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E&Y settlement sets record for auditors

Ernst & Young’s payment is the largest ever in a securities class-action case involving a company listed solely in Canada.

Stephen Yang/Bloomberg

Representing the largest settlement ever by an auditor in a Canadian securities class-action case, Ernst & Young Canada agreed to pay $117-million to investors of Sino-Forest Corp., the Chinese timber firm whose shares collapsed in 2011 amid sensational fraud allegations.

The precedent-setting agreement, which still requires court approval, already marks the largest compensation payment ever in a securities class-action case involving a company listed solely in Canada. Reached last Thursday and revealed in court documents on Monday, the deal sets a new high-water mark regarding the legal responsibilities of audit firms representing Canadian corporate clients.

"It raises the bar in Canada certainly. If auditors had thought prior to this case that they were largely immune from a large liability in cases where they are alleged to have failed to fulfill their professional responsibilities, I think that belief has been exploded," said Dimitri Lascaris, one of the lawyers representing Sino-Forest investors in the lawsuit.

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Previously, the largest settlement made by an auditor in a case involving a Canadian company was a $50.5-million (U.S.) payment by Deloitte and Touche LLP for its role as auditor of Hamilton-based Philip Services Corp. in 2007. The largest total compensation in a Canadian securities class-action case for a company listed solely in Canada was the $85-million (Canadian) won by investors from defendants in the YBM Magnex International Inc. case in 2002.

In addition to E&Y, the $9.2-billion potential Sino-Forest class-action suit also targets executives, directors and the underwriters who helped raise billions in debt and equity for the company.

Mr. Lascaris said he is confident the settlement will win approval by the courts handling the Sino-Forest Companies' Creditors Arrangement Act and securities class-action cases. "We are going to turn our full attention and resources to ensuring they are all held accountable. For us, this is just the beginning. It's a good beginning but it is far from over," he said.

Officials with E&Y declined interview requests but in a statement said the civil settlement, "which is dependent on a series of court approvals and other conditions, will separately resolve all potential civil claims relating to Ernst & Young Canada's audits of Sino-Forest Corporation, and enable us to put the civil litigation behind us. The settlement is without admission of liability," the audit firm said.

However, legal sources, who spoke on the condition of anonymity, said the settlement agreement with E&Y could face opposition in court by other defendants in the class action including underwriters and directors who relied on the firm's audit statements. If approved, the settlement would prevent these parties from seeking compensation from the audit firm.

The settlement was made just days before the Ontario Securities Commission levelled allegations against E&Y Canada on Monday, accusing the firm of violating securities laws when it was the auditor of Sino-Forest's financial statements beginning in August, 2007, until it resigned in April, 2012. Mr. Lascaris said the OSC case would have had no impact on the size of the settlement had it been announced before the deal was reached.

"This is no surprise to us. We always knew this could happen. The allegations that the OSC is making are perfectly consistent with our rationale for settling the case at this level," he said.

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About the Authors
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. He spent six years as the law reporter in The Globe’s Report on Business, covering Bay Street law firms and writing about fraud, insider trading and corporate tax avoidance. More

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