Muddy Waters LLC Reacts to Sino-Forest (SNOFF) Earnigns Call

Muddy Waters LLC issued their reaction to today's Sino-Forest's (OTC: SNOFF) (TRE.T) Q1 earnings call.

Muddy Waters said the sell-off in the shares illustrates their overall feelings about management's response to questions.

The firm noted:

• Ernst & Young has been unable to complete its review of TRE’s Q1 numbers.
  
  
• Chairman / CEO Allen Chan personally guarantees that TRE has disclosed all
  related party transactions. However at no time did management address TRE’s
  relationship with Lei Guangyu, the only disclosed AI. Mr. Chan stated that Mr.
  Lei is a major AI.
  
  
• TRE’s suppliers (agents) and buyers (AIs) are two different parties. As shown by our analysis of five suppliers, none of which were capable of selling nearly the
  volume of timber TRE claims, TRE had made this point clearly before.
  
  
• TRE added an odd twist to its disclosed business model. AIs now apparently do not pay TRE directly (see our discussion of the various problems in doing so).
  Rather they pay TRE indirectly by paying TRE’s “designated purchasing agents”,
  which then purchase more parcels. As we wrote in our initial report, a consistent
  theme of TRE’s stated business practices is that they are unnecessary, overly
  complicated, and risky for a legitimate business.
  
  Is the designated purchasing agent an AI-squared? We look forward to more
  detail on this new facet so that we can analyze the legal and practical issues
  
  
• Mr. Chan explained that the AI model came into being because TRE could not
  form WFOEs in the 1990s to conduct this business. As we pointed out in our
  report, after TRE’s EJV with the Leizhou Forestry Bureau terminated (due to
  TRE’s failure to contribute its capital), TRE had a WFOE that had a business
  scope that permitted it to do business directly. Aside from that point,
  management did not explain why it continues to use an AI model today. Thus the
  AI model makes no more sense now than it did before this explanation.

Muddy Waters also highlighted a number of other items. You can view their full report here

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