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

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

'Our conviction that Sino-Forest is a fraud has not wavered since we issued our report' —Muddy Waters analyst Carson Block

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

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

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

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

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Sino-Forest's three-month stock chart on the TSX ((CBC))

The original release called on the company's directors and executives to resign. But in a bizarre twist at midday, the OSC issued a second release, in which it removed the term from its temporary order.

OSC spokesperson Wendy Day said the order on the resignation of directors  was rescinded because the commission was "persuaded" to do so. She declined to say by whom.

She added that such an order can only be attained after a formal OSC hearing, and the regulator is currently considering whether or not to pursue one.

Carson Block, the Muddy Waters analyst who first raised doubts about the company, said he welcomed the OSC's move to cease trading of Sino-Forest shares. "We believe that the OSC's action in suspending trading in Sino-Forest is a major positive in that the commission is protecting investors from making uninformed decisions in a highly volatile stock," he said. 

"Our conviction that Sino-Forest is a fraud has not wavered since we issued our report, and we look forward to seeing justice done."

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