Paulson Defends Sino-Forest Investment

by Todd Shriber

When one has reached the lofty status hedge-fund manager John Paulson has attained in the financial world, one isn’t used to confessing to gaffes or having to defend investment decisions. That’s by virtue of the fact that one doesn’t get to where Paulson is by having many bad trades. But no one is perfect, and that is a lesson Paulson learned this month as his firm’s position in controversial Chinese-Canadian timber firm Sino-Forest (SNOFF) basically blew up in the New York firm’s face.

Measuring exactly how bad the damage has been to Paulson & Co. due to Sino-Forest’s slide is tricky because there are varying accounts of the potential losses the firm may take on the now eliminated positions. Last week, Bloomberg reported Paulson clients were dealt a “paper loss of $720 million.” Forbes reported Paulson admitted a loss of $750 million, while The Wall Street Journal said net realized losses were more than $106 million over the life of the investment.

At the end of the day, whatever the final tally is, it will represent a scant percentage of the $38 billion the firm manages. And Paulson’s track record is such that it is unlikely clients will run for the hills over one bad trade.

That makes it all the more curious that Paulson has taken to defending his firm’s decision to get involved with Sino-Forest. In a letter obtained by Absolute Return + Alpha last week, Paulson says his firm “conducted considerable due diligence” prior to taking a stake in the timber company. As of late April, Paulson owned 34.7 million Sino-Forest shares. By June 17, the stake had been liquidated.

In the letter, Paulson cites Sino-Forest’s stellar financial results and that the company regularly traded at a discount to comparable firms. Of course, that was before he bought the stock. Research firm Muddy Waters exposed Sino-Forest’s overstatement of timber holdings in a report issued earlier this month that prompted the stock price slide, catching Paulson off-guard in the process.

Paulson goes on to claim that his firm has access to all the same information that other investors in public companies do, so the issue here may not be Paulson’s bad trade. It may be that anyone, including a savvy pro, can take it on the chin due to the financial chicanery some Chinese companies are allegedly involved in.

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