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Ontario court approves $117-million settlement with Sino-Forest auditors

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.

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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."

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About the Author
Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. From 2010 to 2016, he was the law reporter in Report on Business, covering Bay Street law firms and white-collar crime. He won an honourable mention at the National Magazine Awards for investigative journalism in 2010. More

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