Monday, June 20, 2011

Sino Forests and a puzzle for media analysts

The Globe and Mail (a mainstream Canadian newspaper) has published a piece confirming the core allegations of Muddy Waters research re Sino Forest. The deals that Sino did in one area are it seems - grotesquely overstated. By implication Sino is not to be trusted and the Muddy Waters allegations are likely to be substantially correct.

This does not surprise me. I was convinced by the Muddy Waters report after reading it and cross-checking just with the annual accounts. (The business model described was bizarre and major fraud was the simplest explanation consistent with the facts.)

However my view of this was hardly important. When the Globe and Mail prints it is important. I got several emails that pointed to the article and said "game over". And they are right. Despite collapsing revenue and declining importance the "Mainstream Media" still matters. They are to some extent trustworthy - have a reputation for telling the truth about major matters - and they are selling that trust.

Blogs may be right more often than not. (So far - touch wood - this blog has made very few mistakes...) Blogs may be more adventurous (and there are plenty more adventurous than this blog and I express stronger opinions than much of the mainstream media).

But the mainstream media matters. They do have more authority and the reaction to the Sino Forest article in the Globe and Mail is about to prove it.

So here is a puzzle for the media analysts: how do you continue to monetize trust and truthful media? How does alternative media get that trust and monetize it? Or is there no way of monetizing media trust and hence is all media likely to become (more) untrustworthy?

I really do not know the answer. But if there is no way of monetizing the truth in the media then the world is becoming an altogether more dangerous place because there are plenty of ways of monetizing lies...


PS. The Globe and Mail was only last week squibbing on Sino Forest. They published a bizarre editorial which suggested that Muddy Waters inflammatory rhetoric reduced their credibility. I thought that Muddy Waters rhetoric (if they were right) was if anything understated. I wrote this letter to the editor which they did not publish:

Dear Sirs 
In your editorial dated 14 June you suggest that Muddy Waters Research's relentless comparisons of Sino Forest to Bernie Madoff reduces their credibility. 
Au contraire. 
Muddy Waters allegations are far from proven but if true they suggest that in excess of a billion dollars has been raised from Canadian markets to buy forest and forests were not purchased. In other words the money has been stolen. 
Further insiders and related parties have probably sold a further billion dollars in Sino Forest shares. 
This alleged theft is probably in excess of $2 billion. 
Bernie Madoff took money from Peter to pay Paul. The amount of money stolen for Bernie Madoff's personal use was probably less than $300 million. Sino Forest is six times bigger and if the Muddy Waters allegations are correct is probably the largest straight theft in human history. 
The Globe and Mail's suggestion that comparisons to Bernie Madoff are credibility reducing is just an extension of the jelly-backed tradition of apologizing for Canada's inept and faithless investment banking and stock promotion community. 
John Hempton
Sydney, Australia

And that is right. Sino Forest raised the better part of $2 billion in bonds and related parties probably sold huge amounts of stock. All that money was - if the Globe and Mail and Muddy Waters are right - stolen. That is (if the allegations are correct) the biggest theft in human history.

Comparisons with Madoff are unfair as Madoff only lifted a few hundred million for personal use. This is maybe six times bigger.


Later addendum: I figure that if the allegations are true then this theft was over $2 billion. That is money that went from the victims to the perpetrators net. Madoff had bigger money but Madoff got much much less than that net.

Some people have objected to me characterizing this as the largest theft in human history. I understand but can they please suggest one that is larger? I have yet to find one but the best candidates are things like the Albanian Ponzi and the Spanish Stamp Ponzi. Both were organized crime and in both cases the victims were a substantial portion of the population.

The recognized loss number from the Albanian Ponzi is about $1.2 billion... Some numbers for the Spanish Stamp Ponzi are in the 5 billion euro range - but I think the net losses are less than half that and the net-gain by the perpetrators is thus smaller than Sino Forest.

The dispossession of the American Indians or the Australian Aborigines are bigger thefts... I should limit myself to modern financial market thefts. Thefts in war (including things like Iraqi reconstruction funds) are likely bigger.




Anonymous said...

I am Canadian who regularly follows this blog, so the Sino-Forest story is of particular interest. But I thought that the Globe story was in fact a really weak piece of journalism. The story on their website - questioning inconsistencies between the Sino-Forest line and an interview with a Gengma executive - might seem interesting. But in the paper version, the story covered the entire first page of the business section and two entire pages inside the business section, most of it covered with two large photographs that added nothing to the story. It came across was a hugely oversold piece of journalist relative to the actual content. With two weeks to research the story, in China, and a road map to work from in the Muddy Waters report, I would have expect something much better. If anything, I thought it symptomatic of the decline of mainstream media, particularly for what a Canadian might view as the closest thing we have to the New York Times.

Tom said...

I wouldn't be too hard on the Globe & Mail's journalists. After all, budgets for investigative reporting aren't what they used to be. I think they deserve commendation for commissioning an investigation at all.

I might also point out that The New York Times didn't do any investigative reporting on the previous RTO frauds -- which were listed in New York. (To be fair, Floyd Norris did write his usual thorough analysis article, and the Dealbook blog did do some nice summaries of what was going on. But that was all based on released statements -- they didn't, for example, send reporters into China to ride CCME's buses.)

As for the Globe & Mail's loony editorial, it's not that uncommon to have a disconnect between the editboard and the newsroom. Here's an example of a topic that's shown up on this blog before: Microsoft.

Compare the New York Times' June 10 editorial "Remember Microsoft?" with the June 18th article "Lessons in Longevity, From I.B.M." in the Technology section of the same newspaper.


The difference in attitude and perspective is quite stark. And that's why Microsoft is trading at an Enterprise Value of 8x earnings, while value investors are snapping it up.

cargocultinvestor said...

This is in the comment section of the article. The poster is panglozz

"Sino-Forest has released just one single series of documents on a transaction in 2010-2011. This concern the purchase of acreage near Yongning, Yunnan. Yongning is in a mountain basin at 9000 feet, north-east of the major bend in the upper Yangtze. It is near the tourist attraction of Lugu Lake. This is on the north side of the province well separated from Gengma
Folks wanting to geolocate can use: 27.824247° N 100.696406° E

The documents detail rights to lease timber on land owned by an ethnic tribe. There are four parcels of 1,330, 944, 781, and 931 acres. All forest rights is being leased at an identical 260 RMB per cubic meter of total volume. This is equivalent to $95 / mboardfeet.

The chinese documents mention an attachment with maps, but these are not supplied in the data room. Clearly Sino-Forest has edited the documents to obscure the actual surveyable locations.

The leases identify total and "recoverable" volume. This is where the leases get strange.
The 781 acre parcel has 210 cubic m per hectare total and 122 cm3 recoverable. That is commercial forest inventory numbers.

The other parcels have 53, 29, and 28 Cubic M per hectare. That is virtually unstocked. This is not forest, commercial or otherwise.

The deal is peculiar: a identical stumpage price for plots with mixed composition and virtually non-existent resource. This will not be improved because the altitude and climate preclude the lowland eucalyptus plantation model that Sino-Forest publicizes in its PR.

These leases are not intended to be commercial forest. They appear to be "speculative" chips that will be passed on to an anonymous buyer who will pay an anonymous agent who will provide more "lease rights" to Sino Forest."

He also gave a link to photos of the general area.

That is the best foot they had to put forward? Yikes

John Hempton said...

I am not being hard on the recent piece in the Globe and Mail.

But the original editorial was bizarre - flat bizarre.

If you have nothing original to say then report both sides fairly. On one side you have a shortseller with a limited but successful reputation describing one of the biggest frauds in human history.

On the other side you have a company saying it is all a big misunderstanding and that the shortseller did not take time to understand the business.


There was no reason to editorialize about the shortseller.


If you have something to say (and the Globe and Mail clearly now have something to say) then say it and do not underplay it.

This is arguably the biggest straight theft in human history.

That is a BIG story.


IF said...

"This is arguably the biggest straight theft in human history."

You keep saying this, but it won't get truer. A large theft, but the biggest? Hyperbole and not good for you.

John Hempton said...

IF. I think they stole $2 billion.

I do not know a straight theft that is larger.

Do you?

I have puzzled over that and I think it is true.


Anonymous said...

so much for 5,000 years of civilisation and history; the honorable chinaman is a dead pecies

John Hempton said...

If - a few addendum. Obviously the dispossession of the Australian aborigines etc are bigger thefts.

I have limited myself to modern financial thefts.

And no - I can't find anything where the NET GAIN to the perpetrators is larger.

If you can I will withdraw. The best candidate is Spanish stamps.


Phil said...

John, a candidate for a larger scam is possibly this one:

Although the final figures are not in, I'll be willing to wager that > $2billion will never be recovered.

John Hempton said...

Phil - I concede. War theft is often greater than $2 billion. That includes dispossession - but that example is good.


I guess I am going to have to limit myself to modern financial market theft.

Whatever - this is a biggun.


Anonymous said...


I think while the Muddy Waters report appears to be accurate in outcome (i.e. A Chinese Co. is fraudulent) some of the details are not just inaccurate but are actualy incorrect. However he targeted a big Chinese foreign listed company and was right in his presumption they were fraudulent. Bravo! Plenty more to go I am sure, and typical due diligence of a large hedge fund.

To my point though, I believe as I think you do that Singapore listings are not quite kosher either. To that end I would ask you if you have ever looked at a company that actually does own a large percentage of another Australian Company... AV Jennings. This is owned by SC Global, the Group accounts differ significantly from subsidy, albiet a different reporting period. Further recent price action is just incredible, please take a look at may month end prints and then the insider buying to push the stock back up !


An Observer

Anonymous said...

Hi John,
Re: largest thefts
I remember Bill Browder of Hermitage saying in a speech he believed corrupt insiders stole assets the size of Exxon-Mobile from Gazprom in Russia. I am sure there are a lot of others as well- AIG taking $180B from the American taxpayer, Jack Ma taking Alipay, and those are just in the last few years.

Anonymous said...

What you are really proposing is it's the largest criminal profit in history, which would be an very interesting ranking to see.

I'm wondering if the collapse of all these companies will put a dent in the attitude among many small fry Chinese investors that their government simply won't let the housing market implode.

Anonymous said...


I am puzzled as to yourconclusions as to the importance of the media. TRE dropped from ~$25 to ~$3 over the last couple of months. The Globe and Mail (which, incidentally, is a pretty crappy newspaper, despite being Canada's flagship paper) wrote up their article over the weekend. The stock has dropped another, say, half-dollar or so since.

It seems pretty obvious that the mainstream media has had no mipact whatsoever on the price. Sure, maybe there will be a bit more pressure on the powers that be to make an example of this company (although I doubt it), but how can you say that the mainstream news made any contribution to the stock price?

I'm really confused on this.

Anonymous said...


"I wouldn't be too hard on the Globe & Mail's journalists. After all, budgets for investigative reporting aren't what they used to be. I think they deserve commendation for commissioning an investigation at all."

How much of a budget is required to download some free 10Ks from the SEC (or sedar)?

It's not a matter of budget--it's a problem of incompetence.

Anonymous said...

What's your interpretation of the fact that (thus far) that PWC and E&Y haven't resigned? Haven't reputable Western consultants and auditors quit pretty quickly after other Chinese stock frauds have been revealed? I wonder what the possible explanations for their continued involvement here might be.

Anonymous said...

Neither Tre-X nor son-of-Tre-X Greenheart Group (94 HK) can be doing any wonders for Glencore and its recently installed Chairman Simon Murray.

How much of the new wealth in China, so often displayed in garish, ostentatious shows, is obtained through outright theft or corruption?

Anonymous said...

a previous anon beat me to it.

I think the looting people did to Gazprom was much bigger, although less documented and not cut and dry like Sino.

It also should be said that past frauds should be adjusted for inflation in comparison to Sino.

Anonymous said...

U.S. sub-prime crime spree by mortgage brokers, bankers etc dwarfs anything else, However, it was not one entity profiting, so it was the biggest theft in history but not the biggest criminal gain.

Anonymous said...

Zero hedge has a Paulson Filing of his complete disposition of his 31MM Sino forests position. Vote with
your feet.

Jeff Robinson said...

The Globe and Mail spent 2 weeks doing " on the ground reporting " to corroborate Muddy Waters and their report which involved 2 years of investigative research. To the Globe - Want a story? In your own backyard - RIM in Waterloo - Go spend 2 weeks and find out how RIM has gone from success to failure so quickly - Go spend time in the surrounding coffee shops- ask employees what is going on - now there's a story - Be a leader not a follower - tell us something we don't know.

John Hempton said...

Jeff Robinson: send me an email through the blog.


Frances Endencia said...

You questioned how to monetize truth in the media. The media reports what the subject is stating. Media publicize the reports provided. If the source is untruthful, that is the end product.

Subjects can manipulate the media for publicity for personal gains....

Roger Houston said...

I bigger heist?

Consider mass privatization in Russia, or Russia's default on GKO's in 1998. Boris Berezovsky's alleged theft of state assets has got to be up there. Elena Baturina allegedly pocketed a couple of billion in the transaction that got her husband sacked as Mayor of Moscow (allegedly). If you want to find examples of huge theft on a large scale, look to the experts: Russia.

IF said...

I should have left the example I had in mind. Russia in the 90s.
And no, Mishka was not alone.

How about Germany in the 30/40s, Russia's take of the Spanish gold during the civil war etc. But you can argue these are sovereigns. (I occasionally read stories that some enterprising characters might have cleaned out the Reichsbank in May'45 but I am lacking the reference right now.) But why not the theft of California's gold rush Spanish land grants from Sutter by the mob?

Or does art theft count? "St├ęphane Breitwieser (born 1971) is a French art thief who admitted to stealing 239 artworks and other exhibits, worth an estimated US$1.4 billion (£960m), from 172 museums while travelling around Europe and working as a waiter."

There are more and I am really just scratching. How about Ibank executives? Killing your company for profit does not count? Doesn't seem to be too much off from what the Sino Forests is alleged to have done.

John Short ad sinorazum said...

I wouldnt compare Russia to TRE. Russia wasn't a Ponzi scheme.

Of Ponzi Schemes, so far TRE is indeed the greatest. If true.

Anonymous said...

Parmalat collapsed in 2003 with a €14 billion ($20bn; £13bn) hole in its accounts in what remains Europe's biggest bankruptcy.[Wikipedia]

John Hempton said...

yes - but the lift by criminals from Parmalat was much smaller. Parmalat did actually buy large assets.

Sino - if MW is right - just made it up.


Roger Houston said...


Taylor Bean was allegedly a $3 billion fraud. Would that count as being bigger under your criteria?


John Hempton said...

Taylor Bean - no way. I want NET THEFT.

I suspect the NET THEFT - meaning money taken off the table by the perpetrators - is the real number.

In Madoff it was about 300 million.

Sino - in the far-from-proven worst case will be over 2 billion.


Anonymous said...

"Observer" would you expand on your comments or suspicions about SC Global? As an owner of shares of a fund that owns SC Global shares, I'd be very interested in hearing more.

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