Paulson, the hedge fund manager who made billions betting against the housing market at the end of the bubble, is the biggest shareholder of a company called Sino-Forest (SNOFF). That stock lost two-thirds of its value this week, including 17% Friday, after a short-seller released a report claiming the company was a fraud.

The selloff leaves Paulson, whose firm held 14% of Sino-Forest as of April 29, with a paper loss of $340 million. That isn’t a huge hit to a firm whose latest securities filings lists $34 billion in U.S. stock holdings, but it obviously won’t exactly bolster Paulson’s reputation as the smart money either.

Carson Block of Muddy Waters Research in Hong Kong said in a report this week that Sino-Forest “massively exaggerates its assets.” He said Sino-Forest overstated the value of its timber holdings by $900 million.

The report sent shares of Sino-Forest plunging, not least because Block has a history of identifying problematic Chinese reverse merger companies. He issued scathing reports on accounting questions at Rino International (RINO) and China MediaExpress (CCME) before they were delisted and their shareholders largely wiped out.

Sino-Forest didn’t probably help its case by issuing this oddly worded nondenial denial:

Sino-Forest Corporation (TSX: TRE) (“Sino-Forest” or the “Company”), a leading commercial forest plantation operator in China, today commented on the share price decline on June 2, 2011 as a result of the allegations made in a ‘report’ issued on a website by a short seller operating under the name Muddy Waters, LLC. The Company was not contacted by Muddy Waters for comment ahead of publication of its report.

The Board of Directors and management of Sino-Forest wish to state clearly that there is no material change in its business or inaccuracy contained in its corporate reports and filings that needs to be brought to the attention of the market. Further we recommend shareholders take extreme caution in responding to the Muddy Waters report.

Of course, it’s a little late for extreme caution now, as Paulson and other Sino-Forest shareholders are all too aware.