Colin Barr

Following the money in banking, economics, and Washington

Sino-Forest fans push back with SEC hoax

June 21, 2011: 10:36 AM ET

Hedge fund high roller John Paulson has taken some lumps on a Chinese reverse merger stock. But he seems to be dealing with it better than some people.

Paulson's fund filed this week to say it sold all the shares of Sino-Forest (SNOFF) it has bought over the past three-plus years, booking a loss estimated at $700 million. The stock has plunged 91% this year, mostly after a short-seller, Carson Block of Muddy Waters Research, published a report contending the company's books were cooked.

Painful for Paulson

Paulson told Bloomberg he sold the stock "due to the uncertainty over Sino-Forest's public disclosures and financial statements." The company has appointed an independent commission to check the Muddy Waters claims, though there seems to be little doubt that the company has been playing fast and loose with the facts.

The loss is a black eye for Paulson, who made billions betting against the housing market during the bubble but has since had mixed results. His funds have been losing money as his wager on a U.S. recovery, via bank stocks, has gone into the red.

But many others have lost money in the Chinese reverse merger stocks that have been exposed as frauds this year, and you get the idea that some of them aren't taking those losses as maturely as Paulson seems to be.

For instance, some wag on Tuesday published a fake press release purporting to announce a Securities and Exchange Commission lawsuit against Block and Muddy Waters, claiming they manipulated the shares of Sino-Forest, Duoyuan Water (DGW) and Orient Paper (ONP).

The release was obviously a hoax, full of unsubstantiated claims and amateurish grammar and punctuation errors. But that didn't stop it from getting picked up on the Zero Hedge blog, which naturally ran with the idea that in "Communist Amerika" the securities regulators sue the guy who exposes the fraud, not the actual fraudster. Life is hard at the hedge funds.

The SEC declined to comment and BriefingWire didn't return an email seeking comment. Block, who lives in Hong Kong, issued his own statement saying Briefing Wire had "agreed to remove the libelous submission."

Though the hoax obviously getting some attention, it didn't succeed in the way you might assume its authors intended, by causing the mentioned stocks to rise (and presumably saddle Block with losses): Orient Paper shares fell 1% in early trading and Sino-Forest tumbled 21%.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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