Journeys to China
In the summer of 2011, one of the most successful hedge fund managers of the century, John Paulson, made a bet that allegedly cost him and his investors $500 million in a matter of months. It wasn’t on some wrong-way bet on the options market or a commodities trade gone sour. If that were the case, it would be understandable because of the risks involved. No, it was a loss on the shares of a company called Sino-Forest (TRE.T). The company, as the name implies, was a Chinese company involved in the forestry business. A sound bet, it would seem, thanks to the booming market for commodities in China. Better still, the company’s shares were listed not on some obscure exchange in Ulan Bator, but rather they were listed on a major Canadian exchange.
On March 31, 2011, the shares of Sino-Forest reached their high at $25.85. On June 21, 2011, the shares closed at $1.99. In the period between, a company that specializes in researching short-sale opportunities, Muddy Waters, released a report questioning the veracity of the claims that Sino-Forest had made regarding its land holdings. Here’s what the founder of Muddy Waters, Carson Block, had to say about Sino-Forest:
It’s a Ponzi scheme in that the company perpetually issues securities in order to fund itself. Even by its own fraudulent numbers, the company does not generate any free cash and has not done so in 16 years. Were the company unable to issue additional securities to fund itself, it would collapse. ...