A Sino-Panel factory is seen in Gaoyao, Southern China on June 28, 2011.Adam Dean/The Globe and Mail
An Ontario judge has approved a $117-million deal to settle allegations levelled by investors in Sino-Forest Corp. against Ernst & Young LLP for allegedly failing to properly scrutinize the books of the scandal-plagued company.
The ruling, issued on Wednesday, dismisses objections to the deal raised by a small group of investment funds with holdings in the insolvent Toronto-based Chinese forestry firm. Sino-Forest had a market capitalization of $6-billion before a short seller alleged the company was a "Ponzi scheme" in June, 2011, and caused its shares to plummet.
The E&Y deal, first announced last year, would see Sino-Forest's primary auditors settle the allegations against them contained in a $9.18-billion class-action lawsuit launched on behalf of Sino-Forest investors against the company, its former executives, auditors and underwriters. E&Y did not admit liability as part of the deal.
The accounting firm still faces serious allegations from the Ontario Securities Commission that it showed a "lack of diligence" in reviewing the documentation of Sino-Forest's purported ownership of standing timber reserves in China. E&Y has denied those allegations and says its work met professional accounting standards. Sino-Forest and some of its former senior executives are also facing OSC fraud allegations, and the RCMP launched an investigation in the case.
The E&Y settlement was first announced as part of Sino-Forest's court-supervised restructuring to transfer the company's subsidiaries to its debt holders after no suitable buyer could be found. But the deal immediately stirred up a controversy.
Lawyers acting for the group of dissident Sino-Forest investors, which includes Invesco Canada Ltd., Northwest & Ethical Investments LP and Comité Syndical National de Retraite Bâtirente Inc., tried to block the settlement.
They argued it unfairly precluded them from opting out of the class-action and suing Ernst & Young on their own, by wrongly using Sino-Forest's insolvency court proceedings as a shield. They also questioned whether the settlement, which proponents say is the biggest ever extracted from an auditor in a case like this in Canada, was adequate.
But Mr. Justice Geoffrey Morawetz of the Ontario Superior Court dismissed their arguments, saying that class-actions have often been settled in the same way, as part of an insolvency proceeding. A lawyer for the investment firms could not be reached for comment. It was not known if the group would seek to appeal the ruling.
Sino-Forest's restructuring deal also includes a list of other defendants in the class action, such as some of the company's former directors and executives, who would be eligible to negotiate settlements similar to Ernst & Young's.
But Dimitri Lascaris, a class-action lawyer for the Sino-Forest investors, said no such deals are in the works before April, when the lawsuit is due back in court: "Our intention is to pursue these claims vigorously."
Jeff Gray