Sino-Forest: These Are Not the Trees You’re Looking For

The title of this post, in case anyone missed it, aimed to channel Obi-Wan Kenobi:

Sino-Forest ($SNOFF, $TRE.TO) got some “good” news yesterday when Wellington Management announced that it had more than doubled its stake in the company to 28.4mm shares – 11.5% of the company.  I found this somewhat odd.  Although we don’t know which Wellington fund bought the shares (it wasn’t listed in the regulatory filing), I found it surprising that a mutual fund complex would increase risk in a position with so little clarity at the moment.  In other words, if Wellington had sold its stake, and Paulson had increased his stake, I wouldn’t find that surprising – Paulson, a hedge fund, can justify “trading” positions and risk acceptance much more than Wellington, a mutual fund can.  In my view, while hedge funds are in the business of making positive expected value trades, mutual funds generally have more stringent standards, and must consider not only the expected value, but also the shape of the distribution and the confidence levels assigned to each outcome.  In other words, a hedge fund trader can be an EV whore – scalping trades with the thinnest of expected value edges -  but a mutual fund trader cannot be quite as much of an EV whore.  Then again, that’s just a “rule” I have in my head…  As a friend put it, “it’s not a violation of fiduciary duty to use reasonable judgment and be wrong.”  I guess, in my mind, the standard of what constitutes “reasonable judgement” differs for a hedge fund vs a long-only mutual fund – but again, that’s not a legal distinction, perhaps.

It’s possible that Wellington owns the Sino-Forest position in an alternative asset class fund, not a long only mutual fund, but this increased risk in a time of pure informational opacity struck me as odd, in any case.

Anyway, today Sino-Forest went back down the rabbit hole, postponing an analyst tour:

“On behalf of the management team of Sino-Forest Corporation (“Sino-Forest’), we are writing to inform you that we are postponing the analyst trip that was previously proposed for mid-July.

When we first proposed the analyst trip on June 6, following the unfounded allegations made by Muddy Waters, LLC, our aim was to showcase Sino-Forest’s forestry assets and business partners to the sell-side and buy-side analysts who follow the company. However, following management’s recent conversations with the analyst community who cover Sino-Forest, it has become apparent that many of you have been precluded from resuming coverage of the company and otherwise discussing its affairs publicly until after the Independent Committee reports on the unfounded allegations made by Muddy Waters, LLC.”

That’s CEO Allen Chan’s explanation, which leaves me shaking my head in awe.  As a colleague of mine put it this morning: “They make it so hard to believe the company is legit.”

Yes, Mr. Chan – the analysts had to withdraw coverage of Sino-Forest because they have no idea what’s going on over there – you are not providing them with the answers they need to form an educated opinion.  Yes – they are eagerly awaiting the results of the special committee’s investigation, but that doesn’t mean that you cannot further help their understanding by providing answers to the questions that they have – questions which certainly would be helped by the analyst tour.

I sold my $SNOFF position this morning for a 71% gain, and currently have no position.  I encourage readers to go back and read my prior pieces on the subject, especially the comment threads where several commenters assured me that this stock was going to be a zero in short order.  It still may be a zero, but I wasn’t buying it to hold for 30 years in my IRA, so I don’t really care.  As long as it goes to $5 first, the trade works (and in this case, it happened to work).

-KD

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