The free fall of Sino-Forest’s fortunes, once a stock market darling, adds to the growing concern about companies listed on the TSX but which operate almost entirely elsewhere.

“The mind and management of the company is in China. The entire business is in China, and all the books and records are in China,” said Ermanno Pascutto, executive director of FAIR Canada, the Canadian Foundation for Advancement of Investor Rights.

That alone makes it difficult to monitor. Add to that, Canadian underwriters, lawyers, regulators and auditors who may not have the ability to do proper due diligence on these types of companies, he said.

By comparison, in Hong Kong, where state and private Chinese firms are listed, extreme caution and diligence is taken when listing such companies.

In an unusual move, the Ontario Securities Commission said Friday that Sino-Forest officers and directors including the chairman and CEO Allen Chan appear to be engaging or participating in acts that they know or reasonably ought to know are fraudulent.

It issued a rare temporary order, citing the public interest for investors, to halt trading of Sino-Forest shares, amid concerns officers and directors “appear to have misrepresented some of its revenue, and or exaggerated some of its timber holdings.”

The share last traded Thursday at $4.81. Its 52-week range is $25.85 to $1.29.

The Sino-Forest case immediately conjures up images of Bre-X, the mining company that claimed to have struck a huge gold deposit in Indonesia, but in the end it was an elaborate fraud.

Experts say the cases are different, noting there was no gold with Bre-X, while Sino-Forest has timber reserves, though possibly not as much as reported.

Sino-Forest has also been around for nearly two decades, and at one time was Canada’s largest publicly-traded timber company.

Fair Canada has called on the Ontario Securities Commission to create a task force of players to come up with standards for due diligence for emerging market listings.

“It’s not enough to send one person who doesn’t speak Chinese to China to look at a business, or trees or any other business, and who gets taken around by people, and accepts what they are told,” Pascutto said, adding there also needs to cooperation agreements with securities regulators in other countries.

Richard Powers, a business law professor at the Rotman School of Management, called Sino-Forest an unusual case that raises questions about regulating foreign companies listed in Canada

Powers cautioned the case involves unproven allegations of fraud, but which might cause regulators to rethink how Sino-Forest got listed on the TSX and on what basis analysts gave it such high ratings.

It will also force regulators to examine the reverse takeover, a practice of letting companies acquire dormant shell companies to list on the stock exchange, he said.

However, Powers cautioned that it is very hard for regulators to find fraud.

“I think we have enough regulation in place. Enforcement, perhaps, is something that we should take a look it. We have to be more diligent in asking the right questions and making sure we have checks and balances in place within the regulatory framework.”

Colette Southam, an assistant professor of finance at the Ivey School of Business, said this case shows the regulatory process works.

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Canada does not have a national securities regulator, meaning the Ontario Securities Commission is understaffed and underfunded, she said.

“They don’t have the regulatory power. They don’t have the federal government behind them,” she said, estimating there are about 400 companies out of 1,500 companies on the TSX that should be closely monitored.

“I wouldn’t be one to be critical of the OSC,” Southam said.

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