Just Who Buys These Things – Tree-X Edition (TRE CN)

While he is in no way as moronic as the Glickenhausen, who continue to defend Chinese reverse-merger fraud posterboy China Agritech (CAGC) (Read Bronte Capital on China Agritech here, read about CAGC‘s CFO Gareth Yau-Sing Tang, superstar Director Gene Michael Bennett, and IR shill Kevin Theiss, and don’t miss the sad story of Jesse Glickenhaus here), Christopher Davis of Davis Advisors, another storied family firm, certainly owes his remaining clients an explanation. A big explanation as to why they owned so much (17%) of one of the biggest scams to come out of China, Sino-Forest (TRE CN), affectionately known as Tree-X.

Sino-Forest was exposed in the summer of 2011 by Muddy Waters. The firm had managed to fool some very large and well-respected investors, including the Paulson family of funds, Wellington Management, and Davis Advisors.

Unlike John Paulson, who upon learning that his firm had been scammed, wisely dumped his entire Tree-X position, the folks at Davis Advisors added to their Tree-X stakes in both July and August 2011, which is after Muddy Waters exposed Sino-Forest in June.

Old news really, until after the close on the 15th of December, however, when Davis Advisors issued a sad Open Letter to the Board of Tree-X. The release states:

On behalf of our clients, Davis Advisors currently owns more than 17 percent of the shares outstanding of Sino-Forest, making our clients your second largest shareholder.

Chris, that is not something of which you should be proud.

Four weeks ago, after spending more than $35 million of shareholder funds over five months investigating allegations made against the Company, you and your advisers issued an interim report. Among other important findings, your report stated that the Company had in excess of $570 million in cash as of 11/4/11, $236 million of which is available to make the interest payments. Because we have relied on this and your other reports in making both investment and valuation decisions concerning our position in Sino-Forest, we are shocked by your failure to make a ten million dollar interest payment on December 15 and your consideration of a plan to put the company into liquidation.

Chris, you are absolutely correct that a real, honest, legitimate enterprise that had over $570mm in cash on the balance sheet would certainly make a less than $10mm interest payment. Where you are clearly deluded is in thinking for even a second that Tree-X is a legitimate company. The failure of Sino-Forest to make the payment fits the fact pattern exposed by Muddy Waters. Tree-X management has simply been lying to the world again and again and again. And you keep falling for it.

Based on these facts, we are unable to reconcile your actions with your fiduciary duty to represent the interests of shareholders. Because your published findings express no concern that this company is a going concern with real assets, we would strongly ask you to reconsider your recent decisions and take all steps necessary to protect shareholders and ensure that further value is not dissipated or transferred in the form of needless fees and expenses to other constituencies.

Chris, once again we agree. Legitimate companies should not be spending such absurd amounts on lawyers, accountants, advisors, and their ilk, the parasites of the capitalist world. But here your worries are misplaced. The fees Tree-X are paying are a small price to keep the charade alive through meaningless “reports” and “internal investigations“. What you should be worried about is what is happening with the bulk of the liquid assets at the company. How much has been stolen already? How much is left for the insiders to steal?

One can only hope that your firm has written down its huge stake in Sino-Forest to zero, and you have prepared an honest, and thorough assessment of what went wrong at your firm to not only get conned initially, but to add more in July, and then again in August when the less-dumb money was fleeing. The smart money, of course, was short. And one can only hope that next time Chinese Kool-Aid is being served, you graciously decline.

The content contained in this blog represents only the opinions of the author. The author may hold either long or short positions in securities of various companies discussed in the blog. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. This blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.
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