The Ontario Securities Commission said Wednesday it is investigating allegations against Mississauga-based Sino-Forest Corp.
An OSC spokeswoman did not provide any more details about the investigation.
At the same time, a Toronto law firm launched a class-action lawsuit against the company.
The firm, which owns timberland in China, has been accused by short-seller Muddy Waters Research of exaggerating its sales and assets.
Shares in the company have been devastated since Muddy Waters made its allegations. Short-sellers benefit from a fall in the price of shares.
After hitting a five-year intra-day low of $3.67 Tuesday, an 85 per cent drop from its high on April 1, shares in the company closed up 91 cents, or almost 23 per cent, to $4.92 on the Toronto Stock Exchange.
Later Wednesday, Toronto law firm Rochon Genova LLP said it had begun a class action on behalf of Sino-Forest shareholders, alleging securities law violations by the company, some of its executives, board members, its auditors and underwriters.
Rochon Genova said it began the suit on behalf of shareholders who bought shares on or after May 17 and investors who acquired stock through the company's 2009 stock listing.
The lawsuit "alleges misrepresentations in Sino-Forest's filings, including the 2009 prospectus offering, press releases and public statements that, among other things, greatly exaggerated the company's assets and revenues," the law firm said in a statement. The allegations are not yet proven.
Sino-Forest has appointed an independent committee to investigate the claims by Muddy Waters and has said it's confident it will be vindicated.
It has also posted sales agreements and other documents showing its ownership of timberlands in China on its website.
The company also said it would ask securities regulators to investigate trading activities conducted by Muddy Waters and others prior to the release of the allegations, while the short seller said it would provide copies of the documentation it has reviewed to the regulator.
Sino-Forest said it welcomed the OSC investigation, adding that it believes the answers the regulator is seeking are likely the same as those being sought by the company's independent committee.
Both the Toronto Stock Exchange and the Investment Industry Regulatory Organization of Canada would be asked to investigate trading in Sino-Forest stock by Muddy Waters and others ahead of the release of the critical report.
"The company also intends to request an investigation by the Singapore Exchange Ltd. in respect to the trading of the company's bonds," Sino-Forest said in a statement.
On Tuesday, Moody's Investors Service put Sino-Forest under review for a possible downgrade after it raised concerns the company's business may be affected, even if the accusations are proven false.
"Moody's notes that Sino-Forest has been growing aggressively, and needs ongoing access to the equity and debt markets to continue such growth," the debt rating agency said in a statement.
"There is a risk that the current allegations will damage its ability to do so, or increase the cost of doing so."
Moody's, which currently had a rating of Ba2 on the company, said $1.9 billion in Sino-Forest debt is affected by the review.