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Report On Business Sino-Forest auditor BDO agrees to multimillion settlement

Timber plantations owned by Sino-Forest are seen in Southern China in this 2011 file photo.

Adam Dean/The Globe and Mail

Former Sino-Forest Corp. auditor BDO Ltd. has agreed to pay $8.77-million to settle a class-action lawsuit filed by investors who alleged BDO allowed the forestry company to misrepresent its financial statements in 2005 and 2006.

The payment, which still requires court approval, comes on top of a $117-million settlement negotiated with Ernst & Young LLP, which was Sino-Forest's auditor from 2007 until the company's collapse in 2011.

The Sino-Forest settlement agreement said BDO did not admit to any wrongdoing or liability, and said the settlement was reached "based on a consideration of the legal challenges related to the claims against BDO." BDO is the Hong Kong-based member of global accounting network BDO International Ltd.

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Sino-Forest switched auditors several times over its years of operation, initially using Ernst & Young after its founding in 1994, then switching to now-defunct Arthur Andersen LLP in 1999, then returning to Ernst & Young from 2000 to 2004. The company hired BDO for its audits in 2005 and 2006, then returned to Ernst & Young from 2007 to 2011.

If the BDO payment is approved, the $126-million total contribution from Sino-Forest's audit firms would rank among Canada's largest investor recoveries from auditors of a failed company. The total, however, is significantly less than the $240-million paid by auditors of defunct real-estate firm Castor Holdings Ltd. in a record settlement approved last year.

BDO was paid $315,000 for its work as Sino-Forest's auditor in 2005 and $483,000 in 2006, according to regulatory filings.

The defendants named in the Sino-Forest case have so far paid a total of $165-million in settlements, including auditors, underwriters and directors of the company. The original class-action lawsuit, filed in 2011, sought a total of $9-billion from the company and other defendants, alleging they participated in misstating Sino Forest's financial statements.

Class-action lawyer Garth Myers of Toronto law firm Koskie Minsky LLP said legal action remains outstanding against Sino-Forest itself and six of its former executives and directors, who have not settled.

Settlements to date also include $33.5-million paid by nine of Sino-Forest's underwriters. The underwriter group originally agreed to pay $32.5-million to class-action claimants, but increased the amount to $33.5-million following further negotiations with the new shell company that was created to manage Sino-Forest's legal claims after its assets were sold. The class-action claimants received $31.75-million and the rest went to the Sino-Forest successor company.

Other settlements included $5.6-million paid by former chief financial officer David Horsley, and a total of $250,000 approved earlier this year from former independent directors William Ardell, James Bowland, James Hyde and Garry West.

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Sino-Forest, which was worth over $6-billion on the Toronto Stock Exchange at its peak, collapsed in 2011 after a short seller issued a report alleging improper accounting practices and calling it "a Ponzi scheme."

The Ontario Securities Commission concluded a hearing in April into fraud allegations levelled against five former top executives of the company, who are accused of misleading investors by overstating Sino-Forest's revenue and assets between 2007 and 2010. A decision has not been released yet in the case.

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