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What’s behind the great China stock scandals?

The fall of the multi-billion dollar Sino-Forest Corporation is merely the most prominent show in the overseas-listed China stock scandal circus, as a colourful cast of auditors, corporate executives, exchanges, investors, regulators and short sellers argue over who’s to blame and what can be done about the alleged frauds and misdeeds now coming to light. Lawrence White follows a saga that takes in Hong Kong, New York and Shanghai.

IT IS LATE May 2011, and a team of 10 agents fans out across China’s Guangxi and Fujian provinces, taking photographs, asking questions, making notes. The pictures show a series of unprepossessing locations: a grey high-rise apartment block with laundry hanging from every available inch of balcony space; a scuffed "Welcome" mat beneath a security door leading in to a dimly lit fifth floor apartment room; the overgrown exterior of a three-storey office block.

These anonymous agents work tirelessly for two months for a 35-year-old American, Carson Block, whose tiny research agency is unknown outside the world of Chinese stock investing, and whose previous business ventures include a failed self-storage company in Shanghai called Love Box. The photographs, of the offices of two private Chinese forestry companies, will be used in a 39-page report that targets a Canada-listed, China-based company that could not be more different from the minnow investigating it.

Sino-Forest Corporation had assets valued at $3.5 billion at the time of the report’s publication on June 2, and has been listed on the Toronto Stock Exchange since 1995, having taken over a Canadian company in a process known as a reverse merger.

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