John Paulson has finally broken his silence on the Sino-Forest disaster, in a four-page letter to investors.
For weeks Paulson refused to answer questions about the investment, according to AR,
He says now that the firm has sold out of the position, he can discuss it.
The shareprice of Sino-Forest, a Chinese plantation operator listed in Toronto, has collapsed in the wake of a Muddy Waters research report accusing the company of a fraud tantamount to the Madoff Ponzi scheme.
Paulson’s hedge fund held a major position in the company, and reports of up to $700 million in losses have been widely reported. The firm’s flagship is down at least 15% for the year, in large part because of the Sino-Forest implosion.
The hedge fund became interested in the company back in 2007 and began “researching the company and started building a position after news that Sino-Forest’s potential acquirers would not be bidding sent its stock price down.”
(There were media rumours of a takeover by Macquarie Bank and CVC Asia Pacific back in 2007).
Paulson & Co’s losses were far less than reported — amounting to “$107 million over the life of the position based on its sale of the bulk of its holdings between $19.30 and $25.40, still well above the $9.14 price at which the firm initially began acquiring the stock,” AR reported.
DUE DILIGENCE EXPLANATION
Paulson said the firm “conducted extensive due diligence” and basically that their access to information is the same as the general public, and they relied on information published by auditors (including Ernst and Young) and underwriters, which had said the company’s financials were accurate.
Paulson also noted that Sino-Forest had passed “several legal and institutional controls” including an audit by the Toronto Stock Exchange and wide coverage by sell-side analysts and ratings agencies.
WHY THEY SOLD OUT
Paulson told investors the firm finally decided to liquidate the position because, via AR,
Although Sino-Forest steadfastly denies the Muddy Waters allegations … and maintains that there is no fraud, we believe significant uncertainties exist and we made the determination to sell our full position and await the results of the independent investigation. Even if Sino-Forest’s special committee investigation clears management and supports the public disclosures and financial statement, the stock may remain depressed for an extended period of time.
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