An interim report by an independent committee disproves allegations Chinese timberland company Sino-Forest Corp. is a fraud, the company said Tuesday.
Sino-Forest chief executive Judson Martin said the independent committee has verified the firm's cash balances and confirmed registered title or contractual rights to timber assets, as well as the value of the assets.
"A great deal of financial and reputational damage has been caused by unfounded accusations made by a short-seller, who we understand personally profited a great deal from the losses of others," Martin said in a statement.
"Far from being a 'near total fraud' and 'Ponzi scheme' as alleged by Muddy Waters, Sino-Forest is a real company, with real assets and real revenue."
However, Martin noted that there was room for improvement in the company's operations.
"While the investigation has been difficult, we have also learned much through this process, including a better understanding of the way we need to communicate the operational and regulatory complexities of operating in our industry in China in order to give confidence to our international investor community," he said.
Sino-Forest became embroiled in scandal after allegations in June by short-seller Muddy Waters Research which accused the company of overstating the value of its assets and revenue.
A short-seller profits when the price of a share falls, which happened in Sino-Forest's case after the Muddy Waters report.
The allegations prompted the Ontario Securities Commission to launch its own investigation and later to refer the case to the RCMP for a criminal investigation.
Muddy Waters research director Carson Block questioned the credibility of the independent committee's report Tuesday.
"The timing of Sino-Forest's press release makes clear that the directors and officers are responding to the criminal investigation announced last week by the integrated market enforcement team of the Royal Canadian Mounted Police," Block said in a statement.
"It should be noted that all three directors who oversaw the investigation are defendants in shareholder lawsuits, and one of the three resigned just prior to this release."
Sino-Forest announced in June that the committee of independent directors would take at least two or three months to complete its report. The company said in August it would take longer than that and a final report was expected out by the end of 2011.
As part of the Sino-Forest report, audit firm PwC reviewed 28 bank accounts covering 80 per cent of the company's cash balance in Hong Kong and mainland China.
The independent committee noted that it faced significant challenges in verifying the company's timberland holdings because of China's legal regime for forestry and national laws and policies that have not been implemented at all local levels.
The independent committee also said Sino-Forest's operational and administration systems did not reflect the company's size and complexity in relation to North American practices.
The report noted that there was incomplete or inadequate record creation and retention practices, no integrated accounting system and employees conducted company business from time to time using personal devices and non-corporate email addresses.
Sino-Forest said the final report by the independent committee is expected by the end of the year.
In the meantime, the timber company said the release of its third-quarter results will be delayed by about a month.
Sino-Forest has raised about $3 billion from the sale of shares and corporate debt issues since 2003 — bought by Canadian, American and international investors.
Its stock, which traded for more than $14 before the allegations were first made, had fallen to as low as $1.29, but recovered to trade for $4.81 before the OSC halted trading.