A specialty research firm, Muddy Waters Research, released a report alleging that Sino-Forest Corporation (TSX: TRE) is essentially a huge fraudulent operation, backed up by quite a comprehensive research report. TRE was slaughtered in yesterday’s trading, down nearly 20% before it was halted for the day.
If the fraud allegations turn out to be true, this will be the biggest fraud story on the TSX since Bre-X. Sino-Forest had a market capitalization of about 6 billion dollars just two short months ago. In an eerie parallel, Bre-X collapsed after reaching a market cap of approximately $6 billion.
My own investment policy on China is simple – don’t. I am sure there are fortunes to be made investing in legitimate Chinese companies that actually have shareholder-friendly management (this is a contradiction in itself) that have been tarred-and-feathered by all of the rampant fraud that is coming out of China today. Such companies might be possible to find when you are across the wrong side of the Pacific Ocean, but how can you ever know without even knowing the local language?