Hugh Culverhouse targets John Paulson's Sino-Forest investment
MIAMI, February 22, 2012—A prominent Miami investor and philanthropist filed suit today against the adviser and the administrator of one of the world's largest hedge funds, claiming that they recklessly bought a large position in a Chinese timber company that has been exposed as a potential fraud.
Hugh F. Culverhouse brought the lawsuit against Paulson & Co., Inc. and Paulson Advisers LLC of New York, claiming that they caused the Paulson Advantage Plus fund to purchase stock in Sino-Forest Corporation. Culverhouse's lawyers, Harvey Gurland of Duane Morris LLP and Lawrence Kellogg of Levine Kellogg Lehman Schneider + Grossman LLP—both in Miami—intend to expand the suit into a class action, the lawyers said, as other investors suffered similar losses when the company's stock plummeted 70-percent in June 2011. They estimate that there may be hundreds or even thousands of such investors.
"With just the basic due diligence, the Paulson companies could and should have foreseen Sino-Forest's problems," Gurland said yesterday after filing the lawsuit in U.S. District Court for the Southern District of Florida. "Instead, Paulson simply threw money at the company with a shocking disregard for the financial well-being of its investors."
Gurland said that the flaws in the approach of Sino-Forest – which has undergone both internal and external investigations and is battling two of its own class actions – should have been obvious to a sophisticated hedge fund manager, and that the Paulson companies are culpable for the drastic deterioration in share value that its investors suffered as a result of Sino-Forest.
John Paulson took responsibility for the failure of his research in an investors' conference call on July 21, 2011, according to a Reuters news story, Gurland noted, and said at the time that he needed to strengthen his Asian research arm.
"It's painful to read that,” Gurland said. "It's a classic case of shutting the proverbial barn door after the horses are gone."
Kellogg observed that Sino-Forest's main problem is its ownership claims to the forest lands. Sino-Forest does not obtain registered title to plantations purchased through its offshore subsidiaries, and the company's rights to the tree plantations therefore may be open to challenge. The scheme to capitalize on Chinese wood may even be illegal under the laws of the People's Republic.
"In China, land generally can only be owned by the government and farmer collectives," Kellogg said. "It is questionable whether Sino-Forest could ever have laid claim to any land, or the trees on it."
An independent investigation demonstrated that the company's documents are not officially recognized by the government and do not reflect any legal interest in, or title to, land or timber, Kellogg said. And neither the nature nor the legality of the company's business model, or its use of certain "third-party intermediaries," could be confirmed after an eight-month inquiry.
"One of the killer facts is this," Kellogg said. "To this day, Sino-Forest itself cannot confirm the extent or value of its timber holdings."
Securities research firm Muddy Waters released an investigatory report in June disclosing these and other problems, the lawyers said, leading to the stock price tumble. It has not recovered and the investment community expects the company to fail.
The report was initially greeted by the Paulson funds with support for the company, but within days Paulson had sold its entire 14-percent stake in the forest company.
About Duane Morris
Duane Morris LLP, a full-service law firm with more than 700 attorneys in offices across the United States and around the world, offers innovative solutions to the legal and business challenges presented by today's evolving global markets.
About Levine Kellogg Lehman Schneider + Grossman LLP
LKLSG is a Miami-based commercial law firm providing focused, efficient, and hands-on representation in high-stakes legal proceedings including complex commercial litigation, bankruptcy and receiverships, lender/borrower litigation and workouts, and labor and employment litigation.