By Ian McIlwraith
HEDGE fund hero John Paulson, the man credited with making north of $US15 billion betting against subprime mortgages during the financial crisis, has discovered something else that is red in China - ink.
Paulson's funds were caught long in Sino-Forest, one of the many China-based companies that have listed on North American markets, which has plunged more than 80 per cent in value this month after allegations that its forestry assets were overstated.
John Paulson, president of Paulson & Co.Credit: Brendan Smialowski
His group has now sold its stake, in spite of being referred to by Sino as ''supportive'' less than a week earlier. Ironically, the claims about Sino-Forest came from another hedge fund manager and noted short-seller, Carson Block's Muddy Waters LLC.
Block has been roundly bagged since his report, which claimed that land ownership records in China did not match Sino's claims, because he ''pre-marketed'' the report and short sold the stock before publication. His response has been that he declared on the front page that he was short.
The other criticism has been that Sino-Forest may have had its land holdings registered in other names for tax purposes.
The Canadian-listed Sino's response has been to appoint an independent committee to review the allegations, with PricewaterhouseCoopers assisting.
One local fund manager probably having a quiet celebration is Bronte Capital's John Hempton, who blogged his own thoughts on Sino a couple of weeks back. Followers of his blog will know that Hempton has been a sino-sceptic, as in sceptical about companies from China (other than state-owned) offering investment opportunities to investors elsewhere.
The problem with China has always been the limitations on foreigners owning companies there, resulting in some cute workarounds, but none as cute as exploiting the Western accounting rule on ''variable interest entities'' that was supposed to stop Enron-style structures (having a whole lot of assets and liabilities off balance sheet).
Instead, the entrepreneurs have created listings on markets outside China that are effectively lenders to the real owners of the assets in China. The Canadian and US listed groups, though, have to consolidate those entities because they have effective control - even though they do not own them.
The question has always been, if push comes to shove, what assets will investors outside China be able to lay their hands on?
In the Sino-Forest case, the company is now battling to prove that it is a viable entity, but Paulson (pictured) has decided to cut his losses and sell the stock, taking a hit of somewhere around $US700 million $A662 million). That would hurt Insider, but for someone running global funds of $US37 billion, not so much.
Looked at another way, if the smart money has now bailed out and lost 80 per cent - what about everyone else? The most exciting aspect could be if Sino-Forest's independent inquiry debunks the Muddy Waters report, what size class action will other investors try to mount?
Shortcomings at Longtop
SINO-FOREST'S troubles come less than a month after another China-based group, Longtop Financial Technologies, lost its auditors, Deloitte, in the wake of allegations that its account were being falsified.
Bronte's John Hempton played a hand in that one, pointing out that if the numbers supplied by Longtop were correct then the company was ''absurdly cash rich''.
According to the statement by Longtop at the time, Deloitte and the company's chief financial officer had quit because ''falsity of the company's financial records in relation to cash at bank and loan balances (and possibly in sales revenue)''. Similar concerns were raised last year, about Chinese listings outside of China, during the Singapore Stock Exchange's multibillion-dollar bid for the Australian Securities Exchange.
It is understood that part of the (successful) lobbying against that bid in Canberra involved pointing out some of the shortcomings of such listings in Singapore, and allegations that that they were not being properly policed by Singaporean authorities.
Rare-earth battles
MEANWHILE, in Greenland, the battle between disaffected shareholders of would-be rare-earths miner Greenland Minerals and Energy and the incumbent board is bubbling along.
Proxy figures seen by Insider suggest that the ginger group, headed by geologist Greg Barnes, is unlikely to unseat the existing management team at next week's shareholder meeting.
It has to be remembered that the dispute is really about control of Greenland Minerals and Energy's partly owned Greenland subsidiary which owns the mineral leases that might make its fortune. Barnes and his associates are minority investors in that company and trying to get a look at the books.
GME has long been thought a plaything of roving Australian prospector Mick Shmazian, although he declined to confirm to Insider recently that GME's largest shareholder, GCM Nominees, was his company.
GCM does, though, bear many of the hallmarks of Shmazian - particularly that of filing late substantial shareholding notices. Then again, it is a long way to GME's home of Perth from the Isle of Man, where GCM Nominees lives.
Oddly enough, with Barnes and his team poring over the Greenland Minerals share register, GCM last week clarified its substantial shareholding as still at 35 million shares, or 18 per cent of the company.
Greenland director Simon Cato must have been embarrassed by that notice, given that last November he wrote to the ASX telling them that GCM had sold down all but 4 million of its shares to a UK group called Rensburg Sheppards Investment Management.
Rensurg laid claim to the 31 million shares back then. Now, GCM reckons that the Rensburg stake is still in its orbit, although halved in percentage worth due to option exercises by GME investors.
Still, at least GCM having worked out how many shares it has should nto have any trouble putting up proxy votes to support the existing board against the usurpers.