A group of major institutional shareholders of Sino-Forest Corp. is opposing a record $117-million proposed settlement agreed to by Ernst & Young LLP, the former auditors of the disgraced Chinese timber firm.
The embattled former forestry giant goes before a Toronto bankruptcy judge on Friday to have its restructuring deal, which would see Sino-Forest's remaining assets transferred to its debt-holders, approved.
Included in the deal is a massive proposed settlement with Ernst & Young, which would see the auditing firm freed of any further liability in the $9.18-billion potential class-action lawsuit filed against Sino-Forest by burned investors.
On Friday, lawyers for a breakaway group of Sino-Forest shareholders, Invesco Canada Ltd., Northwest & Ethical Investments LP and Comité Syndical National de Retraite Bâtirente Inc., intend to challenge the E & Y settlement.
In court documents, a team of Toronto lawyers led by Won Kim of Kim Orr Barristers P.C. alleges that the proposed deal with E & Y would see any investors that choose to opt out of the class-action case against Sino-Forest "forever precluded" from suing E & Y on their own.
While the proposed E & Y deal would free the auditor of any possible obligations to Sino-Forest shareholders suing the company, the deal was announced the same day the Ontario Securities Commission issued allegations that the auditing firm had failed to live up to proper standards reviewing Sino-Forest's books.
In court documents filed late Thursday, counsel for the investor group allege that Sino-Forest's court-appointed monitor has been unable "to verify Sino-Forest's operations, assets, and receivables in any meaningful way" and had been "unable to verify more than 8 per cent of Sino-Forest's reported net stocked forests."
Mr. Kim's filings explain that the class-action against Sino-Forest has yet to be certified by a judge as a class-action lawsuit on behalf of all investors. Normally, once a lawsuit has been certified, potential class members who wish to instead pursue their own claims may opt out. But Mr. Kim argues that in this case, the E & Y settlement is being approved inside Sino-Forest's insovlency proceedings in a way that effectively bars his clients from pursuing their own claims.
Eric Adelson, a senior vice-president and head of legal for Invesco Canada, in an affidavit, also outlined his firm's opposition to the Sino-Forest restructuring plan.
Mr. Adelson's affidavit says counsel for E&Y has said the parties involved will not seek approval from the CCAA court for the proposed auditor settlement. Mr. Adelson contends, however, that "the provisions of the plan, even apart from the E&Y settlement, appear to affect the legal and practical ability of Invesco and other investors to seek adjudication of their claims against defendants in the Sino-Forest litigation."
Invesco Canada controlled more than 3 million Sino-Forest shares and suffered significant losses when the stock collapsed amid fraud allegations in 2011.
A spokeswoman for E & Y declined to comment. Lawyers for the plaintiffs in the potential class-action against Sino-Forest also declined comment. Mr. Kim declined comment.
Mr. Kim and his clients had originally filed their own class action against Sino-Forest Corp., but a judge awarded control of the potential class-action to rival law firms Siskinds LLP and Koskie Minsky LLP.