Hedge Fund Sues Morgan Stanley Over Canceled Sino-Forest Options

Sep 23 2011 | 12:40pm ET

A hedge fund is suing over its investment in Sino-Forest Corp.—and it isn't Paulson & Co.

Hong Kong-based Oasis Management wants C$9.5 million from Morgan Stanley, which it said failed to settle put options on Sino-Forest shares that Oasis bought three weeks before a short-selling hedge fund's scathing report on the company sent Sino-Forest shares plummeting. Morgan Stanley claims it terminated the options because trading in Sino-Forest shares was suspended, but Oasis alleges that the bank did so to "limit its liability."

Sino-Forest shares fell more than 70% in June after the Muddy Waters report alleged that the company overstated its timberland holdings. That swoon cost several hedge funds dearly, notably Paulson, which lost more than US$500 million on its huge stake in Sino-Forest.

According to Oasis, it bought options to sell Sino-Forest shares for C$19 million on May 12. On June 2, Muddy Waters published its report, sending shares down to C$5.22 over a two-day period; they have not recovered.

Oasis said that Morgan Stanley offered it C$3.8 million to cancel the options, which the hedge fund paid the bank a C$770,000 premium for. Oasis, which filed the lawsuit in London in July, wants C$7.5 million to settle.

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