Sino-Forest might be an outrageous fraud; it might not be. For now, two things are clear. First, that the Toronto-listed stock is trading closer to the C$1 price target of Carson Block, the short-seller who triggered an 86 per cent collapse this month to C$2.60, than the C$6 target of the one remaining investment-bank analyst. Second, that John Paulson should have known better.

No hedge fund manager likes to write the kind of letter Mr Paulson produced for investors last week, as he explained the circumstances behind the sale of his entire 12.5 per cent stake in the Hong Kong-based company. Still, readers in a charitable mood might have forgiven his self-serving valuation of the loss: C$105m, based on the purchase price, rather than the C$462m decline between the end of May and the sale on June 17. They might also have excused buying the stock on takeover speculation, then selling it on a speculative attack. Reacting is what hedge funds are supposed to do best.

The really damning admission is that Paulson & Co held on to its stake because Sino-Forest reported “outstanding financial results” while trading “at a significant discount to its global forest company peers.” Mr Paulson should have known that a spectacular income statement combined with an unspectacular valuation has been a feature of many fallen China stocks. Orient Paper, for example, reported operating margins about three times better than the global packaging sector, but traded at about half the average forward price/earnings ratio in the three years before Mr Block came knocking. Sino-Forest, similarly, posted industry-leading returns while trading significantly more cheaply than timber peers such as Acadian and West Fraser. Mr Block’s talk of Ponzi schemes may prove far-fetched. But the market long ago sensed that something was up.