aware of, nor involved in, this transaction. The Finance Manager reminded the General Manager of his responsibilities for managing Sino
(Luzhai)’s daily operations and elevated her concerns by copying Ip, Ho and Yeung. Ip instructed Ho (in English) to “stop her yelling” (referring to the Finance Manager who was making the inquiries), and told him “the integrated sales is being arrange [sic] by the HQ”. The Respondents submit each
450 Transactions were arranged “by the HQ”, out of Hong Kong even though they were WFOE transactions. All BVI documentation was controlled out of Hong Kong as well.
[804]The Respondents submit it was not surprising documentation for the 450 Transactions, based on a handshake deal in October 2009, had not been completed by December 2009, given this was the practice in the BVI Model. The Panel, however, was not provided any evidence to show this practice was standard in the WFOE Model, so the submission does not help us.
iv.The Supplemental Purchase Agreements
[805]By March 3, 2010, well past the due dates for the first set of payments on the purchase and sales contracts dated in Q4 2009, no payments or receipts had been made or received, which raised issues with E&Y in an audit of 2009 financial statements. Original terms required payment in full for the purchase contracts by January 8, 2010 and full collection of receivables from the sales contracts by March 28, 2010. While aged receivables might give rise to bad debts, outstanding payables would (and did) raise questions with the auditors regarding
[806]Hence, draft Supplemental Agreements were created on March 3, 2010, dated October 19, 2009 and emailed to Ip and Ho. The reason given for these
Supplemental Agreements was “EY and Eric [Chan, a
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months
[807]The terms of initial and final payment changed from the draft to the final versions of the Supplemental Agreements from seven and nine months, to six and eight months, respectively. The Respondents submit that the change in terms supports an arm’s length negotiation between
[808]While Yuangao was not inserted into the 450 Transactions until after mid - December 2009, the backdated Supplemental Agreements, prepared in March 2010, named Yuangao as the supplier in October. Yeung, in cross
[809]Ho, in cross examination, could not explain why Supplemental Agreements were required, nor why they were dated October 19, 2009 when the issue of payment and receipt did not arise until March 3, 2010.
[810]The facts surrounding the creation and backdating of the Supplemental Agreements lead us to find the Supplemental Agreements were not entered into as of October 19, 2009, but were created by
v.The Harvesting/Sales Confirmations
[811]According to the sales contracts, all dated October 15, 2009, the customers were responsible for harvesting by December 20, 2009 and a Harvesting/Sales Confirmation had to be issued within 10 days following completion of harvesting. The Harvesting/Sales Confirmations were all dated December 28, 2009. Payment in full was required within three months of the harvesting confirmation: March 28, 2010. The Panel notes the trees were therefore harvested without any signed purchase contract, any signed sales contract, or any Forestry Bureau Confirmation, and before details of tree species, area, volume, yield and tree diameters were finalized in the survey reports.
[812]The Harvesting/Sales Confirmations stated that 456,309.9 m3 of timber were delivered to the customers in the 450 Transactions. This was the confirmed yield following purported harvesting and deviated only slightly from the expected quantity outlined in the sales contracts. The final yield volume was exactly 65% of the stocking volume stated in the survey reports (versus the 64.98% estimated in the sales contracts).
[813]When first asked if the Harvesting/Sales Confirmation was detailed evidence of what was actually cut down and delivered to the customer, Ip responded, “Yes. True”. The following week, Ip was asked specifically about the Harvesting/Sales Confirmations for the 450 Transactions. He testified again that the Harvesting/Sales Confirmation for the 39,409.7 mu sold by Sino
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the sales contract. However, he testified it did not sound right to him that the 39,409.7 mu could have been cut down in the 75 days between the dates of the sales contract and the Harvesting/Sales Confirmation. He explained, although it was priced as cut logs, what was actually sold was standing timber. Notwithstanding the terms of the sales contract and the Harvesting/Sales Confirmation, Mr. Ip testified the plantation would not have been logged, but would have been handed over to the customer in the form of standing logs. Ip completely changed his testimony. As noted elsewhere in these Reasons, standing logs is a term used to refer to standing timber priced as cut logs; in other words, uncut trees.
[814]The
[815]When Yeung was asked if the Harvesting/Sales Confirmation was misleading, he agreed it might be for those who were not in the forestry industry. He stated: “…this may be a log transaction, but the delivery is in the form of standing timber” (Hearing Transcript, November 9, 2015 at
[816]The sales contracts in evidence clearly state the customers were required to commence harvesting by October 20, 2009 and to complete harvesting by December 20, 2009. The Harvesting/Sales Confirmation attached to the contract between
[817]We find the sales contract and the Harvesting/Sales Confirmation were meant to deceive. The wording was explicit in terms of timber being cut down. The use of 64.98% in the sales contract but 65% in the harvesting confirmation was meant to deceive the reader into thinking the former was an estimate whereas the latter was the actual yield derived from actual harvesting. We find the sales documentation in the 450 Transactions deceitful and misleading.
(e)The Accounts Receivable and Accounts Payable Offsetting Arrangement
[818]By March 10, 2010, no payments had been made or received by the Sino
W. Chen).
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[819]Emails of March 12, 2010 to Ho refer to a meeting held the previous day to review various options regarding a RMB 150 million gap, being the difference between accounts receivable of RMB 330 million and accounts payable of RMB 180 million. The accounts receivable of RMB 330 million includes the RMB 232 million for the 450 Transactions, as well as others. The accounts payable of RMB 180 million in the email is a reference to the RMB 182 million accounts payable in the 450 Transactions. The Cash Flow Gap specific to the 450 Transactions was the RMB 50.2 million of purported profit.
[820]One of the emails discussed various ways to close the Cash Flow Gap (i.e. demonstrate collection of the full amount of accounts receivable). Suggestions included increasing the registered capital and making additional timber purchases. Also suggested was the creation of new accounts payable by purchasing timber through Yuda Wood (a company we find was controlled by
[821]The process of having customers and suppliers exchange funds is generally referred to in the BVI Model as the AR/AP
Mainland China, thereby creating
[822]
[823]Throughout June and July 2010 numerous emails and versions of charts of the offset plan were circulated among
[824]When Ip was
[825]When Ho was
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they were
[826]An August 13, 2010 email circulated among
[827]The Respondents submit a more appropriate translation for wai wei gong si is
“outside companies”. They submit, while “peripheral companies” can be a literal translation of the term, the idiomatic translation of the informal expression was more correctly explained by the expert witness Professor Huang who explained it in his expert report as “… an important business partner in a group of corporate entities, but one that is at
“periphery” is the more correct translation; the alternative translation of “Pay attention: the term ‘outside’ should not appear in emails or documents/forms” simply does not make sense.
[828]Ip confirmed the three periphery companies referred to in the August 13, 2010
email were Haosen, Meishan and Xinqi.1 5 The email stated the previously paid funds to Yuangao would be returned to the three
[829]An August 13, 2010 email from Huang Ran’s employee to a
[830]Over the course of August 2010, further emails ensued, in which Ip, Ho and Huang Ran were updated on the progress of the flow of funds.
[831]In an October 28, 2010 email, an individual who worked for Huang Ran, Yang Jun, asked Ip if he should return the funds of RMB 20,800,000, which had been transferred from
1 5 Although the email referred to Taiyuan, Ip confirmed that this was a typographical error and the reference to Taiyuan was meant to refer to Haosen.
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the Nanning account of Yuangao, back to
[832]Also in July 2010, the foreign exchange conversion of US dollars into renminbi began, and Ho was advised of this by
[833]By the end of 2010, the flow of funds had not been completed nor had the Cash Flow Gap of RMB 50.2 million been resolved. The balance of unpaid accounts payable was RMB 26.25 million and the balance of unpaid accounts receivable was RMB 128,717,150 million, for the 450 Transactions, which had occurred in the last quarter of 2009.
[834]Plans to complete the offset arrangement were discussed in emails (copying Ip and Ho) and at meetings in February 2011. Charts in attachments to these emails indicated the settlement of accounts payable on one side and the corresponding collection of accounts receivable for the same amount of RMB 182 million on the other side.
[835]Further emails included one from Ho’s assistant to Ip on February 15, 2011 with the subject “Accounts Receivable and Accounts Payable Clearing Process” that advised him in English that “George would like to inform you that the process has been started accordingly [sic] to the plan”. Ip, Ho and others were advised in another email later that morning that the first stage of settlement of accounts payable had been completed that day.
[836]Once Ip learned the first stage had been completed, he instructed Yang Jun in a February 15, 2011 email to “arrange for the funds to be channelled back immediately”. It is clear that Ip was orchestrating the flow of funds for the 450 Transactions.
[837]Further emails were exchanged among
[838]Ip testified he reported to Chan on how he was going to resolve the accounts receivable problem with Xinqi, Meishan and Haosen. He testified he told Chan Yuangao was lending money to these three customers so they could settle the accounts receivable. Although this was a finance issue, Ip did not report it to Horsley as CFO, but went directly to Allen Chan. When asked why he did this, Ip responded:
Allen Chan and I would meet regularly at the Hong Kong meetings. It was at such meeting that I reported what I did on a
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David Horsley, he would have said so to me, or he would have told Dave Horsley himself.
(Hearing Transcript, September 3, 2015 at
[839]We find the accounts receivable/accounts payable offsetting arrangement in the 450 Transactions was a circular flow of funds, orchestrated by Ip and Ho and with Chan’s knowledge, to resolve the outstanding accounts receivable. We do not accept the Respondents’ explanation that Yuangao provided a loan to the
(f)Horsley and the Rainy Season Memo
[840]By July 14, 2010, Horsley, as CFO, was concerned about the outstanding accounts receivable arising from the 450 Transactions and emailed Ip and Ho, copying Yosanda Chiang, Chan’s Executive Assistant, regarding their collectability. Apparently having received no reply, two weeks later on August 2, 2010, Horsley sent another email to Ip and Ho, copying Yosanda Chiang, and Chan directly, asking for a written update and an explanation for E&Y.
[841]Despite the fact Horsley’s second request occurred in the middle of plans to use a
[842]The Rainy Season Memo stated the spring rainy season prevented the logs from being transported from the logging area down to the flatlands stations. It was authored by Ho and prepared by his Finance Department. Ho stated the information was sourced from Ip, to whom the Memo was sent.
[843]Ip testified at one point the farmers could not access the area to log; another time he said there were not enough farmers to do the logging, and it was a slow process. Both these explanations differ from the Rainy Season Memo, which stated the trees had been cut but the logs could not be transported.
[844]Ho was asked why a
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[845]Ho also said he would have relied on Ip or Chan to either talk to Horsley or write him an explanation about the collection of accounts receivable.
[846]The Panel notes the Rainy Season Memo indicated timber had been harvested and logs were awaiting transportation to market, which differs from Ip’s testimony that the Harvesting/Sales Confirmation was simply an estimate based on standing logs. Ip stated customers could not harvest because farmers could not get to the logging area to do the cutting because of the rain. Despite the fact Ip was copied on the Rainy Season Memo, he did not correct the misleading language even though he was in charge of
[847]On February 3, 2011, Horsley emailed Chan directly regarding his concerns over the remaining accounts receivable of US $27 million which had been outstanding for more than one year. Chan replied within 70 minutes: “All collectible. Will get A [Albert Ip] and G [George Ho] on it…”. The Panel finds Chan’s immediate response indicates he was aware of the circular flow of funds in the 450 Transactions.
[848]While Ho and Ip were engaged in the offsetting arrangement, none of this information was shared with Horsley or with E&Y. On the other hand, Ip updated
Chan in July 2010 with a “set of arrangement and flow for post
[849]The Respondents submit implicit in the memo is that customers cannot pay until they have sold harvested timber. Horsley is told by Ho that the logs had been harvested even though Ho knew no harvesting had taken place. Ip also testified harvesting had not taken place and he had reviewed Ho’s Memo. We find the Rainy Season Memo was meant to deceive Horsley and E&Y, and to hide the circular flow of funds in the 450 Transactions from their view.
(g)Vendor Financing and Nanning Bank Accounts
[850]The Respondents submit the flow of funds arrangement was a type of vendor financing that was common practice in China, due to the lack of readily available cash, causing challenges for businesses when trying to collect accounts receivable. Ip testified
[851]The Panel heard expert testimony from Michael Murphy on the structural issues regarding cash liquidity in the Chinese managed economy. Murphy testified Chinese businesses were always concerned about access to liquidity; banks may not lend to certain companies, industries or regions if guidelines in the Chinese government’s economic plan stipulated other industries or regions were to be the focus of investment. As a result, companies would hold on to their cash and
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used workarounds, such as vendor financing, to collect accounts receivable. Instead of using their own cash to pay a liability, companies could request another party to make a payment to some person or some entity that owes the company money. He also testified having customers and suppliers deal with set- offs would save the company liquidity and avoid having to deal with the credit risks of the customer.
[852]Ip could not describe any terms of the Yuangao loan. He guessed at the interest rate, at first saying it could be between 10 and 15%, then as much as 20 to 30%. He could not explain how customers could eke out any profit at that rate, nor why Yuangao would take on such credit risk, other than to say it would earn Yuangao the goodwill of
[853]The Respondents suggest it was not unusual
[854]Moreover, Ho admitted under
[855]The Respondents submit Huang Ran was inserted as the middleman to facilitate the process and that the customers were too embarrassed to ask Sino
[856]Subsequent emails establish Ip controlled the flow of funds among these bank accounts. Huang Ran provided Ip with the balances for bank accounts for various companies including Yuangao, Maoxiang, Xinqi, Haosen and Meishan, all involved in the 450 Transactions. An email of March 4, 2011 from Huang Ran to Ip provided an update on balances of bank accounts for these companies, Huang
Ran specifically stated: “…the situation of funds for the periphery companies is as follows”. This email was originally written in Chinese and the English word
“periphery” has been provided as the translation for the Chinese term wai wei gong si, a translation which the Respondents contest. Of the eleven companies listed in the email, we previously found
(Taiyuan) and four others were related parties (Kun’an, Yuangao, Meishan and Juncheng). The list was not comprised entirely of “outside” companies unrelated to
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it was not normal practice for one supplier (Huang Ran) to have the bank account numbers and balances of other suppliers and customers who might also be his competitors and/or customers. Ip also testified it was not beyond reason Huang Ran would know the account information for these companies because he was a shareholder in Yuangao. Irrespective of Ip’s testimony, the inference we draw is that Huang Ran was updating Ip about companies associated with the circular flow of funds.
[857]The Panel finds these three customers in the sales contracts of the 450 Transactions, Xinqi, Haosen and Meishan, facilitated the flow of funds back to
[858]The Panel finds the vendor financing explanation is not credible, but rather is a fabrication. The Panel finds no legitimate business purpose for this circular flow of funds and, therefore, the purported transactions have no economic substance. Accordingly, we find the sales contracts between
(h)The Roles of Chan, Ip, Ho and Yeung
[859]Chan was closely involved in determining the price at which the standing timber was sold, the target gross profit and the settlement of accounts receivable in the 450 Transactions. Chan was directly emailed by Horsley about the overdue outstanding accounts receivable in February 2011. Chan’s response of “All collectible” indicates Chan was aware of the 450 Transactions and subsequent collection issues. Chan was copied on the Rainy Season Memo and knew Ip and Ho did not inform Horsley of the real reason accounts receivable were still outstanding. There were weekly Monday Morning Meetings with Chan, Ip and Ho, among others, at which the subject of the 450 Transactions and issues about payments and collections were discussed. Ip told Chan about the plan for settlements of the outstanding receivables and the “loan” from Yuangao.
[860]Chan submits he was included on emails simply in the ordinary course of business and that the “circular” flow of funds was a legitimate business structure that would not raise a red flag. We reject the submission this specific flow of funds was a legitimate business structure.
[861]Ip testified it was impossible for Chan to be unaware of an April 19, 2010 foreign debt application made by a
Transactions.
[862]Ip and Ho were closely involved in
[863]Ho stated repeatedly in his affidavit and in testimony that he had limited involvement in the 450 Transactions because he was busy with investigating investment opportunities in Russia. However, there are many emails in which it is clear Ho was significantly involved in the 450 Transactions. For example: he
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told a
[864]To support Ho’s submission he was very busy with the Russia project and did not therefore have much involvement with 450 Transactions, Ho submitted 16 reports produced by the consulting firm Pöyry. While the reports are voluminous, they do not speak directly to Ho’s involvement in Russia, whereas the emails discussed above support the Panel’s finding Ho was directly involved in the 450
Transactions, regardless of any additional obligations he may have had at the time.
[865]Ip was undeniably involved, to the point of approving the opening of bank accounts to facilitate the circular flow of funds.
[866]Yeung was closely involved in
[867]Ip, Ho and Yeung were the key
(i)Conclusion
[868]The Panel finds:
∙the purchase and sale transactions were
∙the Forestry Bureau Confirmations were backdated and the survey reports were created and changed well after the dates on the purchase contracts;
∙the Harvesting/Sales Confirmations were meant to deceive the reader into believing harvesting had occurred;
∙the vendor financing argument is not believable and the circular flow of funds was created and executed by
∙the Rainy Season Memo was meant to deceive Horsley and E&Y.
Based on the totality of the evidence, the Panel finds the sales contracts between the
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3.Gengma #1 Transactions
(a)Introduction
[869]The third example of alleged fraudulent conduct perpetrated in the Standing Timber Fraud Allegations is the Gengma #1 Transactions. Staff alleges Sino- Forest, Chan and Ip committed fraud relating to the standing timber assets purchased from Gengma Dai. As a result, Staff alleges this inflated the value of forestry assets on
[870]In late 2006
[871]In May 2007,
in the PRCs. Ultimately, as of May 25, 2007, 105,750 mu were registered for a total cost of RMB 105,231,200 (approximately US $14.2 million)1 6 . These contracts were not recorded on
[872]In a contract with Yuda Wood dated April 20, 2007,
Forest’s financial statements.
1 6 One PRC provided only standing timber rights (not land use rights) for 1,380 mu. As of May 25, 2007
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(b)Positions of the Parties
i.Staff
[873]Staff submits the unrecorded contracts in Gengma Contract Set 1 were for both standing timber and land use rights and are the “true” contracts. In contrast,
Staff submits, the recorded Gengma Contract Set 4 contracts, for the same standing timber and land use rights at a higher total purchase price, are fictitious. Staff alleges this resulted in an overstatement of Sino
[874]In 2010, the standing timber in Gengma Contract Set 4 was purportedly sold for RMB 1,579,153,315 (approximately US $231 million), or more than 15 times the allegedly “true” value of both the land and timber when it was purchased pursuant to Gengma Contract Set 1 three years earlier in 2007. Staff alleges this sale was fictitious, and submits that supporting this allegation is the fact that the same standing timber was used as collateral for a bank loan in 2011. Thus, Staff alleges that
[875]Staff submits
ii.Respondents
[876]The Respondents submit the
–this was Ip’s first major standing timber contract and he was assisted by a
[877]We must decide: (i) which contract set represents the actual transaction; (ii) whether Gengma Contract Set 1 deals with land only or both land and standing timber; and (iii) whether the standing timber sales occurred at all, and, if so, whether the sales price was inflated.
(c)The Evolution of the Purchase Contracts
i.
[878]When
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[879]However, the February contract referred to in the survey report actually related to a contract between Gengma Dai and Dongkou, the purportedly arm’s length company located in Hunan Province. In our analysis of the allegations of undisclosed control, we found Dongkou was not in fact an arm’s length company, but rather was controlled by
[880]The February 2007 contract referenced in the Lincang survey report was the contract between Dongkou and Gengma Dai that
Dongkou Contract
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Transfer of |
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Staff submits the contract is for land use and standing timber rights, but Ip testified that the contract was for land use only.
[881]
Q. … So why sign an agreement or why have an agreement in Dongkou Shuanglian's name if you don't own them? Why not use some other
A.At that time, there was no other company that had the resources of, or the manpower to do this deal, and at that time, Gengma Dai made a request that the money should be paid to them by early February. So we were
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there were no other way except to use Shuanglian to
(Hearing Transcript, May 28, 2015 at
His further testimony did not answer the question as to why
Q.So Commissioner Leckman is asking, did you say that there was no other
A.That's right. What I said was
CHAIR: Was that human resources that I heard?
MR. KOEHNEN: Yes.
THE INTERPRETER: The witness used those two words in English.
COMMISSIONER KERWIN: So if I understood the witness, he'd followed on from talking about no other manpower or human resources to do the deal. Gengma Dai wants payment by early February.
MR. KOEHNEN: Yes.
COMMISSIONER KERWIN: I wasn't certain the connection between human resources and payment.
BY MR. KOEHNEN:
Q.So Commissioner Kerwin is asking, Mr. Ip, you said that there was no other
A.There was no connection. What I was saying that
--what I was saying is that Gengma Dai was coming after us to finalize the deal, and if the deal was not finalized and if we did not pay by the beginning of February, then they would not sell the forest.
(Hearing Transcript, May 28, 2015 at
We find Ip’s confusing response does not assist us.
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[882]Ip testified Dongkou’s employees, mainly management, would have moved from Hunan Province to Yunnan Province to manage the Gengma #1 Plantation. When asked in
2015 at
Ip’s insistence the contract was for land use only, he would have us believe it would be possible for Dongkou’s employees to harvest timber to which they had no rights. We reject Ip’s explanation as not believable.
[883]On this issue, Ip testified “this contract is all mixed up”, “that is why I say there are a lot of contradictions within this contract itself” and that the contract “is a mess” (Hearing Transcript, September 21, 2015 at
[884]The email that attached the “final version” of the Dongkou contract was sent to
Ip on February 3, 2007 with the subject line “Final Contract Version - Yunnan Gengma Plantation Land Acquisition” states:
Dear Albert,
Attached please find the latest final version of the contract that we plan to sign on next Wednesday. This contract was negotiated among Lu Ci Deng
I would like to stress and highlight that Gengma requires RMB 25 m to be remitted to their account on or before Feb 15, otherwise the contract will be cancelled and they will not sell to us even if this money is given to them after Feb 15. It would be much appreciated if you could kindly arrange remittance of this sum of money.
[emphasis added]
[885]This email clearly indicates that
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[886]The Dongkou purchase from Gengma Dai was subsequently replaced with the
ii.Gengma Contract Set 1 – WFOE Contracts
[887]The contracts in Gengma Contract Set 1 were contracts for the purchase of the Gengma #1 Plantation in the WFOE Model. They were executed, but never recorded on
[888]Gengma Contract Set 1 specifically stipulates the transfer of forest land use rights as well as standing timber use rights. The “Subject of Transfer” in these contracts is described as the forest rights owned by Gengma Dai, being “the lawful forestland use rights, timber ownership and timber use rights”. PRCs were issued by the Forestry Bureau and conveyed registered title to
[889]Gavin Hao, who was qualified as an expert in the Chinese forestry industry, provided evidence on general difficulties in obtaining PRCs in Mainland China and stated specifically in his expert report that “in some regions, when the Forestry
Bureaus are registering forestry land use rights, they currently will not permit such rights to be registered to different owners” (Robert Flynn and Gavin Hao,
Report on China’s Forestry Issues (June 2013) at
[890]The Respondents submit, and Ip testified, the reason Gengma Contract Set 1 referred to the transfer of both standing timber and land use rights was that Forestry Bureaus would generally not issue PRCs with separate owners for these two types of rights. They further submit the fact that Gengma County was in a particularly remote district of China makes Ip’s explanation more reasonable.
The PRCs issued to
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[891]The details of Gengma Contract Set 1 are as follows:
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determined |
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27 |
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105,750 |
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105,231,200 |
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*The area in each of the contracts in Gengma Contract Set 1 was an estimate, to be determined based on figures from the PRCs, and the contracts were priced at RMB 1,000/mu and RMB 980/mu, respectively. The final Area and Contract Value numbers are derived from the PRCs issued on May 25, 2007.
[892]Ip agreed the Gengma Contract Set 1, on the face of it, stipulated the transfer of both land and standing timber rights; however, he testified this was a business deal for land only. Ip testified that, subsequent to the execution of the contracts, a survey would be completed by the Forestry Bureau, which would provide more information on the exact area and stock volume of the plantation, after which the total price of the contract (including standing timber) could be determined. The Respondents submit this is a nuance that is implied but not specified in the contracts, notwithstanding the fact that the terms “forestland use rights, timber ownership and timber use rights” are explicitly stated in the contracts.
[893]Ip is incorrect; the contracts in Gengma Contract Set 1 explicitly state:
Within 14 days after the completion and acceptance of the comprehensive forest survey conducted by both parties, Party A (Gengma Dai) shall complete the submission of all formalities for registration of change of forest rights to the authorities responsible for registering the change in forest rights.
[emphasis added]
Therefore, it was
Although
171
site survey (i.e. before the completion of the formal report). This is consistent with
[894]A May 26, 2007 email to Ip confirmed that PRCs for 105,750 mu had been obtained and noted that there were 1,380 mu without land use rights. It also attached a payment summary with two different options: (i) payment that included the 1,380 mu with rights to the standing timber only for a total amount of RMB 105,231,200, and (ii) payment that excluded this 1,380 mu for the lesser amount of RMB 103,033,600. The email concluded as follows:
PS Inside are two pieces of forestland totaling 1,380 mu, over which our company does not have the forest land use rights. It is necessary to enter into an agreement with Gengma Forestry Co. [Gengma Dai] and require them to transfer the forest land use rights to be under the name of Sino. Otherwise, our company can refuse to pay the amount for that 1,380 mu.
This email indicates the
[895]Between December 2007 and February 2008, Gengma Dai issued fapiao to Sino- Panel (Gengma) for the full amount of RMB 105,380,000. The Panel has heard evidence that fapiao are limited by the government and therefore valuable. Gengma Dai would not give up fapiao unless a valid transaction required it to do so.
[896]Between June 2007 and January 2009,
[897]The contracts in Gengma Contract Set 1 were also the contracts that were shown to the tax authorities for the issuance of fapiao. There is no evidence the recorded contracts (Gengma Contract Set 4) were shown to the tax authorities or any fapiao was issued in respect of these contracts, notwithstanding that the Respondents submit they are the true contracts.
[898]
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2017 ONSEC 27 (*)
Forest, is responsible for paying it. Ip previously testified that VAT applied to standing timber sales, and not land only sales. The employees who wrote this memo considered the tax on both standing timber and land separately because different tax rates apply to each, which provides further evidence that Gengma Contract Set 1 applied to both land and standing timber.
[899]The Panel finds that Gengma Contract Set 1 included both standing timber and land use rights.
iii.Gengma Contract Set 2 (WFOE Contract) and Supplementary Contracts
[900]Several iterations of contracts were created between Gengma Contract Set 1 and Gengma Contract Set 4, which was ultimately signed and recorded by Sino - Forest. The first contract that named Yuda Wood was attached to an August 9, 2007 email and was titled Contract of Transfer of Forest Rights between Yuda Wood and
Gengma Contract Set 2
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determined |
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*The area in Gengma Contract Set 2 was estimated to be 105,750 mu, to be finally determined based on figures from the PRCs.
[901]A set of Supplementary Contracts to Gengma Contract Set 2 was attached to an email dated October 17, 2007 and changed the terms of the lease in Gengma Contract Set 2 from 5 years to 30 years, but was unsigned and undated. There was no previous evidence that the lease had been for a term of 5 years – in fact, the contracts stated the duration was to be the same as that stipulated on the PRCs, which ranged from 20 to 70 years. The only evidence that earlier contracts were for a term of five years was found on
[902]Staff submits these contracts were created, changing the term and increasing average yield per mu, in order to justify the increase in value of the timber assets to the value eventually recorded by
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2017 ONSEC 27 (*)
[903]Sometime after the June 1, 2007 Gengma Contract Set 2 was entered into, but before the September 21, 2007 Gengma Contract Set 4, there was an undated but signed (by Chan and Huang Ran) rescission of the June 1, 2007 contract (Gengma Contract Set 2)(during the hearing, the rescission was referred to as Gengma Contract Set 3). Since Gengma Contract Set 2 had already been provided to BDO, this rescission was required so that the auditors were not provided with two purchase contracts for the same timber assets once Gengma Contract Set 4 had been created.
iv.Gengma Contract Set 4 – BVI and WFOE Contracts
[904]The purchase contracts for the Gengma #1 Plantation eventually recorded on
Gengma Contract Set 4
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260/m3 |
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Acquisition |
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105,750 |
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1,958,960 |
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N/A |
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509,329,600 |
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21, 2007 |
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[Undated] |
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Contract of |
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June 2, |
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35/mu |
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(Gengma), |
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Yuda |
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2007 to |
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April 20, |
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Forestland |
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105,750 |
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N/A |
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times 30 |
111,037,500 |
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a WFOE |
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Wood |
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June 2, |
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2007* |
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Lease |
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years |
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subsidiary |
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2037 |
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620,367,100 |
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*The contract between
[905]A second survey was prepared for Gengma Contract Set 4, and was conducted by Zhanjiang Southern. It was dated September 2007 (September 21 on the cover page and September 14 in the body of the report), was prepared for Suri- Wood, encompassed exactly 105,750 mu and took nine days to complete, from September 4 to 13, 2007. The Zhanjiang Southern survey did not state who the counterparties to the proposed transaction were, unlike the Lincang survey, which did refer to a contract between
174
2017 ONSEC 27 (*)
He testified that
[906]When questioned about the difference in the length of time it took Lincang versus Zhanjiang Southern to complete their surveys, Ip was evasive about how much time in general a survey would take, and claimed he had no knowledge about the process, despite his role as head of operations for the Sino
[907]There was no evidence of any agreement to rescind Gengma Contract Set 1. In contrast, there was a Rescission of Contract agreement (Gengma Contract Set 3) regarding Gengma Contract Set 2 between
[908]Chan signed both the BVI and WFOE purchase contracts for Gengma Contract Set 4, although the usual process in 2007 was for K.K. Poon to sign all purchase contracts. When Ip was asked why Chan signed in this case, he testified: “…in the beginning of this contract,
[emphasis added] (Hearing Transcript, September 25, 2015 at
[909]Between June 6, 2007 and January 22, 2009,
[910]The contract for standing timber rights in Gengma Contract Set 4 was settled through both offsets and a direct payment from a BVI subsidiary. In partial settlement of the standing timber contract between
[911]The BVI
175
2017 ONSEC 27 (*)
generally signed in the quarter following the date on the contract. In this case, a written contract would not be executed until sometime in the first quarter of 2008.).
[912]Yuda Wood’s manager and shareholder, Huang Ran, told the Independent
Committee Advisors that Yuda Wood would use four or more parties to settle accounts receivable with
[913]There was no indication Yuda Wood actually owned the Gengma #1 Plantation. No evidence was presented to show that Gengma Dai transferred ownership of the timber assets to Yuda Wood. Ip testified the owner of the forestry rights at the time was Gengma Dai, but
(Gengma) and would take a long time. Ip said “they [the head of Sino
Resource Department, Lu Qiding, and the Forestry Bureau] came up with this solution, and that is, there would be this contract with the transferor and the transferee as such” (Hearing Transcript, September 23, 2015 at
Yuda Wood’s name.
[914]Ip’s explanation directly contradicts his own testimony in chief. He testified that if
[915]In summary, the cash payments for the settlement of Gengma Contract Set 4 land use rights were distributed as follows:
∙RMB 102,113,966 to Gengma Dai from
∙RMB 8,923,534 to Yuda Wood from
The settlement of the standing timber was:
∙a cash payment of RMB 150,000,000 to HK Sonic Jita from the BVI subsidiary
∙payments by offset totalling RMB 359,329,600 purportedly paid to Yuda Wood from the customers of another
In total, these payments amount to RMB 620,367,100, the full amount of Gengma Contract Set 4. The only direct payment to an independent third party is the payment to Gengma Dai. We reject the evidence of other payments in settlement of Gengma Contract Set 4. RMB 158.9 million was paid to Yuda
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2017 ONSEC 27 (*)
Wood, a company controlled by
[916]We find the contracts in Gengma Contract Set 4 between Yuda Wood and both of
v.Assignment Agreement
[917]An unsigned agreement dated October 16, 2007 switched the purchaser of the standing timber of the Gengma #1 Plantation from
Agreement in E&Y’s audit working papers.
[918]When asked if this Assignment Agreement was created to explain the discrepancy between the PRCs and the
“Can I put it the other way? At the time, we had to dig up this contract and this contract was
[919]The Panel notes the apparently simple method of transferring assets from a BVI to a WFOE in this Assignment Agreement. Evidence has been provided that Sino - Forest had attempted to
[920]The Panel notes the further inconsistencies with dates. While the contracts recorded on
177
2017 ONSEC 27 (*)
transactions were changing well into October 2007. The evidence supports the fact that
vi.Conclusion on the Actual Purchase Contracts
[921]Ip testified
[922]Yet in November 2007, when disputes arose between Sino
[923]We reject Ip’s explanation of Yuda Wood’s role. Further, we find this dispute resolution between
[924]A draft report to the Lincang City branch of SAFE by Sino
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2017 ONSEC 27 (*)
[925]The Panel finds the contracts in Gengma Contract Set 1 were the true and valid contracts by which
∙the contracts specified land use rights and standing timber rights;
∙PRCs were issued for both land use rights and standing timber rights for 105,750 mu;
∙
∙Gengma Dai, an arms’ length company, issued fapiao for RMB 105,380,000;
∙these contracts were used for currency conversion with SAFE; and
∙these contracts were also presented to the tax authorities.
The fact that three government authorities (Forestry Bureau, SAFE and the tax authorities) relied on the validity of these contracts is evidence that supports our finding. More specifically, the Forestry Bureau issued PRCs for land use rights, standing timber rights and standing timber use rights and registered this ownership to
[926]The purchase contracts of Gengma Contract Set 4 were fictitious and were created to increase the value of
We find Yuda Wood never owned the Gengma #1 Plantation. We find
(d)The BVI Sales Contracts
[927]Between January and June 2010,
[928]The Panel was provided no explanation of how
[929]Three of the five customers, representing 56% of the sales price, could not be located by the Independent Committee advisors following the release of the Muddy Waters Report. The accounts receivable arising from this sale were all
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2017 ONSEC 27 (*)
purportedly settled through offsets; two of the five suppliers that received payments, representing 60% of the receivables, were companies in which Huang Ran had an ownership interest, Yuda Wood and Jiangxi Senchangtai Forestry Co., Ltd. The Panel has found elsewhere in these Reasons that Huang Ran acted as a nominee for
[930]Despite recording the sale of the standing timber in the first half of 2010, Sino- Forest pledged the Gengma #1 Plantation assets as collateral in its application for a bank loan with China Development Bank in a valuation report dated August 12, 2010. Staff submits this confirms that
[931]The Respondents submit that there is no evidence they had any role in formulating the asset list for the bank loan with China Development Bank. However, Yeung stated in his affidavit that “Negotiation of the loan and preparation of the security for the bank” were the responsibility of Ip and a Vice- President, Project Finance at
[932]The Respondents submit this pledging of collateral was simply an error. While it might be plausible that one error occurs, the same “error” occurred multiple times. In addition to the Gengma #1 Plantation assets, assets from the Gengma #2 transaction were also pledged as collateral for this loan. In total, the Gengma #1 and Gengma #2 Plantation assets were purportedly sold through 38 sales contracts between March 2008 and June 2010. The explanation that this is an error involving 38 contracts executed in 10 different months over more than two years is not credible. We reject the Respondents’ explanation and find the
Gengma #1 Plantation assets were still on the books of
[933]Based on the following, we find the sales were fictitious:
∙the reported value of the sales amounts to 99% of the GDP for Gengma County for 2006;
∙60% of the accounts receivable were settled by offsets with companies associated with Huang Ran, whom we have found acted as
∙subsequent to the sale, the Gengma #1 Plantation assets were pledged by
∙three of the customers to whom the standing timber was purportedly sold could not be located when the Independent Committee advisors tried to track them down.
Therefore, we find the revenue for 2010 was overstated on
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2017 ONSEC 27 (*)
[934]Staff has also provided other data which supports their submission the sales price is inflated, however, the Panel makes no finding regarding valuation. We have found the contracts in Gengma Contract Set 1 reflected the actual and valid transaction between
(e)Conclusion
[935]The Panel finds:
∙Gengma Contract Set 1 between
∙Gengma Contract Set 4, which involved Yuda Wood, a company controlled by
∙The Gengma #1 Plantation was never sold and therefore the fictitious sale of standing timber by
(f)The Roles of Chan and Ip
[936]Chan’s involvement in the Gengma #1 Transactions is clear. Although he did not sign purchase contracts in the regular course of business, Chan signed Gengma Contract Set 2; the Rescission of Contract to Gengma Contract Set 2 (Gengma Contract Set 3); and both contracts in Gengma Contract Set 4. Ip testified Chan was involved in negotiations “from the beginning”. Ip testified he consulted Chan about using Yuda Wood as a supplier for the Gengma #1 Plantation.
[937]Chan signed the 31 BVI sales contracts which totalled RMB 1.5 billion. Given his involvement in
[938]Ip’s involvement in the Gengma #1 Transactions is also clear. Numerous emails were sent directly by him, sent directly to him, or were copied to him. He has acknowledged this was his first major standing timber contract and so would have been intimately aware of all the details. He reviewed contracts before they were signed by Chan and coordinated payments. His very detailed testimony supports this conclusion.
4.Gengma #2 Transactions
[939]The fourth example of alleged fraudulent conduct perpetrated within the Standing Timber Fraud Allegations is the Gengma #2 Transactions.
(a)Positions of the Parties
i.Staff
[940]In the Gengma #2 Transactions, Staff alleges
[941]
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2017 ONSEC 27 (*)
million (Gengma #2 Contract 1A). The second contract was for land use rights. It was between
[942]Staff alleges
Kun’an for RMB 53,584,417.50 pursuant to a contract dated November 23, 2009.
As has been noted elsewhere in these Reasons, Staff alleges that Kun’an was controlled by
[943]Staff further alleges
[944]Staff alleges Yuda Wood, however, did not acquire the Gengma #2 Plantation until September 2008, after
[945]Staff makes these allegations against
ii.Respondents
[946]The Respondents submit Ip understood
Plantation in September 2007. They rely on Ip’s testimony that he does not know why or how this mix up about who held the plantation rights or when the transfer of rights to the Gengma #2 Plantation occurred. They submit Ip was unaware of any problems
[947]The Respondents submit the evidence of circulation of purchase agreements involving the Gengma #2 Plantation assets is not consistent with fraud, but with a mix up on the supplier’s side for which they do not have a complete answer. The Respondents submit, when the problem was discovered, it was rectified when
(b)Purchases of the Gengma #2 Plantation
i.
[948]
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2017 ONSEC 27 (*)
[949]
[950]The details of the Gengma #2 Contracts 1A and 1B are as follows:
Gengma #2 Contracts 1A and 1B
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Contract |
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Contract |
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Contract |
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Purchaser |
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Supplier |
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September |
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Timber |
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Yuda |
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260/m3 |
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1A |
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Acquisition |
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50,815 |
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161,185,180 |
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27, 2007 |
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Wood |
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Contract of |
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Yuda |
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35 * 30 years |
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1B |
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Undated |
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Forestland |
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50,815 |
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53,355,750 |
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214,540,930 |
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[951]Together, the acquisition price for the standing timber and land use rights for the Gengma #2 Plantation is RMB 214,540,930 for 50,815 mu of forestland distributed across two towns of Gengma County: Gengma Town and Mengsa Town, as described in the Zhanjiang Southern survey report. The BVI contract (1A) was signed on September 27, 2007. The WFOE contract (1B) was undated, however, it stipulated that the period of lease began on September 15, 2007. Ultimately, PRCs for only 44,630.7 mu were transferred to
ii.Taiyuan and Gengma Dai Contract – Gengma #2 Contract 2
[952]Although
[953]In July 2008,
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2017 ONSEC 27 (*)
[954]One attachment to the email is a Contract of Transfer of Forest Rights (forestland use rights, timber ownership and timber use rights) from Gengma Dai to Taiyuan for RMB 680 per mu. The total 58,465 mu of forestland that is the subject of this contract is comprised of various villages in six towns: Hepai Township, Gengma Town, Mengsa Town, Mengding Town and Mengjian Township in Gengma County and Banhong Township in Cangyuan County. The contract is dated July 9, 2008 and is signed by Huang Ran on behalf of Taiyuan as its legal representative. The Panel notes the differences in locations between this contract and the
[955]The details of Gengma #2 Contract 2 are as follows:
Gengma #2 Contract 2
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Approximately |
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Contract of |
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58,000 mu and not |
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less than 55,000 |
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July 9, |
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Transfer of |
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Taiyuan |
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Gengma Dai |
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mu. |
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680/mu |
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Unstated |
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2008 |
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Forest |
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(The attached |
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Rights |
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appendix indicates |
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58,465 mu) |
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[956]Another attachment entitled Notice of Change of Forest Rights is a notification from Taiyuan instructing Gengma Dai to transfer its purchase rights to Sino- Panel (Gengma); it is neither dated nor signed. Ip testified that he did not open the attached notification because it “gave … the impression that this was to do with finance matters” (Hearing Transcript, May 22, 2015 at
Q. So you would approve payments without first reviewing the underlying materials, Mr. Ip? Is that right?
A. I needed to see the supporting documents to make an approval, but here I am asking George Ho to handle the payment. If there was any need for me to give the approval, George Ho would have come back with the request.
(Hearing Transcript, September 25, 2015 at
[957]We find Ip’s response is not credible. We agree with Staff’s submission that, as is evident from Ip’s testimony, Ip sought to distance himself from the Taiyuan – Gengma Dai contract and
[958]In a second email dated September 26, 2008, in the same email chain, a Sino - Forest employee asks Ip for direction on how to record the payment to Gengma
Dai on behalf of Taiyuan: “As this is processed through signing a contract with
Huang Ran, I cannot figure out how this is to be reported. Huang Ran also said
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2017 ONSEC 27 (*)
that he is merely signing”. Ip disagreed this email was referring to how the payments should be recorded in
[959]Ip was questioned about the September 26, 2008 email that concerned Gengma Dai, Taiyuan and
A.That is because he was aware that the acquisition of forests was for
Q.And when you started your answer by saying "he was aware", who is the "he"?
A.Gengma Dai was aware that ultimately this forest would be sold by Yuda to
Q.So why does that lead Gengma Dai to raise the issue with
A.That is because at the time Gengma Dai did not receive payment from Yuda.
Q.So help me understand why Gengma Dai is approaching
A.Because they talked with Yuda, and Yuda informed them that for the time being there was not enough capital to pay them.
(Hearing Transcript, May 22, 2015 at
Ip contradicted himself in
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2017 ONSEC 27 (*)
not have the funds or whether Yuda wanted us to pay them first” (Hearing Transcript, September 28, 2015 at
[960]When asked by his counsel why Gengma Dai was bringing Yuda Wood into the mix, Ip responded, “It's because Gengma Dai knew that the forest would eventually be sold by Yuda to
iii.Yuda Wood and Gengma Dai Contracts – Gengma #2 Contracts 3A and 3B
[961]It is unclear why Taiyuan was dropped as the counterparty to the purchase from Gengma Dai, but in March 2009, Yuda Wood replaced Taiyuan as purchaser in the transaction with Gengma Dai for the Gengma #2 Plantation. While the Gengma #2 Plantation was situated in Yunnan Province, Yuda Wood’s registered office was in Hunan Province.
[962]Attached to an email dated March 5, 2009 between Sino
Gengma #2 Contract 3A
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Contract |
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Contract |
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Purchaser |
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Unit Price |
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Contract |
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Approximately 58,000 |
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September |
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of |
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mu and not less than |
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15, 2008 |
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Transfer |
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Yuda Wood |
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Gengma Dai |
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680 / mu |
39,440,000** |
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55,00 mu * |
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(unsigned) |
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of Forest |
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Rights |
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*According to PRCs issued for the Gengma #2 Plantation, only 44,630.7 mu was transferred. **The actual purchase price, based on the 44,630.7 mu would have been RMB 30,348,876
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2017 ONSEC 27 (*)
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Gengma #2 Contract 3B |
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Transferor of |
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Transferee of |
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Contract Date |
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Purchaser Rights |
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Purchaser Rights |
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Supplier |
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and Obligations |
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and Obligations |
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Agreement of Change in |
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Undated and |
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Contracting Parties in |
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Taiyuan |
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Yuda Wood |
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Gengma Dai |
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unsigned |
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Regard to Contract of |
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Transfer of Forest Rights |
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[963]In a January 16, 2009 email from Ip to a
[964]When asked to clarify why the
THE WITNESS: Not at all. That’s not what it means here. It is asking here May [a
BY MR. ROSSI:
Q. And that’s your interpretation that you’re giving to that sentence, correct?
A. Yes, I understand it this way.
(Hearing Transcript, September 28, 2015 at
The Panel finds Ip’s response not credible.
[965]Gengma #2 Contracts 1A and 1B recorded by
[966]In an email dated January 16, 2009, a
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VAT. He states that the problem is “not yet resolved regarding the contract between Yuda and the Forest Product Company” (i.e., Yuda Wood and Gengma Dai). Both Ip and Ho are later copied on the chain of emails, although no one from Yuda Wood is copied despite the fact that the tax issue involved Yuda Wood.
[967]This email chain resolves any disputes as to whether Gengma #2 Contract 3A between Yuda Wood and Gengma Dai is for both land use and standing timber rights or simply for land use rights. It is evident from these emails that Sino - Forest employees understood this contract to be for both land use and standing timber rights. We do not believe Ip’s explanation that Gengma #2 Contract 3A was for land use only. Therefore Ip’s explanation does not account for the difference in price between what
[968]In his testimony, Ip agreed
[969]We note
iv.Plantation Rights Certificates for the Gengma #2 Plantation
[970]A June 30, 2009 email circulated among
Transcript, September 28, 2015 at 68:1), even though Sino
Dai. Ip does not recall any contract transferring ownership to Sino
[971]The PRCs that were transferred to
44,630.7 mu and are distributed in the following manner:
∙ 12,305.5 mu in Mengsa Town;
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∙12,346.9 mu in Gengma Town;
∙3,283.9 mu in Mengding Town;
∙10,417.8 mu in Hepai Township; and
∙6,276.6 mu in Banhong Township.
The first four towns are in Gengma County and the fifth town is in Cangyuan County. These PRC locations differ from both those referenced in the Zhanjiang Southern Survey Report associated with Gengma #2 Contract 1A (described below) and those contemplated in Gengma #2 Contract 2 between Taiyuan and Gengma Dai.
[972]The Zhanjiang Southern survey dated September 27, 2007, in support of Gengma #2 Contract 1A refers to an area of 50,815 mu distributed across two towns in Gengma County: 27,180 mu in Gengma Town and 23,635 mu in Mengsa Town. This was the survey for Gengma #2 Contract 1A, which was recorded in
[973]Ip testified he disagrees with the assertion
[974]Ip testified that although
[975]Ip’s response is not credible. Land is not a fungible asset. The Respondents’ own counsel argued land value can vary when attempting to explain the difference in values between the assets in the Gengma #1 Plantation and the Gengma #2 Plantation (RMB 980 to 1,000 per mu and RMB 680 per mu, respectively). Counsel offered a
content. Such factors would in turn affect the unit stock volume. In fact, the unit stock volume in the Gengma #1 Plantation was 18.5 m3 per mu while that in the Gengma #2 Plantation was 12.2 m3 per mu.
[976]As a result, it is not possible to simply swap assets from the Gengma #1 Plantation to the Gengma #2 Plantation to make up for the shortfall, as Ip
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testified. Even if this was possible, there was no accounting adjustment made to the asset value of the Gengma #1 Plantation in the books of
[977]In the end, by December 8, 2009, PRCs representing 44,630.7 mu of forestland were transferred to
v.Cash Flows, Payments and Settlements
[978]Between January 7, 2009 and April 2, 2009,
[979]All six payments Yuda Wood made to Gengma Dai were from the two Yuda Wood bank accounts in Guangzhou that
Wood and Gengma Dai,
[980]
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and Yuda Wood. It is noteworthy that all eight payments from Sino
[981]As well, as of September 27, 2007, Yuda Wood had not yet acquired the assets from Gengma Dai and no PRCs had been issued to Sino
Based on these facts we find Contract 1A is fictitious.
(c)Sales of the Gengma #2 Plantation
i.Standing Timber Sales
[982]Between March 2008 and November 2009,
#2 Contract 1A.
Forest. The remaining four sales were in 2009 to two other customers for a much lower sales price of RMB 437.1 per m3 . There were no submissions or evidence these two customers were not independent arm’s length customers.
[983]The three sales by
[984]Ip testified that no one raised any issues with him when Sino
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ii.Land Sales
[985]
Plantation to Kun’an on November 23, 2009, for RMB 53,584,417.50, to be settled in two equal installments in February, 2010 and May, 2010. This amount is very close to the RMB 53,355,750
[986]Kun’an was previously found to be a company related to
[987]Kun’an’s Statement of Operation Situation filed with SAIC (i.e., its corporate filings) in April 2010 indicates that since its incorporation on January 20, 2009,
Kun’an had not had any sales, expenses, liabilities or assets, except for its initial registered capital of RMB 500,000. Yet, Kun’an seemingly bought over 50,000 mu for more than RMB 50 million in November 2009. As previously noted, discrepancies between information in a company’s SAIC filings and its books and records is common, so it can be problematic to rely on SAIC filings exclusively, and the Independent Committee determined no conclusions can be drawn from this information alone. However, the magnitude of this discrepancy is significant and is one more data point we consider to arrive at our finding.
[988]Staff submits
When we first abandoned our replanting programme in Yunnan we wanted to lease out the land for which we had lease contracts. And with Gengma Dai and Yuda we had a contract for 50,815 mu, and that contract was still in force. And at a certain point in time we had received PRCs for 4,400 [sic] mu. Well, in fact, the PRCs were still being collected. We were still obtaining the rest of the PRCs.
In fact, both Yuda and Sino wanted to complete the agreement; that is, for the entire 50,815 mu. Nobody wanted to stop the completion of the contract, no. So in leasing out the land, in our minds we were still thinking that we had 50,815 mu that we could lease out.
(Hearing Transcript, September 29, 2015 at
However, according to Ip, when unable to get the balance of PRCs, they swapped in 5,000 mu from the Gengma #1 Plantation and added it to the Gengma #2 Plantation. As discussed in paragraphs [973] to [976], Ip’s explanation of swapping assets is not credible.
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[989]The Panel finds Staff’s submission to be the more likely explanation why exactly 50,815 mu were sold to Kun’an, despite the lack of sufficient PRCs.
[990]By March 2010, no funds had been received from Kun’an although the first payment on its contract with
Agreements to extend payment terms because E&Y had been “questioning closely about this issue”. Huang Ran was also copied on this email. According to Ip, Huang Ran is copied on the email as a representative of Yuangao (the email also addresses issues relating to the 450 Transactions, to which Yuangao was a party). Staff submits he was acting as a representative of Kun’an in this instance. The Panel has found elsewhere in these Reasons Huang Ran acted as a nominee for
[991]The settlement of the account receivable from the purported sale of the Gengma #2 Plantation to Kun’an also involved Juncheng, a supplier to
Kun’an, was a shareholder of Maoxiang from August 7, 2009 to October 15, 2009 and was an employee of
[992]In February 2011, Kun’an delegated its payment obligation of RMB
53,584,417.50 arising from its purchase of land use rights from Sino
∙Juncheng was delegated to pay RMB 12,637,989.84 on behalf of Kun’an; and
∙Yu Degang was delegated to pay RMB 40,946,427.66 on behalf of Kun’an.
Juncheng and Yu Degang ultimately settled this obligation on behalf of Kun’an using funds provided by
[993]According to internal
∙RMB 6,000,000 to
∙A further RMB 6,637,989.84 to
∙RMB 20,946,427.66 recorded as being provided to
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The first two payments total the RMB 12,637,989.84 payment that Kun’an delegated to Juncheng regarding the sale of the Gengma #2 land use rights. An internal
∙“Unusual Disposition Purpose”: “Payment to Yu Degang for paying
Gengma”;
∙“Solution”: “Create a Loan Agreement (illustrating the purposes)”; and
∙“Remarks”: “Payment to Sino Gengma transferred by Yu Degang”.
This indicates that RMB 33,584,417.50 out of the total RMB 53,584,417.50 owed by Kun’an to
[994]The remaining RMB 20 million that Yu Degang paid
[995]Employees in the
[996]Staff submits Juncheng and Yu Degang remitted these funds back to Sino
(Gengma) to settle the account receivable from Kun’an, and these funds were part of the circular flow of funds in the settlement of the 450 Transactions, which is discussed in greater detail elsewhere in these Reasons. We agree with Staff’s submission, and find the entire amount of the RMB 53,584,417.50 paid to Sino -
Panel (Gengma) for the land sale to Kun’an originated from Sino
[997]With respect to the sale of land use rights to Kun’an, the receivables were settled entirely through a circular flow of funds, for which we find no legitimate business purpose. The Panel finds these sales to be fictitious.
iii.Pledge of the Gengma #2 Plantation as Collateral
[998]Despite recording the sale of the standing timber in 2008 and 2009 and the sale of land use rights in 2009,
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[999]The Respondents submit there is no evidence they had any role in formulating the asset list for the bank loan with China Development Bank. However, Yeung stated in his affidavit that “Negotiation of the loan and preparation of the security for the bank” were the responsibility of Ip and a
[1000] The Respondents submit pledging the Gengma #2 (and Gengma #1 Plantation) assets as collateral was simply an error. However, as we found in our analysis of the Gengma #1 Transactions, to have the same error recur for 38 sales contracts executed in 10 different months between March 2008 and June 2010 strains credulity. We reject the Respondents’ explanation and find the assets were still owned by
(d)Conclusion
[1001] The Panel finds:
∙the Gengma #2 Transactions involved companies that were controlled by and/or related to
∙
∙the locations in the PRCs that
∙the land use sales transaction with Kun’an involved a circular flow of funds and was fictitious;
∙Yuda Wood did not own the Gengma #2 Plantation in September 2007 when
∙
[1002] The Panel finds the recorded purchase contracts between
∙
∙the PRCs issued to
∙
∙the cash payments from Yuda Wood to Gengma Dai came from bank accounts that were controlled by
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As a result, the Panel finds that
[1003] We find the recorded sales of the Gengma #2 Plantation were fictitious. We base this finding on facts that include:
∙a substantial portion of the standing timber sales by dollar value were to Dongkou, a company controlled by
∙the sale of the land use rights was made to Kun’an, a company related to
∙
The Panel therefore finds that
(e)The Roles of Chan, Ip and Ho
[1004] The Panel found in Gengma #1 that Chan’s involvement was clear. Gengma #2 occurred six days later. Ip testified under cross
[1005] Therefore, the Panel finds Chan’s involvement in the Gengma #2 Transactions is equally clear. He signed Gengma #2 Contracts 1A and 1B despite the fact that he did not normally sign BVI purchase contracts. Chan also signed the WFOE and BVI sales contracts. The Panel heard repeatedly that Chan was closely involved in
[1006] The Panel finds Ip’s involvement is also clear. Numerous emails were either directly sent to him or were copied to him. He was intimately aware of all the details. He approved contracting Zhanjiang Southern to undertake a survey of the Gengma #2 Plantation in September 2007. He reviewed all contracts before they were signed by Chan. He coordinated payments. His very detailed testimony supports the conclusion that Ip directed the Gengma #2 Transactions.
[1007] Ho joined
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F.Conclusion on the Standing Timber Fraud Allegations
[1008] Staff alleges, during the Material Time, the Respondents engaged in numerous deceitful and dishonest courses of conduct that ultimately caused the assets and revenues derived from the purchase and sale of standing timber (which constituted the majority of
[1009] Staff alleges the Standing Timber Fraud was comprised of three deceitful and dishonest courses of conduct in:
a.undisclosed control of purportedly arms’ length companies with which
b.the Deceitful Documentation Process; and
c.undisclosed internal control weaknesses or failures .
Staff alleges each of the above dishonest and deceitful courses of conduct by the Respondents put the pecuniary interests of Investors at risk, constituting fraud.
[1010] Staff cites four examples of alleged fraudulent courses of conduct that the Respondents perpetrated within the Standing Timber Fraud Allegations (collectively referred to as the Four Frauds):
a.the Dacheng Transactions;
b.the 450 Transactions;
c.Gengma #1 Transactions; and
d.Gengma #2 Transactions.
[1011] Based on their involvement in the Standing Timber Fraud Allegations, Staff alleges the Respondents engaged in deceitful or dishonest conduct related to
[1012] In addition, Staff alleges, as officers of
[1013] Staff submits the failure of the Respondents to provide truthful disclosure to Investors about the issues of ownership of assets, control of parties with which
[1014] The Respondents submit there was no fraud and they acted in good faith to protect the interests of
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1.The Law on Fraud
[1015] Subsection 126.1(b) of the Securities Act prohibits fraud, and states:
A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,
…
(b) perpetrates a fraud on any person or company.
[1016] Fraud is “one of the most egregious securities regulatory violations” and is both “an affront to the individual investors directly targeted” and something that “decreases confidence in the fairness and efficiency of the entire capital markets system” (Re Capital Alternatives Inc, 2007 LNABASC 47 at para 308, citing D Johnston and K D Rockwell, Canadian Securities Regulation, 4th ed, Markham: Lexis Nexis, 2007 at 420).
[1017] The Securities Act does not provide a definition of “fraud”. Since the fraud provision came into force in 2006, the Commission has considered it in light of the leading criminal case on fraud of R v Théroux, [1993] 2 SCR 5 (Théroux). In Théroux, the Supreme Court of Canada stated that a single precept underlies the offence of fraud: “commercial affairs are to be conducted honestly” (Théroux at 15, quoting J.D. Ewart, Criminal Fraud (Toronto: Carswell, 1986), at 9).
[1018] The Court confirmed the elements necessary to prove fraud as follows:
... the actus reus of the offence of fraud will be established by proof of:
1.the prohibited act, be it an act of deceit, a falsehood or some other fraudulent means; and
2.deprivation caused by the prohibited act, which may consist in actual loss or the placing of the victim's pecuniary interests at risk.
Correspondingly, the mens rea of fraud is established by proof of:
1.subjective knowledge of the prohibited act; and
2.subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which deprivation may consist in knowledge that the victim's pecuniary interests are put at risk).
(Théroux at 20)
In doing so, the Court described fraud as an “offence of general scope capable of encompassing a wide range of dishonest commercial dealings” (Théroux at 16).
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[1019] The Commission has adopted the test established by the Supreme Court in Théroux and applied by the British Columbia Court of Appeal in Anderson v British Columbia (Securities Commission, 2004 BCCA 7 (Anderson). In Re
(a)Actus Reus
[1020] The actus reus of fraud contains two elements: (i) the respondent must have committed a dishonest act, and (ii) that act must have caused deprivation to the victim.
i.Dishonest Act
[1021] The first element, a dishonest act, is established by proof of deceit, falsehood, or other fraudulent means. The first two categories, fraud by deceit or by falsehood, only require the respondent, as a matter of fact, to have represented that a situation was of a certain character, when, in reality it was not (Théroux at
[1022] The third category, fraud by “other fraudulent means”, is determined objectively, by reference to what a reasonable person would consider to be a dishonest act (Théroux at 16). Underlying this idea of dishonesty is the “wrongful use of something in which another person has an interest, in a manner that this other’s interest is extinguished or put at risk” (R v Olan, [1978] 2 SCR 1175 at 1182 (Olan)).
[1023] Omission or
[1024] In the securities regulatory context,
ii.Deprivation
[1025] The second element of the actus reus of fraud, deprivation, is established by proof of detriment, prejudice, or risk of prejudice to the economic interests of the victim, caused by the dishonest act (Théroux at 15).
[1026] While an economic loss may satisfy the requirements of deprivation under the Théroux test, the offence is not limited to those instances only. Prejudice or risk of prejudice to economic interests will also support a finding of fraud. The notion of prejudice is to be given a broad interpretation and even the mere imperilling
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of another’s economic interest is sufficient. In Re Phillips, (2015) 38 OSCB 617, the Commission found where the perpetrator of the fraud has concealed or not disclosed important facts about an investment from investors, those investors are prejudiced because their funds are exposed to risks of which they are not aware. The perpetrators of the fraud do not need to profit from their actions (Théroux at 17).
(b)The Mental Element of Fraud
[1027] A breach of subsection 126.1(b) of the Securities Act requires a finding that the person or company knew or reasonably ought to have known their conduct perpetrated a fraud. The Commission has applied the test for mens rea articulated in Théroux within this statutory context.
[1028] Subsection 126.1(b) of the Act has the identical operative language as the fraud provision in the British Columbia Act. In interpreting the fraud provision in the British Columbia Act and with respect to the mental element, the British Columbia Court of Appeal in Anderson stated at paragraph 26:
…[the fraud provision of the BC Act] does not dispense with proof of fraud, including proof of a guilty mind. Peek v. Derry (1889), 14 App. Cas. 337 (U.K. H.L.) confirmed that a dishonest intent is required for fraud. Section 57(b) [the fraud provision of the BC Act] simply widens the prohibition against participation in transactions to include participants who know or ought to know that a fraud is being perpetrated by others, as well as those who participate in perpetrating the fraud. It does not eliminate proof of fraud, including proof of subjective knowledge of the facts constituting the dishonest act, by someone involved in the transactions. …
[emphasis in original]
(Anderson at para 26)
The Commission has applied the test from Anderson.
[1029] Proof of two elements must be established for the mental requirement for a finding of fraud: First, subjective knowledge of the prohibited act, and second, the subjective knowledge that the prohibited act could have as a consequence the deprivation of another. The two elements together are described in Théroux as the “subjective awareness that one was undertaking a prohibited act (the deceit, falsehood or some other dishonest act) which could cause deprivation in the sense of depriving another of property or putting that property at risk” (Théroux at 19).
[1030] The mental element for fraud under subsection 126.1(b) of the Securities Act still requires consideration of the subjective knowledge of the respondent. In Anderson, the British Columbia Court of Appeal rejected the argument that the substantially identical fraud provision in the province established an objective standard:
…The section does not offer a definition of fraud. It creates a statutory prohibition which may extend to persons who ought to be aware of the fraud even though they may not be participants in it, but it does not dispense with the
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requirement that there must be a fraud involved in the transaction, which requires a guilty state of mind as well as an act.
(Anderson at para 24)
[1031] The respondent need not have intended the consequences, nor are beliefs regarding the morality of the course of conduct relevant to the issue (Théroux at
[1032] Proving subjective awareness does not require the trier of fact be provided with a mental snapshot proving exactly what was in the respondent’s mind at the time the dishonest act was committed (Théroux at 21). Inference of subjective knowledge of the risk can be drawn from the facts as the respondent believed them to be (Théroux at 21) and subjective awareness can be inferred from the act itself (Théroux at 18).
2.The Standard of Proof
[1033] The standard of proof in proceedings before this tribunal is the civil standard of proof on a balance of probabilities. The Commission has consistently applied this standard, following the direction of the Supreme Court in F (H) v McDougall:
…it is time to say, once and for all in Canada, there is only one civil standard of proof at common law and that is proof on a balance of probabilities. Of course, context is all important and a judge should not be unmindful, where appropriate, of inherent improbabilities or the seriousness of the allegations or consequences. However, these considerations do not change the standard of proof.
(F (H) McDougall, 2008 SCC 53 at para 40)
[1034] Chan submits Staff’s case has not met the high standard of proof required for securities fraud. The standard of proof for fraud under s. 126.1(b) is the same for any other allegation of a breach of Ontario securities law: proof on a balance of probabilities.
[1035] Fraud is a very serious allegation. However, the seriousness of the allegation does not elevate the standard of proof. The question we must ask ourselves is whether, based on the evidence before us, it is more likely than not that the elements of fraud have been made out (F (H) McDougall at para 44).
3.Was the Alleged Standing Timber Fraud a Fraud on Investors?
[1036] We now consider whether each of Chan, Ip, Hung, Ho, Yeung and Sino
[1037] For the reasons that follow, we find that each of
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(a)The Respondents’ Roles in the Three Elements of the Standing
Timber Fraud
i.Undisclosed Control of Purportedly Arm’s Length Companies
[1038]
[1039] Chan, Ip, Hung and Ho actively hid information from
[1040] We find Chan knew
[1041] As Chairman and CEO of
[1042] Ip was responsible for all purchases in the BVI Model and oversaw elements of the business and transactions of companies that were controlled by, or related to,
[1043] Ip knew
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controlled or related companies – specifically, Kun’an, Taiyuan, Juncheng, Meishan, Shun’xuan and Yuangao – to perpetrate the Standing Timber Fraud. Ip signed purchase contracts on behalf of
[1044] As a senior officer of
[1045] Hung also was involved in, and had knowledge of,
[1046] Like Ip, Ho was involved in
[1047] Ho knew these companies were not independent of
[1048] Yeung played an integral role in
[1049] Yeung was
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Unlike Hung and Ho, he was not responsible for the financial aspects of Sino - Forest’s business and was not on the Disclosure Committee, and he had no financial background. Notwithstanding his involvement with Yuda Wood and Kun’an, it is not clear he knew Investors’ economic interests were put at risk by his conduct.
ii.The Deceitful Documentation Process
[1050]
[1051] In addition, the AR/AP
[1052] This Deceitful Documentation Process calls into question the assets and revenue
[1053] Chan, Ip and Hung were key architects of the Deceitful Documentation Process, which put Investors’ pecuniary interests at risk.
[1054] We found Chan actively participated in
[1055] Chan instructed Hung to pay suppliers before written contracts were prepared. He also instructed that plantation locations be kept secret in documentation, which resulted in purchase documentation in the BVI Model which was not sufficient to identify plantation locations. Chan signed sales contracts in the quarter following when they were recorded. Notwithstanding this, he allowed
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misleading information regarding
[1056] Chan knew
[1057] Ip was intimately involved in the Deceitful Documentation Process through his role in overseeing all purchases in the BVI Model. He approved all purchases and by Q2 2010 signed all purchase contracts. He was responsible for the Sino
[1058] Ip knew
[1059] Hung was the central figure in, and controlled, the Deceitful Documentation Process. He knew payments were made before contracts were prepared.
[1060] Hung signed
[1061] We reject Hung’s submission he did not understand Sino
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misleading. Hung knew the disclosure he certified as not misleading, was in fact misleading. Hung was a member of the Disclosure Committee since 2005. Its role was to ensure shareholders and the investing public were informed of Sino - Forest’s operations through full, true and plain dis closure of all material information in a timely manner.
[1062] Hung knew the BVI Model assets and revenue recorded in Sino
[1063] As noted elsewhere in these Reasons, we find Ho was not involved in a substantial way in the Deceitful Documentation Process.
iii. Undisclosed Internal Control Weaknesses or Failures
[1064]
[1065] The persistence of this unremediated internal control weakness facilitated the continuation of the Deceitful Documentation Process. Chan was uniquely positioned to remediate this internal control weakness. He did not.
[1066] We find Chan’s motivation in perpetuating the lack of segregation of duties was to maintain the Standing Timber Fraud. No other explanation flows from the evidence. As stated elsewhere in these Reasons, his explanation for why the weakness could not be remediated was simply untrue. There was no reason Hung’s role in overseeing the purchase and sales documentation and settlements in the BVI Model could not have been broken up and redistributed. We find Chan and Hung knew Hung’s role in overseeing the Deceitful Documentation Process was a key element of the Standing Timber Fraud.
iv.The Standing Timber Fraud was an Elaborate Scheme to Defraud Investors
[1067] We find the Standing Timber Fraud was an elaborate scheme to defraud Investors. It consisted of three core elements:
a.undisclosed control of purportedly arm’s length parties,
b.a Deceitful Documentation Process, and
c.undisclosed internal control weaknesses.
[1068] All three elements combined created the necessary infrastructure for the continued perpetration of the fraud in this case over the Material Time. Transactions with purportedly independent third parties that were actually controlled by or related to
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[1069]
[1070] The cumulative impact of the Standing Timber Fraud on Investors resulted in the loss of approximately CA $6 billion in market capitalization. Pursuant to a restructuring plan approved by the creditors of
(b)No Bona Fide Business Purpose
[1071] Ip, Hung, Ho and Yeung submit fraud cannot be found when the impugned conduct was carried out for bona fide business purposes. They cite the British Columbia Court of Appeal’s decision in Anderson, in which the Court overturned a finding of fraud on the basis the loans in dispute were carried out for a bona fide business purpose. They rely on the Court’s finding in Anderson that there was no evidence the respondents in that case knowingly failed to disclose information about
[1072] The Supreme Court has distinguished between unwise business practices and fraud:
…The distinction is the same as the distinction between a corporate officer using corporate funds for unwise business purposes, which is not fraud, and the diversion of corporate funds to private purposes having nothing to do with business. Unwise business practices are not fraudulent. The wrongful use of money in which others have a pecuniary interest for purposes that have nothing to do with business, may however, in appropriate circumstances, constitute fraud.
(R v Zlatic, [1993] SCJ No. 43 at para 24)
[1073] As discussed throughout these Reasons, we find the actions of the Respondents in the three elements of the standing timber fraud and the four examples of fraud were not carried out for bona fide business purposes. In Anderson, the Court stated:
There is no evidence that the appellants made any intentionally false statements to investors, and the allegation rests on concealment of information from investors that was material to the risk to their investments. While as R. v. Cuerrier, 1998 * 796
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(SCC), [1998] 2 S.C.R. 371, 162 D.L.R. (4th) 513, 127
C.C.C.(3d) 1 confirms, dishonest concealment of material facts can amount to fraud, proof of the accused's subjective knowledge of those facts is still required.
(Anderson at 30)
This is not similar to the circumstances in Anderson. Chan, Ip, Ho and Hung dishonestly concealed key facts relating to
(c)The Respondents’ Roles in the Four Frauds
[1074] The Four Frauds provide illustrative examples of the Respondents’ involvement in the Standing Timber Fraud.
[1075] The Dacheng Transactions provide an example of Ip and Ho’s involvement in the perpetration of the Standing Timber Fraud. In the Dacheng Transactions, we found
[1076] Ip was clearly aware of the duplicate assets in Dacheng by Q1 2009 but did not try to correct any errors or misconceptions. Rather, Ip, along with Ho, participated in orchestrating a fraud that deceived Investors about the value of assets held by
[1077] Ho similarly knew the Dacheng Transactions involved the duplication of assets in the BVI and WFOE Models. Like Ip, he was involved in these transactions from the beginning. Although he was
information. Ho knew, in doing so, he put Investors’ pecuniary interests at risk.
[1078] The 450 Transactions provide an example of Chan, Ip, Ho and Yeung’s involvement in the Standing Timber Fraud. We found purchase and sales contracts in the 450 Transactions which were purportedly executed in the same quarter were
[1079] Chan was closely involved in the 450 Transactions. He determined the profit margin, had ultimate oversight, and his approval was key in fabricating a
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significant transaction in Q4 2009. We found Chan would have discussed the 450 Transactions at weekly Monday Morning Meetings with Ip, Ho and others. Chan was aware of Ip and Ho’s deception of Horsley, the CFO, about the reason accounts receivable were outstanding for the 450 Transactions in the Rainy Season Memo. He allowed this deception to continue and did nothing to correct it. Chan was aware of the circular flow of funds in the 450 Transactions, which we found were for no legitimate business purpose. He approved a loan, the proceeds of which were used to fund the fraudulent circular flow of funds.
[1080] Chan knew the circular flow of funds resulted in transactions which had no economic substance, resulting in
[1081] Ip was also closely involved in the fraud perpetrated through the 450 Transactions. He was one of the key
[1082] Ip knew his role in creating the 450 Transactions and their circular flow of funds resulted in sales transactions which had no economic substance. He knew the resulting overstatement of revenue on
[1083] Ho was also significantly involved in
[1084] As has been stated above, Ho knew the importance of ensuring accurate disclosure, and the impact of inaccurate disclosure, as resulted from the 450 Transactions, on Investors’ pecuniary interests.
[1085] Along with Ip and Ho, Yeung was closely involved in
[1086] The Gengma #1 Transactions provide an example of Chan’s and Ip’s involvement in the perpetration of the Standing Timber Fraud. In the Gengma #1 Transactions, we found
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amount of the sales contracts. The overstatement of assets and revenue clearly put the pecuniary interests of Investors at risk.
[1087] Chan’s involvement is clear. Despite the fact he did not sign purchase contracts in the regular course of business, he signed Gengma Contract Set 2, the Rescission Contract to Gengma Contract Set 2 (Gengma Contract Set 3), and both contracts in Gengma Contract Set 4. He was involved in negotiations from the beginning. He was consulted regarding the plan to insert Yuda Wood, a company he knew
[1088] Chan therefore knew the BVI purchase and sales contracts he signed in the Gengma #1 Transactions were fictitious. Chan knew entering into fictitious purchase and sale contracts would have the effect of overstating assets and revenue, which would put Investors’ pecuniary interests at risk.
[1089] Ip’s involvement in the Gengma #1 Transactions was also clear. Emails regarding the Gengma #1 Transactions were sent to him or from him, he was intimately aware of the details of the transactions, reviewed all the contracts and coordinated payments. Notwithstanding his involvement in the true contracts from the beginning, Ip continued to be involved in the evolution of the fraudulent purchase contracts.
[1090] Ip knew that his role in structuring the Gengma #1 Transactions resulted in fictitious purchases and sales in the BVI Model. He knew the resulting overstatement of assets and revenue would have put Investors’ pecuniary interests at risk.
[1091] The Gengma #2 Transactions provide an example of Chan’s, Ip’s and Ho’s involvement in the perpetration of the Standing Timber Fraud. In the Gengma #2 Transactions, we found
[1092] As in the Gengma #1 Transactions, Chan signed BVI purchase contracts in the Gengma #2 Transactions, although he did not normally do so in the ordinary course of business. He signed sales contracts in the BVI and WFOE Models that we found were fictitious. He was also aware of the fraudulent circular flow of funds involved in the settlement of the receivable from the sale to Kun’an, which had no legitimate business purpose. Chan was very involved in the
[1093] Our findings with respect to the Gengma #1 Transactions apply equally to Chan’s knowledge about the implications of his conduct in the fraudulent Gengma #2 Transactions. According to Ip, there was no distinction between the two Gengma plantations at the time the transactions were taking place, and Chan was involved in both from the beginning. He knew his signing of fictitious purchase and sales contracts would have the effect of overstating assets and revenue on the financial statements and that this would put the pecuniary interests of Investors at risk.
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[1094] Ip’s involvement in the Gengma #2 Transactions was also clear. As with Gengma #1, Ip sent or received numerous emails regarding these transactions. He was intimately aware of the details, reviewed contracts, and coordinated payments.
[1095] Ip knew that the Gengma #2 Transactions were fictitious. He knew the resulting
overstatement of assets and revenue would have put Investors’ pecuniary interests at risk.
[1096] While his role was secondary to that of Chan and Ip, Ho was also involved in the Gengma #2 Transactions. He was closely involved in the payments and settlement process for the Gengma #2 Transactions, which included the circular flow of funds to settle the outstanding receivables from Kun’an, and which h ad no economic substance. He approved payments from Yuda Wood’s bank accounts controlled by
[1097] As
(d)Conclusions on the Standing Timber Frauds
i.Chan
[1098] We find Chan engaged in all three elements of the standing timber fraud during the Material Time which ultimately caused the assets and revenue derived from the purchase and sale of standing timber to be fraudulently overstated, putting the pecuniary interests of Investors at risk. Chan’s involvement is exemplified by his roles in the 450 Transactions, Gengma #1 Transactions and the Gengma #2 Transactions.
[1099] We find Chan engaged in deceitful and dishonest conduct related to Sino
ii.Ip
[1100] We find Ip was intimately involved in virtually every aspect of the Standing Timber Fraud during the Material Time. He knowingly deceived Investors through his involvement in
[1101] Ip’s oversight of the execution of all Four Frauds demonstrates the oversight he had of
[1102] We find Ip engaged in deceitful and dishonest conduct related to Sino
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iii.Hung
[1103] Hung was the central figure in and controlled the Deceitful Documentation Process which put Investors’ pecuniary interests at risk. He knew his role in the internal control weakness of concentration of duties was a key element of the standing timber fraud, and went along with Chan’s failure to remediate this internal control weakness.
[1104] We find Hung engaged in deceitful and dishonest conduct related to Sino
iv.Ho
[1105] Ho knowingly deceived Investors through his involvement with Sino
[1106] Although Ho was not an architect of the Deceitful Documentation Process in the way that Chan, Ip and Hung were, his involvement in three of the Four Frauds demonstrates he nonetheless played a role in the Standing Timber Fraud.
[1107] We find Ho engaged in deceitful and dishonest conduct related to Sino
v.Yeung
[1108] Although Yeung was involved in
vi.
[1109] To establish the requisite intent of a corporation, the Commission has found it is sufficient to show its directing mind(s) knew or reasonably ought to have known the acts of the corporation perpetrated a fraud
[1110] Chan was the directing mind of
[1111] Chan, as the directing mind of
[1112] We find
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4.Did Chan, Ip, Hung, Ho or Yeung authorize, permit or acquiesce in Sino-
Forest’s conduct contrary to subsection 126.1(b) of the Securities Act?
[1113] Staff alleges, given their positions as officers of Sino
[1114] Section 129.2 of the Securities Act states:
129.2Directors and officers – For the purposes of this Act, if a company or a person other than an individual has not complied with Ontario securities law, a director or officer of the company or person who authorized, permitted or acquiesced in the
[1115] We found Chan, Ip, Hung and Ho directly breached subsection 126.1(b) of the Securities Act as a result of their conduct in the standing timber fraud. As a result, we find it unnecessary to consider whether they should be deemed to have not complied with Ontario securities law by authorizing, permitting or acquiescing in
[1116] We did not, however, find that Yeung’s conduct was contrary to Ontario securities law. Yeung submits he was never an officer or employee of Sino - Forest, but was an officer of
[1117] We agree that Yeung was not an officer of
VII. ANALYSIS OF THE STANDING TIMBER MATERIALLY MISLEADING STATEMENTS ALLEGATIONS
A.Materially Misleading Statements
[1118] Staff alleges
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were necessary to make the statements not misleading contrary to subsection 122(1)(b) of the Securities Act and the public interest.
[1119] Staff also alleges Chan participated in the conduct that made these statements materially misleading and the conduct of Chan was contrary to subsection 122(1)(b) of the Securities Act, and contrary to the public interest.
[1120] Staff’s allegations relate to statements regarding (i) the ownership of assets and revenue recognition of
a.2006 to 2010 AIFs;
b.2006 to 2010 MD&As;
c.2006 to 2010 audited annual Financial Statements;
d.June 5, 2007 Short Form Prospectus (and the continuous disclosure documents incorporated by reference); and
e.December 10, 2009 Short Form Prospectus (and the continuous disclosure documents incorporated by reference).
(the Impugned Disclosure Documents)
[1121] Further, Staff alleges, pursuant to subsection 122(3) of the Securities Act, in their roles as officers of
1.The Law
[1122] Disclosure has been repeatedly identified by the Commission as the cornerstone of securities regulation. This was affirmed by the Divisional Court in Cornish v Ontario (Securities Commission), 2013 ONSC 1310 (Div Ct) (Cornish), in which the Court states: “The importance of public disclosure in securities markets cannot be underestimated. Disclosure is fundamental to the fairness of Ontario’s capital markets, and to the protective mandate of the Act.” (at para 38).
[1123] The Commission has emphasized the importance of accurate and complete disclosure of information in public disclosure documents to provide all persons investing in securities equal access to information that may affect their investment decisions. The Court in Cornish refers to the following decision by the Commission (at para. 38):
…All persons investing in securities should have equal access to information that may affect their investment decisions. The Act’s focus on public disclosure of material facts in order to achieve market integrity would be
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meaningless without a requirement that such disclosure be accurate and complete and accessible to investors.
(Re Philip Services Corp (2006), 29 OSCB 3941 at para 7)
[1124] The Commission has found disclosure serves to level the playing field amongst investors (Re AiT Advanced Technologies Corp (2008), 31 OSCB 712 at para 198), and allows investors to assess the risks involved in making an investment (Re Rex Diamond Mining Corp (2008), 31 OSCB 8337 at para 262).
[1125] Moreover, requiring accurate public disclosure enhances the accountability of corporate management to their corporation’s shareholders and the investing public.
[1126] In order to achieve investor protection through disclosure, the onus must rest on the company to provide information to the investing public that will enable them to assess the risks involved in making an investment (Re Rex Diamond Mining Corp (2008), 31 OSCB 8337 at paras
[1127] Subsection 122(1)(b) of the Securities Act provides a statutory requirement that disclosure not be misleading or untrue in any material respect. It states:
122.(1) Offences, general — Every person or company
that,
…
(b)makes a statement in any application, release, report, preliminary prospectus, prospectus, return, financial statement, information circular,
…
is guilty of an offence…
[1128] The term “in a material respect” is not defined in the Securities Act. However, in
the past the Commission has applied the reasonable investor standard for analyses of materiality under subsection 122(1)(b) of the Securities Act (Biovail, Re Factorcorp Inc (2013), 36 OSCB 2059). The Commission articulated the reasonable investor standard in Biovail at para 74:
…we will treat a statement as material if there is substantial likelihood that a reasonable investor would consider the statement to be important in making an investment decision. By an investment decision, we mean a decision to buy, sell or hold shares. That will require us to determine whether the statement or omission would have assumed actual significance to a reasonable investor. …
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[1129] In determining to apply the reasonable investor standard, the Commission in Biovail cited Re Donnini, where the Commission stated the following in considering materiality in the context of the term “material fact”:
…materiality is a
Counsel for staff referred us to the materiality standard used in the United States and quoted by the United States Supreme Court in TSC Industries, Inc. [citation deleted]:
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote…. It
does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.
(Re Donnini (2002), 25 O.S.C.B. 6225 (Donnini) at paras 135 and 136)
The Commission in Biovail noted that the reasonable investor standard for materiality articulated in the U.S. case of TSC Industries Inc. has been applied by the Commission in a number of decisions (at para 69).
[1130] We agree the reasonable investor standard is the appropriate standard to apply in our assessments of the materiality of statements in the Impugned Disclosure Documents. As has been stated in previous cases, we presume the legislature intended the words “in a material respect” to have their ordinary dictionary meaning, which would imply a lower threshold of materiality than for the terms “material fact” and “material change”, which are defined in the Securities Act (See Biovail at paras
[1131] The Commission has also provided general guidance about making materiality assessments. In the frequently cited Re YBM Magnex International Corp (2003),
26 OSCB 5285 (YBM Magnex), the Commission stated:
Materiality is a question of mixed law and fact, i.e. do the facts satisfy the legal test? Some facts are material on their own. When one or more facts do not appear to be material on their own, materiality must also be considered in light of all the facts available to the persons responsible for the assessment.
(YBM Magnex at para 94)
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[1132] In Biovail, the Commission expanded upon its statement above in YBM Magnex and found:
…the assessment of the materiality of a statement is a question of mixed fact and law that requires a contextual determination that takes into account all of the circumstances including the size and nature of the issuer and its business, the nature of the statement and the specific circumstances in which the statement was made. …
(Biovail at para 69)
[1133] The Commission further stated in Biovail that the reasonable investor standard “is an objective test and applying it is ultimately a matter of judgment to be exercised in light of all of the relevant circumstances ” (at para 80). The assessment of the materiality of a statement is a question of mixed fact and law that falls squarely within the Commission’s specialized expertise and does not require the opinion or evidence of expert witnesses or of investors (Biovail at para 80, citing Donnini at para 123). Such opinion or evidence may be relevant or useful but is not necessary (Biovail at para 80).
[1134] As the Commission stated in Biovail, common sense judgement must be applied in making materiality determinations (at para 81). We agree with the statement in YBM Magnex, that “[a]ssessments of materiality are not to be judged against the standard of perfection or with the benefit of hindsight. It is not a science and involves the exercise of judgement and common sense” (at para 90).
[1135] We analyze the conduct of
2.Materially misleading statements allegations are not duplicative of the fraud allegations
[1136] Chan submits the materially misleading statements allegations are duplicative of the standing timber fraud allegations. Chan failed to provide the Panel with any case law supporting his position.
[1137] We reject this submission. We do not, in this case, see the allegations as duplicative. Subsections 126.1(b) and 122(1)(b) of the Securities Act impose different requirements on participants in the capital markets; the first prohibits perpetrations of fraud relating to securities, and the second requires that statements made in documents required to be filed or furnished under Ontario securities law be true and not misleading. Although a misleading disclosure record may be used as a means to cover up a fraud, the actions of the Respondents with respect to
3.Who made the statements in the Impugned Disclosure Documents?
[1138] We first consider which party or parties made the statements at issue in the Impugned Disclosure Documents. Staff submits
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[1139] In Re Norshield Asset Management (Canada) Ltd (2010), 33 OSCB 2139 (Norshield), allegations were made against a company that marketed the securities at issue to investors under subsection 122(1)(b) of the Securities Act in respect of statements made in an offering memorandum issued by an affiliate company. While the Commission held the offering memorandum was materially misleading, it found liability under subsection 122(1)(b) attaches to the person or company that made the statements, and in that case, the statements were made by another entity not named as a respondent. The panel stated:
Liability under s. 122(1)(b) attaches to persons or companies that make misleading or untrue statements or fail to state a fact that is required to be stated so as to not make a statement misleading. However, Staff’s allegation was against Olympus United Group only. Statements in the offering memorandum were made by Olympus United Funds, and not by Olympus United Group.
Although Olympus United Group was involved in the marketing of securities for which it is alleged that the offering memorandum was misleading, s. 122(1)(b) does not apply to the allegation of misconduct by Olympus United Group in this situation.
…
As the issuer of the offering memorandum, Olympus United Funds would be the entity to which liability would attach under s. 122(1)(b). However, Olympus United Funds is not a Respondent in this matter.
Staff’s allegation regarding the offering memorandum is levelled at Olympus United Group, but the offering memorandum is that of Olympus United Funds. In the circumstances, Staff’s allegation against Olympus United Group is not made out.
(Norshield at paras 294 to 298).
[1140] We find the allegations against Chan in respect of a breach of subsection 122(1)(b) analogous to those against Olympus United Group in Norshield. The statements made in the Impugned Disclosure Documents subject to Staff’s allegations were made by
4.Materially Misleading Statements Regarding Ownership of Assets and Revenue Recognition
[1141] Staff alleges
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state a fact that was required to be stated or that was necessary to make the statements not misleading.
[1142] Staff further alleges Chan, Ip, Hung and Ho authorized, permitted or acquiesced in that course of conduct, in violation of Ontario securities law.
[1143] Staff submits
a.
b.the purchase contracts did not afford
c.the purchase contracts failed to identify the specific assets being acquired such that the standing timber could be identified and independently verified.
[1144] Staff submits
[1145] Finally, Staff submits
[1146] It is Staff’s position the consequence of the above conduct is the assets and revenue recorded by
(a)Analysis of Materially Misleading Statements Regarding Ownership of Assets
[1147]
[1148]
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purchased plantations”.
For our purchased plantations, we have applied for the corresponding Plantation Rights Certificates with the relevant local forestry bureaus. As the relevant locations where we purchased our purchased plantations have not fully implemented the new form of Plantation Rights Certificate, we are not able to obtain all the corresponding Plantation Rights Certificates for our purchased plantations. Instead, we obtained confirmation of our ownership of our purchased plantations from the relevant forestry bureaus. Based on the relevant purchase contracts and the approvals issued by the relevant forestry bureaus, we legally own our purchased plantations.
[emphasis added]
[1149] There are three false statements in this disclosure regarding Sino
[1150] In its discussion of the issuance of a new form of PRCs, Sino
We have obtained the plantation rights certificates or requisite approvals for acquiring the relevant plantation rights for most of the purchased plantations and planted plantations currently under our management, and we are in the process of applying for the plantation rights certificates for those plantations for which we have not obtained such certificates.
[emphasis added]
[1151] Again, there are three false statements in the above quotation from the 2010 AIF. First, the requisite approvals refer to Forestry Bureau Confirmations; they are neither required documentation nor approvals which can be used as proof of
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[1152] With respect to the disclosure regarding the risks associated with the new form of PRCs,
We can give no assurance when the official Plantation
Rights Certificates will be issued by the relevant local PRC governments to all the purchased plantations and planted plantations acquired and under our management and cultivation. Until official new form Plantation Rights Certificates are issued, there can be no assurance that our rights to our tree plantations will not be subject to dispute or challenge. If such certificates are not issued, or are not issued in a timely manner, or if our rights to any of our tree plantation lands are subject to dispute or challenge, our business, financial condition and results of operations could be materially adversely affected. [emphasis added]
[1153] Again, the statements with respect to the issuance of new form PRCs are false. There is no evidence any form of PRC would be issued for standing timber in the BVI Model. Moreover, while
[1154] Chan submits statements in the Impugned Disclosure Documents about Sino - Forest’s proof of ownership of its standing timber assets were not materially misleading or untrue at the time and in light of the circumstances under which they were made.
[1155] Chan submits
[1156] He submits investors were further cautioned in the 2006 AIF that new PRCs had not been issued in a timely matter. The risks were set out in the “Risk Factors” section (as quoted above in paragraph 0).
[1157] Similar disclosure, Chan submits, was included in Sino
1 7 The 79% of timber holdings in 2010 includes
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disclosed the same risks as were disclosed in
[1158] In addition, Chan relies on Mr. Hyde’s testimony that Sino
[1159] Chan and Ip knew
[1160] Chan submits a reasonable investor, having read
[1161] Chan submits whether or not
Well, if you want to get really technical, it’s my understanding that there were also purchased tree plantations in the WFOEs. So I think what’s really significant about this is, from an investor’s perspective, is the investor given the impression that
…
[Y]ou need to read the disclosure as a whole, and it’s my submission that no reasonable investor could be misled by this disclosure which clearly states that there could be a
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material adverse impact on their entire business, on their assets. There is no guarantee they could enforce them. I don’t think any investor was taken down the garden path on the basis of the passages that I’ve read to you.
…
Just because they couldn’t get the PRCs doesn’t mean that they couldn’t apply for the PRCs, and I’m not
(Hearing Transcript, April 27, 2016 at
We disagree with Chan’s counsel that risk disclosure should rest on technicalities or on investors’ impressions. Rather, investors should be provided with full, true and plain disclosure of material risks. They should not have to hunt for clues. Misleading statements regarding
[1162] Chan relies on the testimony of Dr. Peerenboom that China is a civil law system and the courts therefore defer to administrative agencies if there is ambiguity in the law. In Chan’s submission, the courts would therefore look to the Forestry Bureau Confirmations and confer with the Forestry Bureau if Sino
[1163] Chan submits
[1164] In addition,
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[1165] Furthermore, Forestry Bureau Confirmations were only one of three attachments which were to accompany each BVI purchase contract. Also noted as attachments were Villagers’ Resolutions and Survey Reports. Both Ms. Man and Xu Ni were not aware of any Villagers’ Resolution ever being attached to a BVI purchase contract. The Impugned Disclosure Documents made no disclosure whatsoever that key attachments were missing from every BVI purchase contract, further weakening
[1166]
[1167] As stated elsewhere in these Reasons, unlike in the WFOE Model where specific locations were identified, BVI purchase contracts and their supporting documents did not sufficiently identify the assets
[1168] The Respondents submit the backdating of purchase contracts was simply a more efficient way of getting paperwork done. As discussed elsewhere in these Reasons, whatever oral discussions may have occurred between
[1169] We find
(b)Analysis of Materially Misleading Statements Regarding Revenue Recognition
[1170] Throughout the Material Time,
[1171] Chan submits
Impugned Disclosure Documents was not misleading. He points to the amendment
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Revenue from standing timber is recognized when the contract for sale is entered into which established a fixed or determinable sales price with the customer whereby ultimate collection of the revenue is reasonably assured.
[1172] We disagree with Chan this is not misleading. Evidence presented to the Panel indicated details of sales contracts changed, such that supplier, volume and/or location of standing timber subject to the agreements changed after the quarter in which the transaction was recorded and related revenue was recognized. Furthermore, there was never any disclosure regarding the “daisy chain” of cash in the AR/AP
[1173] Chan, Ho, Hung, and Ip submit the evidence establishes that Sino
[1174] In the “Critical Accounting Estimates” section of the 2006 MD&A under the heading “Revenue Recognition”,
To date substantially all of the Company’s standing timber revenue has been recognized when the Company and the buyer enter into a binding sales agreement.
[1175] As noted elsewhere in these Reasons, the handshake date was not necessarily the date of a binding sales agreement since important details of the transaction often changed in the following quarters in the sales transactions we reviewed. Further, the Respondents’ own expert, Mr. Liu, testified a contract is effective after the companies have applied their seals; in other words, when they have signed the contracts, not at the date of the oral agreement.
[1176] In the “Aging of Accounts Receivable” section of the 2006 MD&A under the heading “Plantation Fibre Operations”,
[1177] In its 2008 MD&A
[1178] This is clearly a false statement since there is no signed contract in the quarter when revenue is recognized.
[1179] Further, the Panel heard expert testimony that sales contracts contained conditions (for example, assisting the buyer to obtain harvesting permits) which, if not fulfilled, would have the effect of rescinding the contract, the effect of which would be the parties would return to their original positions, as if the contract between them never existed.
[1180] Chan submits Staff’s argument that
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incorrect financial information to their shareholders. The Panel rejects this submission. In reaching our decision, the Panel considered the form and substance of the disclosure. The disclosure did not reflect the economic or legal reality of the agreements. Our finding is specific to these circumstances.
[1181] We also note that, if, as the Respondents submit, handshake dates and oral agreements were key to recognizing a transaction, the failure to disclose their existence would be the basis for the Panel to find the disclosure to be misleading through omission.
[1182] We therefore reject the Respondents’ argument that
(c)Did
[1183] In finding a reasonable investor would have considered the statements relating to the ownership of assets and revenue recognition contained in the Impugned Disclosure Documents to be important when making an investment decision whether to buy, sell or hold shares of
[1184] The BVI Model accounted for approximately 70% of Sino
79% in 2010. These salient facts were not disclosed. As a result, the misleading disclosure regarding the ownership of assets and revenue recognition related to the majority of the company’s business and was material. A reasonable investor would consider this information important in making a decision to buy, sell or hold
[1185] As discussed above, we find
(d)Did Chan, Ip, Hung or Ho Authorize, Permit or Acquiesce in the Making of
Ownership of Assets and Revenue Recognition?
[1186] Subsection 122(3) of the Securities Act states every director or officer of a company who authorizes, permits or acquiesces in the company’s breach of subsection 122(1) can also be found liable under Ontario securities law.
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[1187] Chan, Ip, Ho and Hung submit they did not authorize, permit or acquiesce in
…that even the ordinary meaning of ‘acquiescence” upon which JLL relies carries with it the correlative that the party has at least some element of control over the act in question in the sense of being able to oppose successfully the occurrence of the legal consequence that flows from ‘acquiescence.’
(at para 49)
Although that case considered the word in the context of the Canada Business Corporations Act, the Respondents submit it is applicable to the Securities Act. As we discuss below, we find Chan, Ip and Hung had control over processes within
[1188] Ip, Ho and Hung further rely on the R v A & A Foods Ltd., [1997] BCJ No 2720 (A & A Foods), in which the British Columbia Supreme Court analysed similar language within the Canada Agricultural Product Act, and stated:
The terms used in the section, i.e. any officer, director or agent of the corporation ‘who directed, authorized, assented to or acquiesced or participated in the commission of the offence is a party…’ are far reaching. The clear purpose of these provisions is to bring pressure to bear on those persons who are the directing or operating mind of the company, or its delegated agent. They control the activities of the company, and have the power and authority to see that reasonable steps, usually the placement of an effective system to prevent the commission of the offense, are taken.
(at para 20)
[1189] As we have explained elsewhere in these Reasons, Chan, Ip and Hung controlled the activities of the company addressed in
[1190] Ip, Ho and Hung submit it is not reasonable for the Panel to conclude any of them permitted or authorized the CFO or the Directors to make the statements at issue. Further, as A & A Foods and Patheon state, the concept of acquiescing entails a power to stop the conduct at issue. They submit it is not reasonable for the Panel to find they had the power to stop their superiors from making the disclosure they did.
[1191] Ip, Ho and Hung imply in their submissions the Board of Directors knew the Impugned Disclosure Documents were misleading but still approved the financial
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statements and corresponding disclosure. We reject this submission. As discussed elsewhere in these Reasons, the Directors (other than Chan) did not know the scope of the Deceitful Documentation Process. It was in Ip’s and Hung’s power to disclose this; they did not. Passive consent without protest is all that is required (Coventree at para 767). The Panel finds the actions of Ip and Hung go far beyond that threshold. We reject the submissions of Ip and Hung they did not have enough power or authority to authorize, permit or acquiesce.
[1192] Chan submits some form of knowledge or intention is required to find a person authorized, permitted or acquiesced in a breach of subsection 122(1)(b). He relies on Re Momentas Corp (2006), 29 OSCB 7408 (at para 1180) (Momentas) where the Commission held “‘[a]cquiesce’ means to agree or consent quietly without protest. ‘Permit’ means to allow, consent, tolerate, give permission, particularly in writing. ‘Authorize’ means to give official approval or permission, to give power or authority or to give justification”. These definitions have been applied in other cases as well (R v Armaugh Corp, [1993] OJ No 4360 at para 20 and Coventree at para 766).
[1193] Finally, Chan submits he certified the Impugned Disclosure Documents but he did not authorize, permit or acquiesce in the making of materially misleading statements.
[1194] While the Commission recognized in Momentas some form of knowledge or intention is required under subsection 122(3) of the Act, it also stated the threshold for liability is low:
Although these terms have been interpreted to include some form of knowledge or intention, the threshold for liability under section 122 and 129.2 is a low one, as merely acquiescing [in] the conduct or activity in question will satisfy the requirement of liability.
(Momentas at para 1180)
[1195] We found in our analysis of the Deceitful Documentation Process that Chan, Ip and Hung controlled the BVI Model, designed the actual documentation process and were aware this process was deceitful. The process descriptions, on which the auditors relied, failed to accurately describe the actual processes for purchases, sale and
[1196] We find Chan, as CEO, authorized and permitted the making of materially misleading statements by
[1197] Ip and Hung, by virtue of their control of the BVI Model, their design of the actual documentation process and their awareness this process was deceitful, knew the financial statement disclosure was misleading. Ip was in charge of all
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purchases of standing timber in the BVI Model and, as a senior officer of Sino- Forest, could have changed the process. Hung was a senior officer of Sino
[1198] As we find elsewhere in these Reasons, Ho did not have a significant role in the process underlying
5.Effect of the Four Frauds on the Reported Revenue of
[1199] Staff submits the overstatement of revenue arising from the four examples of fraud made
[1200] We have found the Dacheng Transactions resulted in Sino
[1201] Staff alleges these revenue overstatements resulted in disclosure by
(a)The Misleading Statements
[1202] In our analysis of the Dacheng Transactions, we found the purported sale of the duplicate assets through the BVI Model was fictitious and resulted in the overstatement of
[1203] With respect to the 450 Transactions, we found the sales contracts between
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resulted in
[1204] In our analysis of the Gengma #1 Transactions, we found the Gengma #1 Plantation was never sold and therefore the fictitious sale of standing timber by
[1205] In our analysis of the Gengma #2 Transactions, we found the recorded sales of the Gengma #2 Plantation were fictitious and
(b)Did
[1206] We find a reasonable investor would have considered the overstatements in revenue arising from the Four Frauds, described above, made in the Impugned Disclosure Documents to be important when making an investment decision whether to buy, sell or hold securities of
[1207] These overstatements would also have cast doubt over the accuracy and integrity of all
[1208] We find
[1209] As a result we find
(c)Did Chan, Ip or Ho Authorize, Permit or Acquiesce in Sino-
Forest’s Making of Materially Misleading Statements with respect to the Four Frauds?
[1210] Staff alleges Chan authorized, permitted or acquiesced in Sino
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Frauds. We have previously found Chan’s involvement in the Gengma #1 and Gengma #2 Transactions was clear. Chan had ultimate oversight over the fraud relating to the 450 Transactions. As a result, we find Chan authorized and permitted
[1211] Staff also alleges Ip authorized, permitted or acquiesced in Sino
[1212] Staff alleges Ho authorized, permitted or acquiesced in
[1213] In its closing submissions, Staff submits Yeung authorized, permitted or acquiesced in
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6.Materially Misleading Statements Regarding Internal Controls
[1214] Staff alleges
[1215] The specific Impugned Disclosure Documents Staff submits contained misleading, untrue or incomplete disclosure relating to the material weaknesses in its internal controls are
[1216] Staff further alleges Chan and Hung authorized, permitted or acquiesced in that course of conduct.
[1217] Staff submits while
[1218] Staff submits
(a)The Misleading Statements
[1219] Chan submits
[1220] Chan submits the disclosure made by
[1221] Chan further submits a reasonable investor would understand from
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[1222] Hung submits it is unrealistic to expect he be the one to correct the control deficiency arising from the concentration of duties he had. He submits he was carrying out the duties asked of him by his superiors and it was not for him to unilaterally advise his superiors and the Board he would no longer be carrying out his job functions. Hung submits this was a decision to be made by his superiors and the Board.
(b)Did
[1223] We find a reasonable investor would have found
[1224] The disclosure relating to
[1225] Once again, the determination of whether a statement is material must take into consideration all the relevant facts. The BVI Model accounted for approximately 70% of
[1226] As a result, we find
(c)Did Chan or Hung Authorize, Permit or Acquiesce in Making Sino-
Forest’s Materially Misleading Statements relating to its disclosure in relation to internal controls?
[1227] We found in our analysis of
[1228] Hung was a member of the Disclosure Committee, which was formed to assist senior officers in fulfilling their responsibility for oversight of the completeness,
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accuracy and timeliness of the disclosures made by
B.Is a Due Diligence Defence available to the Respondents?
1.The Law
[1229] The Respondents submit the due diligence defence at subsection 122(2) of the Securities Act may be available. The provision states:
Defence – Without limiting the availability of other defences, no person or company is guilty of an offence under clause (1)(a) or (b) if the person or company did not know and in the exercise of reasonable diligence could not have known that the statement was misleading or untrue or that it omitted to state a fact that was required to be stated or that was necessary to make the statement not misleading in the light of circumstances in which it was made.
[1230] The parties agree the defence of due diligence at common law is available when an individual proves that he or she took all reasonable care or all reasonable steps to avoid the commission of the alleged offence:
[o]fences in which there is no necessity for the prosecution to prove the existence of mens rea; the doing of the prohibited act prima facie imports the offence, leaving it open to the accused to avoid liability by proving that he took all reasonable care. This involves consideration of what a reasonable man would have done in the circumstances. The defence will be available if the accused reasonably believed in a mistaken set of facts which, if true, would render the act or omission innocent, or if he took all reasonable steps to avoid the particular event. These offences may properly be called offences of strict liability.
(R v Sault Ste Marie (City), [1978] 2 SCR 1299 at p 14)
[1231] In R v Felderhof, 2007 ONCJ 345 at para 183, in considering subsection 122(2) in a criminal proceeding, the Ontario Court of Justice held a Director or Officer is not liable for making materially misleading statements where they establish that they were not negligent or that they were duly diligent or took reasonable care that the disclosure they authorized, permitted or acquiesced in was not misleading or untrue.
[1232] The onus is on the Respondents to establish a defence of due diligence.
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(a)Mistake of Fact and Due Diligence Simpliciter
[1233] The Supreme Court of Canada held in Sault Ste Marie (City) there are two facets to the defence of due diligence: mistake of fact and what is referred to as due diligence simpliciter.
[1234] Criminal decisions have held any mistake of fact regarding a misstatement must be reasonable in all of the circumstances and must not have involved a deliberate failure to make sufficient inquiries (R v Sisto Finance NV [1994] OJ No 1184 at para 21; R v Sansregret, [1985] 1 SCR 570 at
[1235] Chan, Ip, Ho and Hung submit as part of their efforts to be duly diligent, they relied on legal advice given to
[1236] In Re
a.The lawyer had sufficient knowledge of the facts on which to base the advice;
b.The lawyer was qualified to give the advice;
c.The advice was credible given the circumstances under which it was given; and
d.
(at para 261)
[1237] Reliance on legal advice by officers and directors must be done in good faith, since “[r]eliance would be unreasonable if the directors [or officer] was aware of facts or circumstances of such character that a prudent person would not rely on the professional advice” (YBM Magnex, at para 254). We find Chan, Ip and Hung did not disclose, in good faith, the facts and circumstances of the Deceitful Documentation Process – specifically with respect to proof of ownership of assets and the availability of PRCs, which they were able to do, to those legal advisors on whose advice they now purport to rely. As such, we find such claims of reliance are not open to those Respondents.
(b)The Standard of Care Required
[1238] The Commission has previously held it will “consider the reasonableness of the respondents’ diligence and their belief from the perspective of a prudent person in the circumstances. This necessarily entails both objective and subjective considerations including their degree of participation, access to information and skill” (YBM Magnex, at para 179). This standard takes into account both the general standard of care applicable to the business activity in question and the special circumstances applicable to a particular situation.
[1239] The duty of care required of corporate officers and directors under corporate law is that they exercise their duties “with the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (Canada Business Corporations Act, RSC 1985, c
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the requirements of corporate law, as the Commission must determine whether conduct was in the public interest (Re Standard Trustco Ltd (1992), 15 OSCB 4322, at 32).
[1240] Regarding the subjective component of the reasonably prudent person test, the Commission has held that more is expected of officers and directors with superior qualifications and more may be expected of inside directors than outside directors (YBM Magnex, at paras
2.Analysis of the Defense of Due Diligence as it Relates to the Respondents
[1241] Chan submits Staff incorrectly suggests management is solely responsible for an issuer’s disclosure and that rather, the Board of Directors, the Audit Committee, the Disclosure Committee and management are all responsible. He relies on Re Flag Resources (1985) Ltd, 2010 ABASC 143 (Flag Resources), a decision of the Alberta Securities Commission, for the proposition that “responsibility for financial statements rests with the reporting issuer, its management, its audit committee and its board of directors” (at para 117).
[1242] The Panel agrees the Board of Directors, the Audit Committee, the Disclosure Committee and management are all jointly responsible for an issuer’s disclosure, but also agrees with the statement in Flag Resources that “management is responsible for the accurate recording of transactions and for the preparation of its issuer’s financial statements” (at para 117) [emphasis added].
[1243] Expectations are higher in relation to inside directors, such as Chan, than outside directors. The latter necessarily rely on the former, and management, to ensure the disclosure they review is accurate and not misleading, as “boards of directors are the stewards of a company… the CEO and CFO of a reporting issuer in turn play pivotal roles in coordinating, compiling and vetting material corporate disclosure to the same end” (Re Ironside, 2006 ABASC 1930 at para 963).
[1244] We agree with Staff’s submission that when the CEO of a corporation also sits on its board, and personally certified the public disclosure in issue, the due diligence defence will be even more difficult to establish.
[1245] The evidence shows
[1246] Chan submits
[1247] Chan submits any red flags raised by the disclosure in the Impugned Disclosure Documents would have only been evident to the technical accounting experts, namely, Messrs. Horsley, Hyde, Maradin and Martin and other members of Sino - Forest’s Board and Audit Committee.
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foundational documents on which E&Y relied for understanding the internal controls process underlying information reported in Sino
[1248] In Biovail, the Commission held “more is expected of officers and directors with superior qualifications, such as experienced business people” (at para 386). Ip, Ho and Hung submit the Panel must consider the particular officer’s degree of participation, access to information and skill level, when considering if due diligence has been exercised. Chan submits neither he, Ip, Ho or Hung had the education, skill or experience in Canadian public disclosure superior to that possessed by the Canadian members of management or Sino
[1249] We reject this submission. Each of Chan, Ip and Hung did not require the education or skill that the Board or Audit Committee possessed. They simply had to tell the truth: that the actual process for buying, selling and settling standing timber transactions in the BVI Model differed significantly from the process described in the process descriptions. We find these Respondents deliberately hid the material information concerning ownership of assets and revenue recognition from the Board and the Audit Committee. As such, we reject their submission they relied on the Board, the Audit Committee and Mr. Maradin because of their superior knowledge of Ontario public disclosure requirements.
[1250] Ip, Ho and Hung submit the environment in which
[1251] Ip, Ho and Hung submit they did not have the skill or power to do more than they did: that Ip did not understand the particular details in the disclosure; that at a certain time, Ho was mainly involved in business operations unrelated to these allegations; and that Hung had no real power to make decisions within
[1252] Ip testified over 49 hearing days, resulting in 4,930 pages of transcript evidence. Over that time it became clear to the Panel Ip understood far more about his responsibilities than he was willing to admit, and further, where he did not understand, it was a result of his deliberate choice not to make sufficient inquiries. Ip was a Senior
[1253] As discussed elsewhere in these Reasons, regardless of any additional obligations Ho may have had in Russia at the time, he was actively involved in the
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commission of three of the Four Frauds which led to materially misleading revenue disclosure. He was also on the Disclosure Committee and signed sub- certifications quarterly attesting to the accuracy of the Sino
[1254] The Panel rejects Hung’s submission he had no real power to make decisions within
Q. That was your personal experience in dealing with Mr. Hung, that he had no authority without permission to do things and specific instructions to do things from his superiors within
A. I couldn't
[1255] Counsel followed up on this answer by showing Mr. Maradin an
Q.And the gist of the
A.That's a fair comment.
(Hearing Transcript, October 31, 2014 at 144:
[1256] We find Mr. Maradin’s answer stands for the much more limited purpose of demonstrating Hung had no power to transfer funds, not that Hung had no real power to make decisions within
[1257] Furthermore, Hung was on the Disclosure Committee, which reviewed the financial statements and MD&A on “a page by page basis”, as described by Mr. Maradin. It was completely within his power to raise issues with respect to the undisclosed internal control weakness at that committee. He chose not to do so.
[1258] Chan, Ip, Ho and Hung submit they relied on the comprehensive disclosure process, which included the Board of Directors, the Audit Committee, auditors and other advisors of
[1259] Each of Chan, Ip and Hung had the ability to stop the Deceitful Documentation Process, which they knew to be deceitful and dishonest. They knew this process was the foundation of, and the input for, the information in Sino
[1260] Chan submits he is entitled to rely on
further inquiries in the absence of any red flags. He submits, in such circumstances, he was able to properly certify the covered reports, which
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contained the financial statements, the AIF, the press release and MD&A, were not false or misleading without going behind the
[1261] As found elsewhere in these Reasons, Chan controlled the concentration of authority internal control weakness. He could have remediated it. He did not.
[1262] Messrs. Hyde and Clifford testified management was the primary source of information for the auditors in terms of the business and process of Sino
[1263] The management representation letters, which Chan signed annually, were of the utmost importance to the auditors in preparing their opinion. A Sino
a.“We acknowledge that, as members of management of the Company, we are responsible for the fair presentation of the consolidated financial statements.
b.“The Company has proper titles and rights on all timber holdings as recorded on the consolidated balance sheet.”
c.“Transactions with related parties… have been properly recorded and/or disclosed in the consolidated financial statements.”
d.“… settlements of trade receivables by customers… were made by way of making direct payments…to the plantation owners.”
[1264] Fred Clifford described the high importance he ascribed to the management representation letter, stating “so this [management representation] letter is really foundational to the audit process… without it… I’m not releasing the opinion”.
[1265] Representation (a) at paragraph [1263] acknowledges management is responsible for the fair presentation of financial statements; Ip and Hung were responsible for the source transactions which initiated the accounting process, which ultimately resulted in the Impugned Disclosure Documents. Chan approved or signed source documents such as purchase and sales contracts. Representations (b) through (d), which Chan certified as true, are false, as discussed elsewhere in these Reasons.
[1266] The Respondents submit that Horsley, Mr. Maradin and the Board knew Sino - Forest entered into oral contracts and prepared the written contracts after
[1267] Chan submits Mr. Maradin was responsible for the internal controls project and that Mr. Maradin testified he wrote the disclosure about the material deficiencies. Chan submits from Mr. Maradin’s previous experience, he knew how to properly
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disclose material deficiencies. While this is true, Chan was nevertheless responsible for ensuring disclosure was accurate and complete. He knew it was not.
[1268] Chan submits Mr. Horsley was responsible for overseeing the preparation of the disclosure relating to internal controls, and that Mr. Horsley testified he understood Hung’s role in the settlement process. As discussed elsewhere in these reasons, Hung’s role involved more than just the settlement process and that the disclosure relating to the segregation of duties was wholly inadequate and failed to reveal the extent of the weakness in Sino
[1269] Mr. Horsley testified he believed Hung’s role was administrative and Hung was “in the middle pushing the paper” (Hearing Transcript, November 25 at 116:17- 18). When asked why this internal control weakness was never remediated, Horsley said:
Well, I think it was not deemed to be that important. The conversion of the lack of segregation of duties to concentration of control was really the underlying issue or the underlying weakness. The fact that Alfred Hung pushed paper between Albert Ip and his supplier and Albert Zhao and his customer to me is not
(Hearing Transcript, November 25 at
[1270] We find Horsley’s apparent lack of understanding of the significance of this internal control weakness incredible; Hung’s role was key and pivotal in the success of the Deceitful Documentation Process until June 2, 2011.
[1271] Chan submits the Board and Audit Committee also knew that Hung was the key player in the segregation of duties issue. He submits that various directors, including Messrs. Hyde, Martin and Ardell, testified they were aware of the segregation of duties issue. Chan relies on Mr. Hyde’s testimony that the Audit Committee discussed the segregation of duties issue with the auditors each year, and the auditors were able to produce an audit opinion recognizing internal control weaknesses. Chan further submits the Audit Committee recognized Chan’s role as the ultimate compensating control as a mitigating factor in relation to this issue. Chan misled Mr. Martin and Mr. Ardell: Chan told them Hung’s role could not be split because Hung had important relationships with suppliers and AIs that could be jeopardized if changed. However, Chan’s statement is false; Hung played no role with suppliers or AIs.
[1272] We find the Respondents are unable to rely on the Board of Directors, the Audit Committee, auditors and other advisors of
[1273] The Panel rejects the submissions of Chan, Ip, Ho and Hung that they exercised reasonable due diligence. This is not a case similar to YBM Magnex cited to the Panel above, in which there was good faith reliance on “experienced counsel and financial advisors.” Each of Chan, Ip, Ho, and Hung knew statements in the Impugned Disclosure Documents were misleading or untrue; they did not act in good faith. They each played active roles in the fraud that related to those misleading or untrue statements.
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C.Conclusions on the Allegations of Misleading Statements
[1274] During the Material Time,
∙statements regarding
∙effects of the Four Frauds on the reported revenue of
∙statements regarding
[1275]
[1276] Pursuant to subsection 122(3) of the Securities Act, as officers of
∙Chan authorized and permitted the making of materially misleading statements in respect of (a)
∙Ip permitted and acquiesced in the making of materially misleading statements in respect of (a)
∙Hung permitted the making of materially misleading statements regarding
∙Ho permitted and acquiesced in the making of materially misleading statements in respect of the effect of the Four Frauds on reported revenue of
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VIII. ANALYSIS OF THE GREENHEART ALLEGATIONS
A.Review of the Greenheart Allegations
[1277] In 2010, following a complex series of transactions (the Greenheart Transactions) carried out over a
[1278] Staff alleges Chan committed fraud, contrary to subsection 126.1(b) of the Securities Act and contrary to the public interest, because he knowingly concealed his interest in the Greenheart Transactions and the substantial benefit he received, which placed the pecuniary interests of Investors at risk. Staff alleges Chan was the true beneficial owner of two companies that received over US $22 million in cash and securities of
[1279] Staff further alleges Chan and
[1280] Staff further alleges Chan, as Chairman of the Board and CEO of Sino
[1281] Staff further alleges Chan, as Chairman of the Board and CEO of
[1282] The Panel must determine whether Chan was the beneficial owner of the two companies, Fortune Universe and Montsford. If he was, the Panel has to determine if Chan’s
B.The Greenheart Transactions
[1283] Greenheart Resources held forest concessions in the Republic of Suriname. We heard evidence its main business activity was buying and holding forestland in that country, with the intention of harvesting and transporting some of the logs back to China for sale, as well as building sawmills to process logs into lumber for export sale.
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[1284] By June 2010,
[1285] As the parties did not put any of the underlying transactions in relation to the Greenheart Transactions in issue, we do not propose to give a detailed history of them here. However, given their
[1286]
[1287] Prior to the payments of US $9,000,000 by
[1288] At a meeting of
Resources was “an opportunity for the company”. At the meeting on August 12, 2007, Chan presented the board with the results of the due diligence conducted by
[1289] On August 20, 2007, Omnicorp, through its subsidiary Silver Mount Group Limited, acquired a 60% interest in Greenheart Resources from Sino
39.61% of Greenheart Resources from
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[1290] Judson Martin testified Chan and his management team developed the strategy for the acquisition of a controlling interest in Greenheart Resources by Sino - Forest. David Horsley testified the strategy called for
[1291] The Second Transaction occurred on February 6, 2009, when
[1292] On May 7, 2010, the option to acquire the remaining 39.61% of Greenheart
Resources, which had been acquired by Omnicorp as part of the First Transaction, expired. On May 9, 2010 and June 1, 2010,
[1293] On June 22, 2010,
[1294] Subsequently, in early 2011, Fortune Universe and Montsford sold in the market all of the
[1295] Staff submits, together, Fortune Universe and Montsford ultimately realized approximately CA $40 million from the sale of their interests in Greenheart Resources. In the Statement of Allegations, Staff alleges Fortune Universe and Montsford received over US $22.1 million as a result of the Greenheart Transactions, US $18.4 million of which was in
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C.Analysis of the Greenheart Fraud Allegations
1.Was Chan the Beneficial Owner of Fortune Universe and Montsford?
[1296] Staff submits Chan installed one nominee as the sole director and shareholder of each of Fortune Universe and Montsford and committed a dishonest act by not disclosing in respect of the Greenheart Transactions, that he was ultimately the beneficial owner of both companies, which sold securities to Sino
[1297] In our analysis of this section, we first consider evidence of the establishment and organization of Fortune Universe and Montsford. We then consider evidence of Chan’s involvement with Greenheart Resources prior to
(a)The establishment and organization of Fortune Universe and Montsford
[1298] Staff submits the evidence shows Chan’s intimate involvement in the establishment and organization of Fortune Universe and Montsford and Chan’s assistant Yosanda Chiang’s continued involvement with the two companies should be interpreted as strong evidence of Chan’s interest in them. As discussed below, we agree.
[1299] Fortune Universe and Montsford were shelf companies incorporated in the British Virgin Islands in 2004 and subsequently organized in 2005, purportedly by Lei Guangyu and John Zeng, respectively. Among other business interests, Lei Guangyu was the principal of Shenzhen Hongji Enterprises (Holdings) Ltd. (Hongji), through which he conducted an import and export business. A part of Hongji’s business included the buying of logs from Sino
[1300] Lei Guangyu was called by Chan as a witness in this proceeding and testified via
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meetings and a family matter. He was excused with his proposed return to be indicated to the Panel at the beginning of May, 2015. After several forbearances by the Panel, when he did not return by September 1, 2015, we directed that he inform the Panel of three days ending not later than December 4, 2015 when he would return to complete his testimony. Lei Guangyu did not return within the specified timeframe despite repeated requests and multiple additional forbearances of the Panel. As a result, Staff was not able to test all of Lei Guangyu’s testimony
[1301] John Zeng was a partner of the Kai Tong Law Firm. He worked out of the Kai Tong office in Guangzhou, China and represented Chan in the past, as well as at the interview of Chan by Staff during its investigation in September 2011. John Zeng also acted for
[1302] Yosanda Chiang, Chan’s
[1303] Lei Guangyu testified it was common for his secretary, Jiang Nanyan (also known as Nancy), to work with Yosanda Chiang and secretaries of other companies, and that she might do so without telling him. Lei Guangyu testified Jiang Nanyan asked Yosanda Chiang to help Mr. Lei set up Fortune Universe, and Ms. Chiang did so. The Panel does not find this explanation credible. The evidence, as discussed below, demonstrates Yosanda Chiang’s help went beyond the initial setting up of the company and is not consistent with Yosanda Chiang’s explanation that Chan simply requested she help Lei Guangyu set up the company. We find the evidence is more consistent with Chan having beneficial ownership and control of Fortune Universe.
[1304] In support of their submission that John Zeng was not the beneficial owner of Montsford, Staff submits another person, Tommy Lui, was actually Chan’s first choice as a nominee owner. On September 21, 2005, Yosanda Chiang sent an email to Tommy Lui stating:
As instructed by Allen, here below is the co. name: Montsford Ltd.
[1305] On the same day, Yosanda Chiang sent a “SMS via email” to Chan stating:
Fortune Universe to Lei Guangyu
Montsford Ltd. to Tommy…
Chan submits Yosanda Chiang was informing him of the name of Lei Guangyu’s company and that she had provided the name of Montsford to Tommy Lui of Greenheart Resources. She testified she had sent the email of September 21, 2005, to Tommy Lui at Chan’s instruction. She did not know why he asked her to do so.
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[1306] This evidence demonstrates Chan had a high level of interest in Fortune Universe and Montsford dating back to 2005.
[1307] On September 29, 2006, Yosanda Chiang received an email from Daphne Tse, CFO of Greenheart Resources, requesting various records and information relating to Fortune Universe; this email was not copied to Lei Guangyu or Jiang Nanyan. This request prompted an exchange of documents relating to the organization of Fortune Universe and Montsford and communications between Yosanda Chiang and the individuals described below. These documents and communications support our finding that Chan was the beneficial owner of Fortune Universe and Montsford.
[1308] Later on September 29, 2006, Gilbert Chau of Panocean Secretarial Services Limited,1 8 sent Yosanda Chiang a number of documents by email relating to Fortune Universe, including First Written Resolutions, Acceptance of Appointment, and an Application for Shares. These documents relate to the appointment of the sole director and shareholder of Fortune Universe. A single name, “CHAN”, is indicated throughout and under signature lines; however the documents are unexecuted. When asked about this during her testimony, Yosanda Chiang explained that she thought Gilbert Chau knew her boss’s last name and took the initiative based on previous work to fill in his name, albeit incorrectly. She also stated that, in the alternative, he may have merely been indicating where a last name might go in the documents by including reference to a common Chinese last name. Based on the overall evidence with respect to the establishment and operation of Fortune Universe, the Panel rejects both explanations.
[1309] Yosanda Chiang also testified, even though Lei Guangyu and John Zeng had purchased the companies in 2005, she had them execute First Written Resolutions, Acceptance of Appointment, and an Application for Shares for each of their respective companies in early October 2006. She further testified, as a result of British Virgin Islands’ law, the documents were able to be executed either at the date of incorporation or at the date of sale. As a result, the organizational documents are dated January 2, 2004, which was the incorporation date for each company, even though Lei Guangyu and John Zeng purportedly purchased them in 2005 and signed the documents in October 2006.
[1310] The evidence shows a close connection between Fortune Universe and Montsford. For example, Lei Guangyu’s name appears as the shareholder on a draft version of organizational documents of Montsford, even though John Zeng is ultimately recorded as the owner of that company.
[1311] Yosanda Chiang testified, on October 10, 2006, Chan told her Lei Guangyu and John Zeng wanted to sell the companies to him and instructed her to draft the required change of shareholder and director documents. Conversely, Lei Guangyu testified he was certain his discussion with Chan regarding the sale of Fortune Universe took place after June 2007.
[1312] Yosanda Chiang prepared draft documents for both companies to change the director and shareholder from Lei Guangyu to Chan, in respect of Fortune Universe, and from John Zeng to Chan, in respect of Montsford, on or about
1 8 Yosanda Chiang used Panocean to facilitate the organization and establishment of BVI- domiciled shelf companies.
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October 11, 2006. She then sent the draft documents in respect of Fortune Universe to May Tsui, a lawyer in a Hong Kong law firm, for review. On October 12, 2006, Yosanda Chiang received an email from May Tsui, attaching revised documents providing for the change of director and change of shareholder to Chan in respect of Fortune Universe. Yosanda Chiang testified she would have made similar revisions to the comparable documents relating to Montsford, after reviewing those done for Fortune Universe by May Tsui. Consistent with the documents being in draft format, they are unsigned. In the draft documents of Fortune Universe, May Tsui crossed out the words “is beneficially wholly owned by Mr. LEI, Guangyu”. Given the evidence, the Panel finds it is more likely than not that May Tsui crossed out that description because Lei Guangyu was not the beneficial owner.
[1313] In undated draft notes to John Zeng, Yosanda Chiang wrote, “[t]he attached document is for signature in advance, with the content stating that you resign as director and appoint Allen as [Montsford’s] director and also transfer the shares to Allen.” She continued, “a date will not be filled in for the meantime; the date will be filled in when it is necessary”. There is no evidence these notes were sent to Mr. Zeng.
[1314] Yosanda Chiang testified Chan followed up with her several months later concerning whether she had prepared the documents, and that he told her he would inform her if he needed them. She testified the change of directors and shareholders never took place for either company. We accept no public filings with the government were made in respect of such changes.
[1315] Yosanda Chiang testified the documents relating to Fortune Universe and Montsford, including documents relating to the change of directors and shareholders of Fortune Universe and Montsford, were contained in a deposit box located in Chan’s office. This was corroborated by a deposit box list, which was authored by Yosanda Chiang and recorded the items kept in the deposit box. She testified the documents for the change of shareholders and directors relating to Fortune Universe and Montsford referred to in the deposit box list were unsigned. She further testified Chan never knew the documents relating to Fortune Universe and Montsford were in the deposit box and that she had possession of the only key to the deposit box. We do not accept Yosanda Chiang’s testimony on this issue. Although executed versions of these documents were not in evidence, we find it more likely than not the executed documents
were in the deposit box in Chan’s office, as discussed in the following paragraphs.
[1316] Other items on the deposit box list included items of high monetary value or personal importance to Chan. These included:
∙an insurance policy for himself and his daughters;
∙a copy of a cheque from Chan to George Ho for a HK $2,000,000 loan;
∙a loan agreement with a former classmate of Chan for a HK $1,500,000 loan;
∙a certificate of honorary fellowship awarded to Chan by Hong Kong Baptist University;
∙documents relating to various properties; and
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∙a key to a bank deposit box in the name of Chan’s daughter that contained HK $1,000,000.
[1317] Also recorded in the deposit box list were
[1318] The Panel rejects Yosanda Chiang’s testimony regarding Chan’s lack of knowledge of the contents of the deposit box. The Sino
[1319] With respect to the documents related to the change of shareholder and director of each of Fortune Universe and Montsford, we reject Yosanda Chiang’s testimony it was for convenience’s sake that she also kept draft documents relating to two other persons’ companies in the same deposit box as Chan’s valuable or important items. We reject her explanation that she kept draft versions of the documents in the deposit box. We find the change of director and change of shareholder documents referred to in the deposit box list, authored by Yosanda Chiang, were more likely than not the final and signed versions of the drafts which were the subject of May Tsui’s email of October 12, 2006, which documented the transfer of ownership of Fortune Universe and Montsford to Chan.
[1320] We heard evidence Yosanda Chiang kept the company “chops” or seals of Fortune Universe and Montsford. This means the companies could not conduct official transactions without Yosanda Chiang’s knowledge and assistance. Furthermore, Yosanda Chiang testified Greenheart Resources sent documents for Fortune Universe and Montsford to her, which she says she kept safe for Lei Guangyu and John Zeng. The evidence supports Staff’s submission Chan had beneficial ownership and control of the two companies.
[1321] Finally, the evidence shows Yosanda Chiang was directly involved in the dissolution of Fortune Universe and Montsford. After corresponding with Gilbert Chau of Panocean regarding the settlement of an invoice relating to Montsford in January of 2011, she emailed him again on March 22, 2011, attaching receipts for the settlement of invoices relating to other companies. In the body of the email, she advises Gilbert Chau that Fortune Universe and Montsford would be “stuck off [sic]”. We find Yosanda Chiang’s close involvement in the business of both Fortune Universe and Montsford, as demonstrated here by her involvement in their settlement of invoices and dissolution supports Staff’s submission she acted on the direction of Chan who was the beneficial owner of these two companies.
[1322] The Panel rejects Yosanda Chiang’s evidence that Chan had no involvement in Fortune Universe or Montsford other than instructing her to assist Lei Guangyu and John Zeng in their
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of these two companies and that his involvement continued throughout the Material Time. Furthermore, we find this level of involvement, when viewed in conjunction with all the evidence, supports our finding below that Chan was the beneficial owner of Fortune Universe and Montsford.
(b)Chan’s involvement in Greenheart Resources
[1323] The evidence shows Chan had a financial interest in Greenheart Resources prior to
[1324] Correspondence with shareholders of Greenheart Resources establishes Chan was being kept informed of the corporation’s operations prior to Sino
[1325] In the first half of 2007, correspondence between parties involved in Greenheart Resources shows the company was in financial trouble. On March 8, 2007, Chan received an email from David Van Oppen, a shareholder in Greenheart Resources, attaching the company’s 2006 draft financial statements. In the email Mr. Van Oppen states, “I finally received the year end accounts and I fear that the situation looks much worse than the already negative report from Tommy [Lui]”.
[1326] On April 10, 2007, Mr. Van Oppen, forwarded an email to Chan. The forwarded email was from Tommy Lui, copying Daphne Tse, among others, also dated April 10, 2007. In the email, Tommy Lui informs Mr. Van Oppen of several decisions made at meetings among the key shareholders of Greenheart Resources with respect to roles of executives and officers within the corporation. He states:
Our own Allen [Chan], together with Mr. Lei and Mr. Lok are very much behind the decisions… and they have all agreed to involve more in the business. And one of the most important things I hope they will honour is to care more about the company not just by words but by action. Allen as you know is very busy, and the next acid test of his attitude will come before the end of the month. He should make himself available for the key monthly meeting. If he does not do that I am afraid it will be unfair for the other parties to shoulder all the responsibilities and not getting appreciated for their efforts.
[1327] Chan submits David Van Oppen was merely doing ongoing due diligence for Simon Murray, a director of
[1328] An email from Tommy Lui, a shareholder in Greenheart Resources, to Chan dated April 26, 2007, confirms that Greenheart Resources continued to experience financial difficulty. He stated, “[t]his should be attached to my email to you sent earlier, and is a very important document for your attention”. Attached to the email are minutes of a meeting of certain shareholders of
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Greenheart Resources dated March 29, 2007, which state, “due to the serious delay of the timber trading agreements, the company has a shortage of funds, and business operations have been seriously affected”.
[1329] On May 6, 2007, Lei Guangyu, President of Greenheart Resources at the time, provided an “Update on Suriname Project”, outlining difficulties Greenheart Resources was facing. Lei Guangyu’s report and comments were discussed at a meeting on May 9, 2007, involving Chan, Jim Lok, Lei Guangyu and Tommy Lui.
[1330] On May 11, 2007, Tommy Lui copied Chan and Jim Lok on an email to Lei Guangyu. Tommy Lui was responding to the management report from Lei Guangyu that recommended Greenheart Resources be shut down and expresses his disapproval of this recommendation. In the email he states, “[i]n your own words you actually said next week’s plan was for Allen to consider if Allen did not mind losing money even after having heard your report… time is fast running out. All hell will break loose soon. All the bridging loans totalling HK$11.6 million are overdue or due”. The plan refers to a presentation to be made by Lei Guangyu at a meeting of key Greenheart shareholders on May 15, 2007. We find Chan must have been a shareholder or had a financial interest in Greenheart Resources at that point in time if he was in danger of losing money.
[1331] On May 15, 2007, Yosanda Chiang sent an email to Chan stating:
Lok called this morning and said he wants to speak to you asap. The reason is he think of the money that you, Lei and Lok injected to Suriname in the early stage – Tommy has authority to transfer money by only his signature. Due to Lei’s resign, Lok afraid Tommy will transfer all the money to other places.
[emphasis added]
[1332] Yosanda Chiang testified that due to Jim Lok’s accent, she had difficulty understanding him and may not have understood him correctly. Chan submits the Panel should not rely on the email. The Panel does not accept Chan’s submissions or Yosanda Chiang’s explanation of the email. Furthermore, the Panel finds “Suriname” in the email above is a reference to Greenheart Resources. This email is more evidence Chan was a shareholder or had a financial interest in Greenheart Resources before any involvement by Sino - Forest.
[1333] Furthermore, Jim Lok was a Hong
[1334] Attached to Yosanda Chiang’s email to Chan on May 15, 2007, was a letter from Tommy Lui to Lei Guangyu accepting Lei Guangyu’s resignation as Chairman and Director of Greenheart Resources. Tommy Lui copied Chan and Jim Lok on the letter. Tommy Lui stated in the letter that he was responding as a shareholder of the corporation. We agree with Staff this is further evidence of Chan’s role and capacity as a shareholder or investor in Greenheart Resources prior to July 2007.
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[1335] Lei Guangyu testified he learned, in 2007, that Greenheart Resources did not legally own two of its forestry concessions in Suriname, which were its primary assets, but rather that nominees owned them. He identified one of the nominees as Alex Chau Chi Piu. Alex Chau is also identified as Chan’s “best friend” by Yosanda Chiang in an email. Alex Chau was, for a time, a director and indirect 25% shareholder of Chan’s offshore holding company, ADS Holdings (BVI) Ltd.
[1336] Lei Guangyu further testified Chan did not have a personal investment in Greenheart Resources. The Panel rejects Lei Guangyu’s testimony on this point. We find the communications described above show Chan had a personal financial interest in Greenheart Resources prior to July 2007.
(c)Treatment of Spirit Land versus Fortune Universe
[1337] As discussed above, Lei Guangyu was the purported owner of Fortune Universe. He was also the legal owner of another company, Spirit Land Limited (Spirit Land), along with his spouse. In July 2007, Spirit Land held 110,825,000 ordinary shares of Greenheart Resources
[1338] Staff submits the difference in Lei Guangyu’s treatment of Spirit Land and Fortune Universe indicates he was the beneficial owner of only Spirit Land and not Fortune Universe. Chan submits Lei Guangyu’s wife handled Spirit Land. Chan further submits there are many possible explanations why an investment by a husband and wife might be dealt with differently, and submits there are as many different marriages and relationships as there are people and how decisions are made may vary.
[1339] Lei Guangyu testified he instructed his secretary, Jiang Nanyan, also known as Nancy, to help make arrangements to buy Fortune Universe. According to his testimony, discussed at paragraph [1303] above, Jiang Nanyan asked Yosanda Chiang for help setting up the BVI company. We note this differs from Yosanda Chiang’s testimony, which was that Chan instructed her to set up a BVI company for Lei Guangyu. The Panel finds this conflicting testimony unhelpful.
[1340] Conversely, Lei Guangyu testified Spirit Land was set up by his wife and that her secretary had someone in Hong Kong complete the set up. He stated neither his wife nor his wife’s secretary knew Yosanda Chiang, which explains why they did not use her to set up Spirit Land. We do not find this explanation convincing. Instead, we find Yosanda Chiang was involved in the organization of Fortune Universe because Chan was the beneficial owner of the company. Conversely, Yosanda Chiang was not involved in the organization or operation of Spirit Land because Chan had no ownership interest in that company.
[1341] As discussed below under “Flow of cash proceeds pursuant to the First and Second Transactions”, Yosanda Chiang was active in arranging for the payment of funds to Fortune Universe; however, she took no interest in the funds due to Spirit Land. Attached to an email dated December 12, 2007, from Yosanda Chiang to Jiang Nanyan, were three deposit slips relating to deposits made to Lei Guangyu’s HSBC account. The deposit slips correspond to 50% of the cash consideration, in respect of the First Transaction, due to each of Fortune Universe, Montsford and Spirit Land. However, the deposit slip that corresponds to Spirit Land was crossed out. When asked about the deposit slips, Lei Guangyu testified he did not know why the deposit slip associated with Spirit Land was crossed out.
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[1342] Lei Guangyu also could not explain why Yosanda Chiang had provided information about Fortune Universe to Jiang Nanyan in the December 12, 2007 email, but not Spirit Land. However, he testified Daphne Tse would not have told Yosanda Chiang about Spirit Land because it was entirely managed by his wife.
[1343] Moreover, Fortune Universe and Montsford had recorded the same P.O. Box in the British Virgin Islands as their corporate address. Spirit Land, however, had recorded a different P.O. Box in the British Virgin Islands as its corporate address.
[1344] We find the differing treatment of Fortune Universe and Spirit Land shows Lei Guangyu did not beneficially own or control Fortune Universe, and supports our finding below that Chan was the beneficial owner of Fortune Universe.
(d)Flow of cash proceeds pursuant to the First and Second Transactions
i.First Transaction
[1345] Staff submits the Panel can infer from following the distribution of the funds paid to Fortune Universe and Montsford, in exchange for their interests in Greenheart Resources, that Chan was their beneficial owner. Chan submits the inferences Staff wants the Panel to draw relating to funds flowing from the interests of Fortune Universe and Montsford in Greenheart Resources are refuted by direct evidence.
[1346] Combined, Fortune Universe and Montsford ultimately realized approximately CA $40 million from the sale of their interests in Greenheart Resources. Fortune Universe and Montsford received the consideration for their shares of Greenheart Resources from Omnicorp Limited and
[1347] The cash consideration due to Fortune Universe and Montsford pursuant to the First Transaction was paid in two installments. The first installment, totalling HK $536,400 for Fortune Universe and HK $2,089,800 for Montsford, was paid to Lei Guangyu as "Receiving Agent" of Fortune Universe and Montsford on December 6, 2007.
[1348] Between November 12 and 19, 2007, Yosanda Chiang and Daphne Tse exchanged a number of emails regarding the cash consideration due to Fortune Universe and Montsford. On November 12, 2007, Yosanda Chiang sent Daphne Tse an email in English requesting the dollar figures that “…Greenheart is going to transfer to us (i.e.
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consideration. Moreover Lei Guangyu’s proceeds in relation to Spirit Land are never mentioned in this correspondence. Instead, Yosanda Chiang includes Fortune Universe and Montsford together with
[1349] On November 19, 2007, Yosanda Chiang sent Daphne Tse an email containing the banking information for
[1350] Yosanda Chiang testified John Zeng instructed her to have the proceeds relating to the sale of Montsford’s shares wired to Lei Guangyu’s bank account because he did not have a bank account based in Hong Kong. Lei Guangyu testified John Zeng had asked him to receive the deposits for Montsford for the same reason. The Panel rejects the evidence of Yosanda Chiang and Lei Guangyu on this point. We find it unlikely John Zeng, a partner at a large law firm, would conduct business affairs in Hong Kong without having established a bank account there. We find John Zeng would not be satisfied using the bank account of someone else if these proceeds belonged to him or to a company owned by him.
[1351] On December 12, 2007, Yosanda Chiang informed Jiang Nanyan by email that the transfer “to Mr. Lei’s HSBC bank account a/c” of amounts equal to 50% of the cash consideration in respect of the First Transaction due to Fortune Universe and Montsford had taken place. Although the email refers to the HK $2,089,800 ostensibly paid out for John Zeng’s shares, Yosanda Chiang did not copy him on the email.
[1352] The second installment of the cash proceeds from the First Transaction, totalling HK $345,575.02 for Fortune Universe and HK $1,381,415.94 for Montsford, was paid out on or about January 9, 2008. As with the first installment, all of the funds were directed to Lei Guangyu’s bank account.
[1353] The first installment of the cash consideration appears to have been applied, in part, towards a donation of HK $2,000,000 made to the Hong Kong Baptist University in the name of Chan on December 27, 2007. Yosanda Chiang testified Chan informed her the donation was to be made from the proceeds deposited to Lei Guangyu’s account for Montsford because John Zeng owed money to Chan. She also testified John Zeng told her he needed to return money to Chan, and asked her to make the arrangements with Chan. There was no documentary evidence of any loan by Chan to John Zeng. On September 2, 2008, Chan received an honorary university fellowship from the Hong Kong Baptist University.
[1354] Lei Guangyu testified Chan had called him and asked him to make an urgent payment on Chan’s behalf and told him he would return the money very quickly. Lei Guangyu stated it was only later that John Zeng called and instructed him the payment should be deducted from the funds that Lei Guangyu was holding for John Zeng and that Zeng would handle this with Chan. The differences between the testimony of Yosanda Chiang and Lei Guangyu concern us.
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[1355] Part of the consideration received by Fortune Universe and Montsford pursuant to the First Transaction in 2007 was in the form of Omnicorp convertible bonds. The convertible bonds accrued interest at a rate of 4% per annum. Lei Guangyu was the receiving agent for the interest due under the bonds owned by both Fortune Universe and Montsford. Prior to selling the convertible bonds to Sino - Forest, Fortune Universe and Montsford received interest payments that had accrued on the bonds, totalling HK $2,548,741.41. At Chan’s instruction, Yosanda Chiang arranged for Lei Guangyu to transfer all of the interest paid to Fortune Universe and Montsford to Hu Liang Mei, who was in a close personal relationship with Chan.
[1356] Yosanda Chiang testified these payments by Montsford were also in satisfaction of John Zeng’s debt to Chan. There is no documentary evidence to support this loan’s existence. We reject Yosanda Chiang’s testimony concerning the existence of the loan to John Zeng from Chan. The Panel would expect a loan for more than HK $2 million to have at least some supporting documentation. Furthermore, we know it was Chan’s practice to keep such documentation. Chan kept, in the deposit box in his office, a copy of a cheque to Ho for a loan of HK $2,000,000 and a loan agreement for HK $1,500,000 with a former classmate.
[1357] On October 16, 2007, Fortune Universe sold HK $13,650,000 principal amount of the Omnicorp convertible bonds received pursuant to the First Transaction to
ii. Second Transaction
[1358] Pursuant to the Second Transaction,
[1359] On February 16, 2009, Jiang Nanyan sent an email to Yosanda Chiang enquiring
“whether the documents [a Memorandum of the Sole Director of Fortune Universe and Resolutions of the Sole Shareholder of Fortune Universe] could be signed”. The intended signatory of both documents was Lei Guangyu. These documents provided for the appointment of Lei Guangyu as receiving agent for Fortune Universe for the Second Transaction, pursuant to which Fortune Universe sold shares of Omnicorp and Omnicorp convertible bonds to Sino - Forest. Jiang Nanyan was asking for instruction from Yosanda Chiang with regard to the signing of the documents.
[1360] On March 3, 2009, Jiang Nanyan sent an email to Yosanda Chiang regarding the initial payment due from
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differentiating between those two companies and Spirit Land because Lei Guangyu is only the beneficial owner of Spirit Land. Again, Jiang Nanyan is seeking instructions from Yosanda Chiang with regard to arrangements for the remittance of the proceeds of the Second Transaction that had been received by Lei Guangyu for Fortune Universe and Montsford.
[1361] On March 4, 2009, Yosanda Chiang followed up by way of email to Daphne Tse and Ivy Ching, both of whom worked at Greenheart Resources, regarding the amount that had been paid to Lei Guangyu “re our recent deal for Montsford and Fortune Universe respectively”.
[1362] The emails described in the preceding two paragraphs are related to the Second Transaction and consistently indicate that Yosanda Chiang and Jiang Nanyan considered Spirit Land separate from Fortune Universe and Montsford. They support our conclusion that Chan was the beneficial owner of Fortune Universe and Montsford and Jiang Nanyan looked to Yosanda Chiang for instructions with respect to those two companies.
[1363] Chan’s direction, through Yosanda Chiang, of the flow of funds from Fortune Universe and Montsford to friends and an institution connected to him further supports our finding he was the beneficial owner of the two companies. While Staff has not been able to account for all of the funds after they were transferred to Lei Guangyu’s bank account, they are not required to do so. After examining the evidence, we find Chan directed the dispersal of this money.
(e)Fortune Universe and Montsford’s Holding and Sale of Sino- Forest Shares
[1364] As outlined above,
i.Fortune Universe
[1365] Yosanda Chiang testified Lei Guangyu told her he wanted to sell Fortune Universe’s
[1366] On November 24, 2010, Yosanda Chiang sent an email to Lei Guangyu’s secretary, Jiang Nanyan. In the email, she states “Mr. Lei is the director and shareholder of Fortune Universe. Fortune Universe currently holds 144,019 Sino- forest shares”. She further writes, “we would like to sell the shares” [emphasis added] and then requests Lei Guangyu come to Hong Kong in order to open a securities account so the
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[1367] When questioned why she included the number of shares that Fortune Universe owned in the email, Yosanda Chiang stated it was because she was unsure whether Jiang Nanyan or Lei Guangyu remembered how many Sino
[1368] When questioned why she wrote “we would like to sell the shares”, Yosanda Chiang testified she had intended to write the word “he” and not “we” in her email to Jiang Nanyan, and that this was a “typo” (Hearing Transcript, January 8, 2015 at
[1369] Lei Guangyu testified he does not believe in holding securities, preferring cash instead: “I’m not interested in any kind of shares. I am of the opinion that only cash is cash and any sort of securities is actually not safe”. (Hearing Transcript, April 20, 2015 at 18).
[1370] Fortune Universe first received
[1371] All 144,019
[1372] Yosanda Chiang also instructed Lei Guangyu personally by fax on February 17, 2011, setting forth the same detailed instructions:
With regard to the sale of shares, please arrange as follows:
∙Total number of shares: 144,019
∙Please give instructions to Sun Hung Kai Securities Company today or tomorrow to sell separately in two nights (at current value)
∙After receiving the funds (preferably in Canadian dollars), remit to the following bank and inform me of the amount remitted.
Thank you.
Eminens Limited
HSBC Foreign Currency A/C
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A/C # [Redacted]
[1373] Yosanda Chiang testified it was Lei Guangyu’s wish to sell the shares within a couple of days. She stated it was her own initiative to specify it happen over a
[1374] Lei Guangyu testified he went to Chan for advice on when to sell the shares. When
[1375] The total number of
[1376] Yosanda Chiang then organized the remittance from Lei Guangyu’s HSBC bank account to Eminens. On February 28, 2011, Yosanda Chiang sent Jiang Nanyan an email stating, “[a]s the funds are remitted into the account of Eminens, for the sake of accounting, it will be listed as funds provided by Mr. Lei to Eminens for investment purpose… May I ask whether Mr. Lei will sign the contract in his own name or in the name of a company?”
[1377] Later on that day, in the same email chain, Yosanda Chiang asked Jiang Nanyan whether Lei Guangyu had a BVI company. This question is surprising, given Fortune Universe is a BVI company purportedly owned by Lei Guangyu, and given Yosanda Chiang’s close involvement with the company. We find this supports Staff’s argument that Lei Guangyu was not the beneficial owner of Fortune Universe. If Fortune Universe was Lei Guangyu’s company, Yosanda Chiang would not have asked this question.
[1378] As previously directed by Yosanda Chiang, two days later on March 2, 2011, Lei Guangyu remitted the proceeds from his HSBC bank account to a HSBC bank account of Eminens Limited. Jiang Nanyan reported to Yosanda Chiang on the same day in an email attaching information from the Sun Hung Kai brokerage account. Jiang Nanyan stated, “Mr. Lei has already remitted share funds of HK 25173341.89 to your designated account, please receive and check” and further stated the attached information was “provided for your reference and file record”. We find this to be consistent with Lei Guangyu acting as Chan’s nominee for Fortune Universe. It is also consistent with Yosanda Chiang receiving a full accounting of that company so Chan, its beneficial owner, had full records and
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confirmation his instructions for the transfer of the sale proceeds to Eminens had been carried out.
[1379] After considering the evidence relating to the sale of Fortune Universe’s Sino - Forest shares, and the use of the sale proceeds, we find the instructions to sell the shares and the disposition of the sale proceeds came from Chan.
ii. Montsford
[1380] Yosanda Chiang also organized setting up a brokerage account for John Zeng at Sun Hung Kai Financial. She testified she did this because John Zeng told her he wanted to open a securities account for Montsford. She stated John Zeng did not tell her why he wanted to open the account, but that he knew she helped Lei Guangyu set up a securities account, and he wanted her to also help him. No written evidence of such communication was provided.
[1381] On January 4, 2011, Yosanda Chiang sent John Zeng an email informing him she had arranged for him to meet with the securities company and instructing him what he would need to open a securities account for Montsford in Hong Kong. Sun Hung Kai Financial approved the account application forms for Fortune Universe on January 21, 2011 and for Montsford on January 25, 2011. Lei Guangyu and John Zeng opened brokerage accounts for Fortune Universe and Montsford within four days of each other. The fact that two individuals supposedly acting independently opened brokerage accounts within four days of each other supports our finding that it was Chan who directed the opening of these accounts.
[1382] Montsford sold all of its
[1383] We find it unlikely these decisions regarding the sale in the market by Fortune Universe and Montsford in February and March 2011 of all 1,549,099 Sino
[1384] On April 7, 2011, CA $31,641,000 was transferred from John Zeng’s HSBC account to an account of Momentom (China) Real Estate Development at China Merchants Bank. The Panel is satisfied Momentom appears on the Company Caretaker List (described elsewhere in these Reasons) under the name Renshi (China) Real Estate Development Limited. Renshi is listed under the control of “John”. We find the “John” referenced in the Company Caretaker List is John Zeng.
[1385] The evidence shows funds totalling HK $52,464,530 flowed from Momentom’s bank account to Eminens’ HSBC account on July 28, 2011 and August 17, 2011. Staff submits it is reasonable to assume these funds were a portion of the proceeds of Montsford’s
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circumstances of the Greenheart Transactions, we find it more likely than not these funds were derived from part of the proceeds of the sale of Sino
[1386] In an email dated March 22, 2011, Yosanda Chiang instructed Gilbert Chau of Panocean that Fortune Universe and Montsford should be cancelled. She test ified Lei Guangyu and John Zeng had advised her they no longer needed the companies so they could be cancelled. Staff submits it is curious that both Lei Guangyu and John Zeng would want these two companies cancelled at the same time. Staff submits the instructions from Yosanda Chiang to Gilbert Chau are consistent with Chan no longer needing these companies as all their holdings of
[1387] The Panel does not have much direct evidence regarding the disposal of the proceeds from the sale of
(f)Chan was the beneficial owner of Fortune Universe and Montsford
[1388] We find Chan had a personal financial interest in Greenheart prior to Sino- Forest’s initial involvement in July 2007.
[1389] The differing treatment of Fortune Universe and Lei Guangyu’s company Spirit Land leads us to find Lei Guangyu did not beneficially own Fortune Universe.
[1390] We find Chan was the beneficial owner of Fortune Universe and Montsford. He was closely involved in the establishment and organization of these companies and actively directed their operation through his secretary, Yosanda Chiang. She kept the company seals for both Fortune Universe and Montsford. Important business of both companies could only be done through her. Chan and Yosanda Chiang were involved in both companies from their initial organization until they were dissolved.
[1391] An examination of the disposition of the funds and the proceeds from the sale of
[1392] Fortune Universe and Montsford, companies supposedly independent of each other, opened securities brokerage accounts at the same firm in Hong Kong within days of each other, two years after they received their first Sino
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box in his office at
[1393] While Staff was not able to account for all of the proceeds from the sale of Sino - Forest shares by Fortune Universe and Montsford, it was able to demonstrate millions of Hong Kong dollars flowing from accounts linked to Lei Guangyu (in the amount of HK $25,173,341.89) and John Zeng (in the amount of HK $12,464,585 and HK $39,999,945) to Chan’s sister’s company, Eminens.
[1394] The Panel finds Chan was the beneficial owner of Fortune Universe and Montsford, which together owned 30% of Greenheart Resources, and received over US $22 million in cash and securities in consideration for the Greenheart Transactions.
2.Was Chan’s
[1395] Staff submits Chan did not disclose his interest in the Greenheart Transactions and the substantial benefit he received to the Board of Directors or to the Investors, thereby committing a dishonest act. Staff also submits Chan actively hid his interest behind nominees, which is inherently dishonest. Chan submits the fact he disclosed
[1396] As discussed elsewhere in these Reasons, a dishonest act is established by proof of deceit, falsehood, or other fraudulent means. Fraud by deceit or by falsehood only requires the respondent to have represented that a situation was of a certain character, when, in reality, it was not (Théroux at 17).
[1397] The commission of fraud by “other fraudulent means” is determined on an objective standard. The question we must ask is whether a reasonable person would consider the conduct dishonest (Théroux at 16). Courts have previously held the
[1398] The parties do not dispute Chan never disclosed any interest in Greenheart Resources or in the Greenheart Transactions to the Board of Directors of Sino - Forest, or the Investors before, during or after the Greenheart Transactions. No disclosure of Chan’s 30% interest in Greenheart Resources or his conflict of interest in the Second and Third Transactions was made as required by Ontario securities laws in
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(which included the AIF and MD&A for the year ended December 31, 2008). As a result,
[1399] Chan, as Chief Executive Officer, certified that each of the AIFs of
[1400] Furthermore, the
[1401] The 5.5% interest of Simon Murray, a director of
∙“Interest of Management and Others in Material Transactions” and “Conflict of Interest” in the AIFs of
∙“Significant Business Activities” and “Transactions with Related Parties” in the MD&As of
∙“Subsequent Event” in the Notes to
∙“Related Party Transactions” in the Notes to the Consolidated Financial
Statements of
[1402] Staff submits the
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Forest had not disclosed his interest in Greenheart Resources and conflict of interest in the Second and Third Transactions under the following headings:
∙“Interest of Management and Others in Material Transactions” and “Conflict of Interest” in its AIFs for the years 2008, 2009 and 2010;
∙“Significant Business Activities” and “Transactions with Related Parties ” in the MD&As for the years 2008, 2009 and 2010;
∙“Subsequent Event” in the Notes to
∙“Related Party Transactions” in the Notes to the Financial Statements for the years 2009 and 2010, which disclosure documents, for the year ended December 31, 2008, were incorporated by reference in
[1403] In fact, Chan actively hid his interest in Greenheart Resources by hiding behind two nominee companies he organized in the names of his friends and administered by his executive assistant.
[1404] As we find below, Chan’s 30% interest in Greenheart Resources and his interest in the Second and Third Transactions were material facts that he should have disclosed to the Board and to Investors.
[1405] We find Chan’s course of conduct by which he hid his interest in Greenheart Resources and his
[1406] Chan submits even if the Panel finds he did have beneficial ownership of Fortune
Universe and Montsford, Staff has failed to prove his
There is a range of such failures that extends from mere errors in judgment to negligence to dishonesty. For the offence of fraud to be made out, the failure must reach the level of a dishonest act.
(Sorbara v Canada, [2006] OJ no 1973 at para 57)
[1407] The facts in the Sorbara decision are readily distinguishable from those in this matter. That decision was made on an application for an order severing and/or expunging all reference to the applicant Sorbara in four search warrants issued in respect of alleged offences under the Criminal Code because the applicant contended that another judge who had issued the search warrants ought not to have been satisfied there were reasonable grounds to believe the applicant had committed the criminal offences alleged in the search warrants. The judge on the application concluded there was insufficient evidence before the issuing judge upon which the issuing judge could have concluded there were reasonable and
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probable grounds to believe the applicant had committed the offence of fraud. In reaching that conclusion, the judge on the application noted the absence of evidence of a requirement on the applicant to disclose all related party transactions, regardless of the amount, to the auditors or the board of directors of a reporting issuer of which the applicant was a director. The judge further noted it was not clear that such disclosure was not made.
[1408] Chan was required to disclose his 30% interest in Greenheart Resources and his interest in the Second and Third Transactions . He did not disclose this, but rather hid his interest in Greenheart Resources behind nominee shareholders. We find a reasonable person would consider Chan’s
[1409] In this matter before a panel of the Commission, sufficient evidence of a requirement for Chan to disclose a significant interest in Greenheart Resources and interest in the Second and Third Transactions has been presented. We find because of Chan’s failure to disclose his significant interest in Greenheart Resources and interest in the Second and Third Transactions to the Board of Directors of
3.Were
[1410] Proof of a deceitful act alone is not enough to find Chan committed the actus reus, or required act, of fraud. Staff must also show there was a deprivation caused by the prohibited act. A deprivation is established by proof of detriment , prejudice, or risk of prejudice to the economic interest of the victim, caused by the dishonest act (Théroux).
[1411] The case law is clear that the notion of deprivation goes beyond pure economic loss. As stated by the Supreme Court in Olan, “prejudice” or “risk of prejudice” to an economic interest is sufficient.
If the deceit which is employed imperils the economic interest of the person deceived, this is sufficient to constitute fraud even though in the event no actual loss is suffered and notwithstanding that the deceiver did not desire to bring about an actual loss.
…
Where a person intends by deceit to induce a course of conduct in another which puts that other’s economic interest in jeopardy, he is guilty of fraud even though he does not intend or desire that actual loss should ultimately be suffered by that other in this context.
(Olan at 1182 and 1183)
[1412] The Commission has also held even where victims profit from a fraud, there can still be a deprivation, as the deprivation is a result of the risk to which their
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interests are subjected (Re Axcess Automations LLC (2012), 35 OSCB 9019 at paras
[1413] Staff submits by failing to publicly disclose his interest in the Greenheart Transactions, Chan placed the pecuniary interests of Investors at risk and subjected the Investors to the risk of prejudice to their economic interests, amounting to a deprivation.
[1414] Staff submits inaccurate financial statements in a public company can cause prejudice to investors where the misstatement or omission is material. If public disclosure documents omit information or contain misrepresentations that are material to an investor’s
[1415] Chan submits the pecuniary interests of the Investors were not put at risk by the Greenheart Transactions. He submits Staff failed to prove Sino
[1416] We reject Chan’s submission that the pecuniary interests of
[1417] We note Chan made extensive submissions on the topic of the value of Greenheart Resources in relation to the price paid for Sino
[1418] The omission of disclosure of Chan’s interest in Greenheart Resources and his interest in the Second and Third Transactions is a dishonest act. Since the Investors are entitled to rely on
[1419] We find Investors’ interests were put at risk by Chan’s failure to disclose his interest in Greenheart Resources and in the Second and Third Transactions. Investors need to be able to rely on the accuracy and truthfulness of the public disclosure documents of issuers so they can reliably base their investment decisions on this disclosure. In the absence of this required and truthful disclosure,
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4.Did Chan have the requisite mens rea for the offence?
[1420] Proof of two states of mind are required for the requisite intent for fraud: (i) subjective knowledge of the prohibited act of dishonesty and (ii) subjective knowledge the dishonest conduct could result in deprivation to another.
[1421] Staff is not required to show direct evidence regarding Chan’s state of mind in relation to the Second and Third Transactions during the commission of the prohibited act in order to prove their allegations. Rather, subjective intentio n may be inferred from the act itself (Théroux at 18).
[1422] For the reasons below, we find Staff has met its burden of proof regarding both of the mens rea elements required by the Théroux test.
(a) Chan had subjective knowledge of the prohibited act
[1423] Chan submits Staff has failed to prove he had subjective knowledge of the prohibited act. He submits the requirement for Staff to prove his mental intent is intended to protect the morally innocent who are defined as those who do not understand or intend the consequences of their acts. We reject Chan’s submission Staff has failed to meet its burden and instead find he had subjective knowledge of the prohibited act, which, in this case, was the
[1424] Chan did not perpetrate this fraud on a whim. As we found above, the evidence demonstrates Chan was the beneficial owner of Fortune Universe and Montsford by at least 2005, more than a year before the First Transaction. Through his
(b)Chan had subjective knowledge that the dishonest conduct could result in deprivation to another
[1425] The second required state of mind is that Chan must be shown to have had subjective knowledge the dishonest conduct could result in deprivation to another, including putting pecuniary interests of Investors at risk.
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[1426] Chan submits the reasonable and logical inference about his subjective knowledge of the consequences of
[1427] Staff must prove Chan subjectively knew
[1428] Staff does not need to provide the Panel with a “snapshot” of a respondent’s mind at the time the prohibited act is committed. As the courts have stated and this Commission has held, the Panel is able to look at the totality of the evidence to determine whether a respondent subjectively appreciated the possible consequences of a course of conduct.
[1429] Chan was the Chairman and CEO of a large reporting issuer in Ontario and was recognized as a sophisticated, experienced and
[1430] The Panel finds, on a balance of probabilities, in view of all the evidence, Staff has proven the actus reus and mens rea of fraud on the part of Chan. We find Chan engaged in an act and course of dishonest conduct that he knew constituted fraud on
D.Did
Forest’s public disclosure?
[1431] Staff alleges by not disclosing Chan’s 30% interest in Greenheart Resources and in the Greenheart Transactions, Chan and
misleading statements in
[1432] As we determine below,
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Securities Act. Chan, as Chairman and Chief Executive Officer of Sino
1.Were the statements misleading in a material respect?
[1433] Subsection 122(1)(b) provides that it is an offence to make a statement in certain documents, including a prospectus, financial statements or other documents required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances in which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading. The Securities Act does not define the phrase “in a material respect”.
[1434] The Commission has described its role in making an assessment of materiality of a statement as follows:
…the assessment of the materiality of a statement is a question of mixed fact and law that requires a contextual determination that takes into account all of the circumstances including the size and nature of the issuer and its business, the nature of the statement and the specific circumstances in which the statement was made.
(Biovail at para 69)
[1435] The parties agree in their submissions the standard of assessment of materiality should be the “reasonable investor standard”. We agree the “reasonable investor standard” is the appropriate standard to apply in our assessment of the materiality of the misstatement in the Impugned Greenheart Documents.
[1436] In Biovail, the Commission held a statement is to be treated as material if “there is a substantial likelihood that a reasonable investor would consider the statement to be important in making an investment decision… to buy, sell or hold shares” (para 74). We are of the view an omitted fact is to be treated as material if there is a substantial likelihood a reasonable investor would consider the omitted fact important in making an investment decision to buy, s ell or hold securities. We therefore must determine whether the Impugned Greenheart Documents contained statements that were misleading or untrue, at the time and in light of the circumstances in which the statements were made, or did not state a fact that was required to be stated or that is necessary to make the statement not misleading, in a respect a reasonable investor would consider important in making an investment decision with respect to the securities of
[1437] Staff submits, and Chan admits, the Impugned Greenheart Documents are all documents required to be filed with the Commission or furnished under Ontario securities law. We agree and so find.
[1438] We found above that Chan beneficially owned a 30% interest in Greenheart Resources. Chan was the Chairman of the Board and CEO of
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Documents. We must decide whether these undisclosed facts were required to be stated or were necessary to make the statements in the Impugned Greenheart Documents not misleading or untrue, in a material respect and at the time and in light of the circumstances in which the statements were made or omitted.
[1439] Under Ontario securities laws, the interest of management and directors of reporting issuers in material transactions and conflicts of interest of management and directors of reporting issuers must be disclosed in documents such as the Impugned Greenheart Documents.
[1440] An example of statements in the Impugned Greenheart Documents made in compliance with such requirements is the disclosure in respect of Simon Murray’s 5.5% interest in Greenheart Resources and his conflict of interest in the Second and Third Transactions, which was discussed in paragraphs [1401] and [1423] above.
[1441] We find the 30% interest of Chan, the Chairman and Chief Executive Officer of
[1442] As the Commission stated in Biovail, “[a] public statement can take on more significance to investors than it might otherwise have if it causes investors to question the integrity or competence of management” (at para 233).
Furthermore, we agree with the statement of the Alberta Securities Commission in Re Ironside, 2006 ABASC 1930 at para 615 that “[t]he market price of the securities of a public company reflects in large part, the market’s confidence in the fitness and integrity of that company’s management team… [and] market knowledge of the true facts and circumstances… would reasonably be expected to have a significant impact on [an issuer’s] price”.
[1443] The required disclosure of the 30% interest of Chan in Greenheart Resources and his conflict of interest in the Second and Third Transactions, which were material transactions involving
[1444] We find Chan’s 30% interest in Greenheart Resources and his conflict of interest in the Second and Third Transactions are facts that were omitted from the Impugned Greenheart Documents, which a reasonable investor would consider important in making an investment decision with respect to the securities of
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2.Did
[1445] Ontario securities law requires a reporting issuer to make accurate and complete disclosure of information in its public disclosure documents because all persons investing in securities should have equal access to information that may affect their investment decisions. Investors should have equal access to information that may affect their investment decisions. To be meaningful, such public disclosure needs to be accurate and complete (Cornish v Ontario (Securities Commission), 2013 ONSC 1310 (Div Ct), citing Re Philip Services Corp. (2006), 29 OSCB 3941 at para 7). Accurate and complete public disclosure allows investors to assess the risks involved with making an investment. The requirement to provide accurate public disclosure serves to level the playing field between investors (Re AiT Advanced Technologies Corp (2008), 31 OSCB 712 at para 199). Moreover, requiring accurate public disclosure enhances the accountability of corporate management to their corporation’s shareholders and the investing public. In order to achieve this aim, the onus must rest on the company to provide information to the investing public to enable them to assess the risks involved in making an investment (Re Rex Diamond Mining Corp., (2008), 31 OSCB 8337 at para 263).
[1446] For the purpose of determining the responsibilities for a breach of subsection 122(1)(b) of the Securities Act, we accept Chan’s submission disclosure to the public is the responsibility of the issuer,
[1447] Having found the omission of the facts of Chan’s 30% interest in Greenheart Resources and his conflict of interest in the Second and Third Transactions made the Impugned Greenheart Documents misleading in a material respect, we find
3.Did Chan authorize, permit or acquiesce, pursuant to section 122(3) of the Securities Act, in
[1448] Subsection 122(3) of the Securities Act states every director or officer of a company who authorizes, permits or acquiesces in the company’s breach of subsection 122(1), is also guilty of an offence.
[1449] Chan submits he certified the Impugned Greenheart Documents, but he did not authorize, permit or acquiesce in the making of materially misleading statements. In our view, the certification by Chan of the Impugned Greenheart Documents heightens his involvement and his responsibility for the omission of facts pertaining to his 30% interest in Greenheart Resources and his conflict of interest in the Second and Third Transactions from the Impugned Greenheart Documents.
[1450] Chan had subjective knowledge of the underlying information and actions that made each of the Impugned Greenheart Documents misleading or untrue at the time of their making, due to the omission and active hiding of his 30% interest in Greenheart Resources and conflict of interest in the Second and Third Transactions. Chan, by his failure to disclose his interest in Greenheart
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Resources and his conflict of interest in the Second and Third Transactions, intentionally prevented
[1451] We find pursuant to subsection 122(3) of the Securities Act, Chan, as Chairman and Chief Executive Officer of
IX. ANALYSIS OF THE ALLEGATIONS OF MISLEADING STAFF
[1452] Staff alleges, during the course of interviews conducted as part of Staff’s investigation into this matter, each of Chan, Ip, Hung, Ho and Yeung made statements, which, in a material respect and at the time and in the light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading, contrary to subsection 122(1)(a) of the Securities Act and contrary to the public interest.
A.The Law – Misleading the Commission
[1453] Subsection 122(1)(a) of the Securities Act states:
122.(1) Offences, general — Every person or company
that,
(a)makes a statement in any material, evidence or information submitted to the Commission, a Director, any person acting under the authority of the Commission or the Executive Director or any person appointed to make an investigation or examination under this Act that, in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading;
…
is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both.
…
(2)Defence — Without limiting the availability of other defences, no person or company is guilty of an offence under clause (1)(a) or (b) if the person or company did not know and in the exercise of reasonable diligence could not have known that the statement was misleading or untrue or that it omitted to state a fact that was required to be stated or that was necessary to make the statement not misleading in light of the circumstances in which it was made.
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B.Allegations against Chan
1.Submissions of the Parties
(a)Staff’s Submissions
[1454] Staff alleges Chan misled Staff, when asked whether Sino
(b)Chan’s Submissions
[1455] Chan refers to three emails, on which Chan is copied, which Staff alleges indicate
[1456] Chan submits Staff failed to prove
2.Analysis
[1457] Elsewhere in these Reasons, we found
[1458] We agree with Chan it is not reasonable to infer Chan read every email on which he was copied. However, with respect to the April 2011 email concerning the SAFE investigation, this email was a chain of emails beginning on April 13 to May 11, 2011. It was 31 pages long, linking 23 emails. Chan was copied on all 23 emails. Elsewhere in these Reasons, we found it reasonable to conclude Chan read at least some, if not all, of these emails, which dealt with a serious investigation by SAFE and indicated
[1459] Moreover, Yuda Wood was
[1460] In reading the transcript excerpts of Chan’s interview, Chan was asked numerous times and in various ways if
[1461] Despite at least three opportunities, each time Chan denied unequivocally that
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C.Allegations against Ip
1.Submissions of the Parties
(a)Staff’s Submissions
[1462] Staff alleges Ip misled Staff concerning the creation of Forestry Bureau Confirmations by
[1463] Staff alleges Ip misled Staff about the timing of purported payments made by
(b)Ip’s Submissions
[1464] On August 29, 2011, Ip was questioned about payments to suppliers by AIs. Ip’s counsel submits there was considerable confusion during the interview, which influenced Ip’s reply to a question from Staff. Ip replied:
Okay, I make a claim. So once we confirm with the suppliers on such agreements to purchase. Then I would inform Albert Hung… Okay, I have to reorganize my thoughts. (Pausing)
So after we have signed agreements to purchase, we would inform Albert Hung to release the payments to the suppliers.
2.Analysis
[1465] Staff submits Ip underplayed the influence and control that Sino
[1466] The first reference Staff relies upon regarding the role of Sino
Q. So who are the people who prepared this document?
A. I make a claim. So the draft of this confirmation letter was prepared through our Legal Department in consultation with the legal opinion of Jing Tian company and also in fitting with the demands or stipulation of the Auditing Department.
This describes correctly, in the Panel’s view, the process to prepare the original template for the Forestry Bureau Confirmations. We do not find Ip’s response to
this question misleading.
[1467] The second reference on which Staff relies is in respect of the preparation and issuance of Forestry Bureau Confirmations. In his examination by Staff, Ip stated “the term page would be adjusted in accordance to the formats by the Forestry Bureau”. In fact, the format of the Forestry Bureau Confirmations was not
1 9 In his examination, Ip referred to the Auditing Department. We assume this is a reference to the Finance Department.
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2017 ONSEC 27 (*)
changed based on instructions from Forestry Bureaus. Moreover, Sino
[1468] With respect to Ip’s testimony about the timing of payments to suppliers, we accept Ip’s submission he was confused. The transcript of Ip’s examination indicates the interpreter was tired. Staff was questioning Ip about AIs, yet Ip’s response referred to suppliers and he stated at the end that “I have to reorganize my thoughts”. Staff did not follow up to clarify either the question they were asking or Ip’s answer. This is in contrast to Staff’s questioning of Chan, discussed above, where Staff gave Chan several opportunities to clarify or change his misleading answer.
[1469] We find Ip misled Staff with respect to
D.Allegations against Hung
1.Submissions of the Parties
(a)Staff’s Submissions
[1470] Firstly, Staff alleges Hung misled Staff by falsely describing the creation of purchase contracts, sales contracts and their attachments. Staff alleges Hung made statements that were false and misleading when he informed Staff he confirmed the accuracy of all the information in the purchase contracts and that he ensured the attachments to the purchase contracts, including the Forestry Bureau Confirmations and Survey Reports, would be “in place”.
[1471] Secondly, Staff alleges Hung misled Staff as to the timing of alleged payments made pursuant to the
(b)Hung’s Submissions
[1472] Hung submits a review of his examination by Staff demonstrates he was not evasive about the timing of creation of contracts, nor about the number of times suppliers were paid before the contract was signed.
2.Analysis
[1473] A review of Hung’s examination does not support the first of Staff’s allegations
that Hung deliberately misled Staff, but does support the second allegation.
[1474] Hung provided Staff a description of the creation of purchase contracts, sales contracts and their attachments, which we find was generally consistent with the evidence. Hung did not respond directly or fully to certain of Staff’s questions. When asked whether there was a schedule associated with the preparation of the contracts, he responded that he would arrange for the preparation of a single contract or several contracts when all of the information was ready. Moreover, when Staff asked Hung if he backdated the contracts, he responded the contracts were dated with the date of the verbal agreement. Although Hung’s responses were not directly responsive to those questions, the information he
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provided was not incorrect. Staff did not follow up with questions which might have probed the responses provided by Hung.
[1475] We find Hung did not mislead Staff when he told Staff he checked details in regards to location, area, inventory, and price and ascertained that “all the information is correct” and would make sure the whole contract, with the attachments inclusive is complete “before forwarding a copy to the accounting service for financial records”. Hung stated he would check that two attachments
– the Survey Report on forest resources and Forestry Bureau Confirmation – were included. Furthermore, Hung clearly stated he never saw a Villagers’ Resolution attached to any BVI purchase contract.
[1476] Turning to the second allegation that Hung misled Staff about the timing of purported payments, the transcript discloses Hung stated he made a payment more than once to a supplier on the verbal instructions of Ip without seeing the contract first. He declined to answer if he made such payments more than ten times or more than twenty times or once a month and stated repeatedly that he could not recall or remember. Hung states in his affidavit he had a sense that the Staff examiner was pressing him for a precise number, which he declined to provide. The transcript discloses clearly, however, that although the Staff examiner was persistent, the Staff examiner was asking fo r “an estimate”, which could be “rather vague”, in fact.
[1477] We do not agree the examiner was pressing for a precise number. We find Hung misled Staff with respect to the timing of purported payments made pursuant to the purchase contracts.
[1478] We find Hung misled Staff contrary to subsection 122(1)(a) of the Securities Act and the public interest.
E.Allegations against Ho
1.Submissions of the Parties
(a)Staff’s Submissions
[1479] Staff alleges Ho misled Staff when specifically asked about what role he took “in the whole BVI process”, by providing false and misleading responses of “None whatsoever,” and “No, I’m not at all involved in the BVI whatsoever”.
[1480] In addition, Staff alleges Ho denied he was copied on any emails or communications involving the BVI Model, which was false and misleading.
[1481] Finally, Staff alleges Ho asserted Yuda Wood was independent of Sino
(b)Ho’s Submissions
[1482] Ho submits he was not involved in the BVI process. His activity with Yuda Wood was only regarding WFOE transactions.
2.Analysis
[1483] The evidence indicates Ho was copied on emails that involved the BVI Model. We interpret Ho’s assertion that he was not involved in the BVI process to mean his involvement was peripheral to his main role in the WFOE Model. Staff has not
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provided us with any emails or communications otherwise, that indicate a deeper involvement in the BVI Model.
[1484] Ho submits his interaction with Yuda Wood was only with respect to WFOE transactions, and not with the BVI Model. In the interview, Ho is asked if Yuda Wood is a related party. He states:
A. I’m not aware that it is. Yeah.
…
Q. Do you believe Yuda Wood to be an independent company?
A. As far as I can tell, yes, I believe it’s an independent company.
Q.Totally independent from
A.That’s correct.
Q.And you have no control over any aspect of their business whatsoever?
A.No, no. None whatsoever.
[1485] It is clear to the Panel that Ho is asked if Yuda Wood was independent from
F.Allegations against Yeung
1.Submissions of the Parties
(a)Staff’s Submissions
[1486] Staff alleges Yeung misled Staff, when specifically asked about his involvement in the creation of Yuda Wood, by responding that he assisted with the application process as a favour to his friend, Huang Ran, and denying
(b)Yeung’s Submissions
[1487] Yeung submits he was involved in establishing a company called Jaiyu Wood. He explained he was helping Huang Ran register Yuda Wood and his understanding was that HK Sonic Jita paid Yuda Wood’s capital.
2.Analysis
[1488] Yeung stated in his interview “[t]he capitalization of Yuda has nothing to do with
me”.
[1489] We discuss extensively elsewhere in these Reasons Yeung’s role with respect to Yuda Wood, and why we do not find his explanation in his affidavit and testimony credible.
[1490] We find Yeung misled Staff about his involvement in the creation and capitalization of Yuda Wood.
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[1491] We find Yeung misled Staff, contrary to subsection 122(1)(a) of the Securities Act and the public interest.
X.CONCLUSIONS
[1492] For the reasons discussed above, we make the following conclusions.
[1493] In respect of the Standing Timber Fraud Allegations, we find:
a.
b.We dismiss the allegation against Yeung.
[1494] In respect of the allegations of misleading statements regarding
a.
b.Pursuant to subsection 122(3) of the Securities Act, as an officer of Sino- Forest, Chan authorized and permitted
c.Pursuant to subsection 122(3) of the Securities Act, as officers of Sino- Forest, Ip and Ho permitted and acquiesced in
d.Pursuant to subsection 122(3) of the Securities Act, as an officer of Sino- Forest, Hung permitted
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[1495] In respect of the allegations relating to the Greenheart Transactions, we find:
a.Chan engaged in an act and course of dishonest conduct that he knew constituted a fraud on
b.
c.Pursuant to subsection 122(3) of the Securities Act, Chan, as Chairman and Chief Executive Officer of
[1496] In respect of the allegations of misleading the Commission, we find that each of Chan, Ip, Hung, Ho and Yeung misled Staff during its investigation, contrary to subsection 122(1)(a) of the Securities Act, and contrary to the public interest.
[1497] Staff and the Respondents shall contact the Office of the Secretary of the Commission within 30 days of the date of these Reasons to schedule a hearing with respect to sanctions and costs.
Dated at Toronto this 13th day of July, 2017.
“James D. Carnwath”
__________________________
James D. Carnwath, Q.C.
“Edward P. Kerwin” |
“Deborah Leckman” |
__________________________ |
__________________________ |
Edward P. Kerwin |
Deborah Leckman |
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|
APPENDIX A – GLOSSARY OF TERMS |
|
|
Term or Person |
Description |
|
|
AIs |
Authorized intermediaries, purportedly arm’s length |
|
companies used in the BVI Model that acted as sales agents |
|
in Mainland China for the |
(*)
Ansu Factory
AR/AP
Ardell, William
Audit Confirmation Letters
A plastic products factory in Hunan Province that was purchased by the
Member of the
Letters provided to
2017 ONSEC 27
BDO
BVI
BVI Model
C&F
Cash Flow Gap
Chan, Eric Chan, Pauline
Chau, Alex
BDO McCabe Lo Limited,
British Virgin Islands. Also refers to
One of
Commerce & Finance Law Offices, Chinese counsel whose opinion is in evidence.
The RMB 50.2 million difference between the accounts receivable and accounts payable that arose as a result of the 450 Transactions.
Former Assistant
Allen Chan’s sister. Principal of Eminens Limited, a company involved in the Greenheart Transactions.
Chan’s “best friend”. A director and indirect 25% shareholder of Chan’s offshore holding company, ADS
i
Term or Person |
Description |
|
|
(a.k.a: Chau Chi Piu)
Chen Hua
Chen Jinxing
Chiang, Yosanda
Holdings (BVI) Ltd.
Senior
Former
Allen Chan’s Executive Assistant at
ONSEC 27 (*)
Ching, Ivy
Clifford, Fred
CNFIF
Company Caretaker List
Greenheart Resources employee.
Partner at E&Y,
China National Forestry Industry Federation.
A document containing a list of more than 120 companies. Referred to in our analysis of the allegations of undisclosed control and the Greenheart Transactions.
2017
Confirmation of Sales |
Document addressed to |
Situation |
BVI Model, which confirm the total standing timber sold |
|
pursuant to a sales contract. |
Dacheng |
Guangxi Dacheng Timber Co., Ltd., a |
|
Involved in the Dacheng Transactions. |
Dongkou |
Dongkou Shuanglian Wood Co., Ltd., a |
|
customer. |
Du Aiguo |
Former |
|
|
E&Y |
Ernst & Young LLP, |
Fapiao |
Official tax receipts issued by the Chinese Tax Bureau for |
|
the purchase of goods or services. |
Farmers’ Authorizations |
See Villagers’ Resolutions. |
Forestry Bureau |
Documents prepared by |
Confirmations |
Forestry Bureaus that |
|
standing timber ownership in the BVI Model. |
Forestry Bureaus |
Offices of the Chinese state forestry authority. |
Fortune Universe |
Fortune Universe Limited, a Greenheart Resources |
|
shareholder and a BVI company involved in the Greenheart |
ii
|
Term or Person |
Description |
|
|
|
|
|
Transactions. |
|
Gao Fajun |
Former |
|
Meishan, |
|
|
|
|
|
|
Forestry Co. Ltd., a |
|
Gengma Dai |
Gengma Dai and Wa Tribe Autonomous County Forestry |
|
|
Co., Ltd., a |
|
|
and Gengma #2 Transactions. |
27 (*)
Greenheart Resources
Hao, Gavin
Greenheart Resources Holdings Limited, a company in which
Chinese Forestry Consultant with the pulp and forestry consulting firm RISI. Qualified and testified in the hearing as an expert in the Chinese forestry industry.
2017 ONSEC
Haosen
Harvesting/Sales Confirmations
He Yongning Henderson, Steven
HK Sonic Jita
Horsley, David
Hu Liang Mei
Huang Ran
Huang, Dr. Robin Hui
Guangxi Pingle Haosen Forestry Development Co., Ltd., a
Documents relied on by
Shareholder in Juncheng, a
Chartered Professional Accountant at PwC, advisor to the Independent Committee. Involved in creating the work plan for the Independent Committee advisors and led the Canadian PwC team involved in the Independent Committee advisory process. Testified in the hearing.
Hong Kong Sonic Jita, the parent company of the Sino - Forest supplier Yuda Wood.
Former Senior
In a close personal relationship with Allen Chan. Involved in the Greenheart Transactions.
Former
Shareholder in Yuangao, Taiyuan, Guangxi Chihui Forestry Co. Ltd., and Jiangxi Province Senchangtai Forestry Co. Ltd.,
Professor in the Faculty of Law at the Chinese University of Hong Kong. Qualified and testified in the hearing as an expert in translation of the term wai wei gong si from
iii
|
Term or Person |
Description |
|
|
|
|
|
Chinese characters into English. |
|
Hyde, James |
Member of the |
|
and throughout the Material Time. Was Chair of the Audit |
|
|
|
|
|
|
Committee and the Corporate Governance Committee and |
|
|
was a member of the Compensation and Nominating |
|
|
Committee. Following the Muddy Waters Report, was |
|
|
appointed a member of the Independent Committee. |
|
|
Testified in the hearing. |
|
ICFR |
Internal controls over financial reporting. |
|
Independent Committee |
A committee of independent directors of |
|
|
of Directors appointed to examine and review the |
|
|
allegations made in the Muddy Waters Report. |
|
Investors |
Investors from which |
|
|
$3.0 billion between February 2003 and October 2010 |
|
|
through issuances of debt and equity securities. |
|
Jiang Nanyan (Nancy) |
Lei Guangyu’s secretary. |
|
Jiayu Wood |
Hunan Jiayu Wood Products Co., Ltd., a |
|
|
subsidiary located in Hunan Province. |
|
Jingtian |
Jingtian & Gongcheng Attorneys at Law, Chinese counsel |
|
|
who provided legal opinions to |
|
Jun He |
Jun He Law Offices, Chinese legal counsel. An advisor to the |
|
|
Independent Committee. |
|
Juncheng |
Dao County Juncheng Forestry Development Co., Ltd., a |
|
|
|
|
Kun’an |
Guangxi Hezhou City Kun’an Forestry Co., Ltd., a Sino- |
|
|
Forest supplier. |
|
Lam, Marco |
|
|
Lei Guangyu |
Friend of Chan. Involved in the Greenheart Transactions. |
|
|
Testified in the hearing. |
|
Li Hua |
Legal representative of Bohu, a |
|
Lim, Alvin |
Financial Controller at |
|
Lincang |
Lincang City Forest Inventory, Planning & Design Team, a |
|
|
survey company engaged by |
|
|
the Gengma #1 Transactions. |
|
|
iv |
2017 ONSEC 27 (*)
Term or Person |
Description |
|
|
Liu, Jinrong |
Managing partner of Global Law Office in Beijing, China. |
|
Qualified and testified in the hearing as an expert in Chinese |
|
law, regulation, and government practices as they relate to |
|
specific matters at issue in the hearing. |
Liu Zhiwei |
Former |
|
|
Lok Ho Ting |
Involved in the Greenheart Transactions. |
Lok, Jim |
Hong |
|
for Hong Kong to Suriname. Director and General Manager |
|
of Super View International Holding Limited, the |
|
predecessor company to Greenheart Resources. |
Long, Anthony |
Senior Forensic Accountant in the Enforcement Branch of |
|
the Commission. Testified in the hearing. |
Lu Qiding |
Former |
|
(China) Investments Ltd. Head of |
|
Department, reported to Ip. |
Lui, Tommy |
Shareholder in Greenheart Resources. |
Mainland China |
The People’s Republic of China exclusive of Hong Kong. |
Man, Josephine |
Chartered Accountant. Former Senior Audit Manager and |
|
Audit Planner at E&Y. Audited |
|
statements from 2007 to 2010. Testified in the hearing. |
2017 ONSEC 27 (*)
Maoxiang
Maradin, Thomas
March 15 Report
Martin, W. Judson
Yongzhou City Maoxiang Forestry Development Co. Ltd., a
Report on 2008 Internal Control Certification Project , March 15, 2009, a report prepared by Mr. Maradin to the Audit Committee summarizing the progress on remediating internal control deficiencies.
Member of the
Following Allen Chan’s resignation in August 2011, was appointed CEO of
v
Term or Person |
Description |
|
|
Meishan |
Guangxi Rongshui Meishan Wood Products Factory, a Sino - |
|
Forest customer involved in the 450 Transactions. |
MFA |
Master Framework Agreement, agreements |
|
entered into with suppliers to purchase standing timber. |
Monday Morning |
Weekly |
Meetings |
Monday mornings mainly to discuss |
|
and development and to update Chan and senior |
|
management on the progress of operations. |
Montsford |
Montsford Limited, a Greenheart Resources shareholder and |
|
a BVI company involved in the Greenheart Transactions. |
Muddy Waters Report |
A report released by Muddy Waters, LLC on June 2, 2011, |
|
alleging fraudulent conduct by |
|
a “Ponzi scheme”. |
Murphy, Michael |
Managing Director, Asia Pacific Practice of AlixPartners in |
|
Hong Kong. Qualified and testified in the hearing as an |
|
expert in Chinese business practices and how they relate to |
|
business regulations in China. |
Murray, Simon |
Member of the |
|
investor in Greenheart Resources. |
Omnicorp |
Omnicorp Limited, a widely held company listed on the |
|
HKSE that was a 60% shareholder in Greenheart Resources |
|
and involved in the Greenheart Transactions in which Sino - |
|
Forest purchased a controlling interest. |
Peerenboom, Dr. |
Qualified and testified in the hearing as an expert in the |
Randall |
field of Chinese law and cultural practices in China within a |
|
comparative global and Asia context. |
Plantation Fibre |
Term used in |
|
from standing timber and harvested logs. |
Pomeroy, James |
Vice President of PwC, advisor to the Independent |
|
Committee. Testified in the hearing. |
Poon, Kai Kit (K.K.) |
|
|
Forest from 2004 to 2008. |
Pöyry |
Pöyry Forest Industry, the forestry consulting company |
|
|
|
prepare a valuation of its standing timber holdings. |
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2017 ONSEC 27 (*)
Term or Person |
Description |
|
|
PRC |
Plantation Rights Certificates, official Chinese government |
|
documents that provide proof of forestry rights ownership in |
|
Mainland China. |
PwC |
PricewaterhouseCoopers, an advisor to the Independent |
|
Committee. |
Qi Shuxiong |
Former |
|
survey company Zhanjiang Southern. |
SAFE |
State Administration of Foreign Exchange, the Chinese |
|
regulatory body responsible for overseeing the conversion |
|
of foreign currency into renminbi. |
SAIC |
State Administration for Industry and Commerce, the |
|
Chinese regulatory body that oversees corporate filings. |
Second IC Report |
Second Interim Report of the Independent Committee of the |
|
Board of Directors of |
|
2011, the second of three reports the Independent |
|
Committee released in the course of its investigation. |
Shao, Maggie |
Senior Forensic Accountant in the Enforcement Branch of |
|
the Commission. Testified in the hearing. |
Shen Siguo |
Former |
Shun’xuan |
Yunnan Shun’xuan Forestry Co., Ltd., a |
|
supplier. |
|
involved in the Greenheart Transactions. |
|
operator in China and an Ontario reporting issuer during the |
|
Material Time. |
|
the parent company of the approximately 48 subsidiary |
|
companies in the |
|
subsidiary involved in Gengma #1 Transactions and |
|
Gengma #2 Transactions. |
|
WFOE subsidiary involved in the 450 Transactions. |
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2017 ONSEC 27 (*)
Term or Person |
Description |
|
|
|
subsidiary involved in the Dacheng Transactions. |
|
subsidiary involved in the 450 Transactions. |
|
subsidiary involved in the 450 Transactions. |
|
involved in Gengma #1 Transactions and Gengma #2 |
|
Transactions. |
|
companies with operations in nine provinces in China, |
|
headed by Ip. |
|
subsidiary of |
Standing logs |
A term used in the hearing to describe unharvested trees |
|
priced for sale at the expected volume of logs that those |
|
trees will yield. |
Standing timber |
A term used to describe the ownership of unharvested trees |
|
in a given specified area, but does not include ownership of |
|
the land on which the trees are growing. |
|
Dacheng Transactions. |
Survey Reports |
Reports produced by a survey company produced for |
|
plantations purchased by |
|
attachments to |
Taiyuan |
Guangxi Rongshui Taiyuan Wood Co., a |
|
involved in the Gengma #2 Transactions. |
Tian Jianguo |
Former |
|
|
Tse, Daphne |
CFO of Greenheart Resources. |
Van Oppen, David |
Shareholder in Greenheart Resources. |
Villagers’ Resolutions |
Authorizations from villagers for the transfer of forestry land |
|
owned by a village collective in Mainland China, and listed |
|
as attachments to |
|
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2017 ONSEC 27 (*)
Term or Person |
Description |
|
|
|
Alternatively translated as “Farmers’ Authorizations”. |
WFOEs |
Wholly |
|
in Mainland China that are owned by foreign companies, |
|
such as |
WFOE Model |
One of |
|
|
|
China to directly purchase and sell timber forestry |
|
plantation rights in Mainland China. |
Wong, Kenny |
|
Wu Ruiming |
Former |
|
|
Xinqi |
Gaoyao City Xinqi Forestry Development Co, Ltd., a Sino- |
|
Forest customer involved in the 450 Transactions. |
Xu Ni |
|
Yang Jun |
Former |
|
Responsible for finance at Kun’an, Yuda Wood, and |
|
Yuangao, |
Yu Degang |
Former |
|
Maoxiang, and Shun’xuan, |
Yuangao |
Guangxi Hezhou City Yuangao Forestry Development Co., |
|
Ltd., a |
|
Transactions and the 450 Transactions. |
Yuda Wood |
Huaihua City Yuda Wood Co., Ltd., |
|
supplier to BVI subsidiaries between 2007 and 2010, |
|
involved in the Gengma #1 Transactions and the Gengma |
|
#2 Transactions. |
Zeng, John |
Involved in the Greenheart Transactions. |
|
external counsel, and represented Chan during his interview |
|
by Staff in connection with this matter. |
Zhanjiang Southern |
Zhanjiang Southern Forestry Projects Quality Supervision |
|
Co. Ltd., a survey company employed by |
|
prepare Survey Reports for BVI purchases. |
Zhao, Albert |
Senior |
|
operations of |
|
for BVI standing timber sales. |
|
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2017 ONSEC 27 (*)
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