In June 2014, a partial settlement was reached in several class action lawsuits pending in Canada and the United States brought on behalf of purchasers of securities in Sino-Forest Corporation (“SFC”) (SNOFF:US).  The total settlement was in the amount of CAD $4.2 million (approximately USD $3.9 million). Named plaintiffs in the Canadian class actions, along with Lead Plaintiffs in the U.S. class action, reached the settlement with David J. Horsley, a former officer of SFC, in May 2014 (the “Horsley Settlement”).

Case Background

Cohen Milstein Sellers & Toll PLLC filed a class action complaint on January 27, 2012 in New York Supreme Court, County of New York, on behalf of (i) all persons or entities who, from March 19, 2007 through August 26, 2011 (the “Class Period”) purchased the common stock of Sino-Forest on the Over-the-Counter (“OTC”) market and who were damaged thereby; and (ii) all persons or entities who, during the Class Period, purchased debt securities issued by Sino-Forest other than in Canada and who were damaged thereby.

The complaint asserts claims against Defendants Sino-Forest Corporation ("Sino-Forest"), Allen T.Y. Chan, David J. Horsley, Kai Kit Poon, Banc Of America Securities LLC, Credit Suisse Securities (USA) LLC, Ernst & Young Global Limited, and Ernst & Young LLP (“E&Y”), for misleading investors in connection with the offer and sale of Sino-Forest common stock and debt securities. 

The complaint alleges that during the Class Period, Sino-Forest represented that it was one of the world’s largest and most successful forestry companies.  According to the Company’s Annual Information Form for the year ended December 31, 2010 (the “2010 Annual Form”) Sino-Forest “had approximately 788,700 hectares of forest plantations under management" and its forestry assets (primarily plantation acreage located in China) purportedly grew between 2006 through 2010 from $1.2 billion to over $5.7 billion, while revenues grew from $555 million to $1.9 billion and net income more than tripled from $113 million to $395 million.  From 2007 through 2010, the Company’s financial statements were audited by Defendant Ernst & Young LLP which certified they had been prepared in accordance with Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) and that the audit had been conducted in conformance with Canadian Generally Accepted Auditing Standards (“Canadian GAAS”).

However, on June 2, 2011, Muddy Waters (a stock research firm) issued a report that raised serious questions regarding the business practices, true assets and financial condition of Sino-Forest.  Upon release of this news, and subsequent reports in the press, the prices of Sino-Forest's common stock and debt securities dropped dramatically.  Eventually, the Ontario Securities Commission halted trading in the company's common stock on the Toronto Stock Exchange and commenced an investigation into the allegations raised concerning Sino-Forest's business and finances.   Sino-Forest is now also under investigation by the Royal Canadian Mounted Police and the company has indicated that investors should no longer rely upon its historical financial statements.  

Among other things, the Complaint alleges that Sino-Forest and the individual defendants made materially false and misleading statements in the Company's financial statements and regulatory filings regarding Sino-Forest's business and financial condition.  The Complaint also alleges that the Company’s auditor Ernst & Young was negligent in performing its audits of Sino-Forest's financial statements and that its audit reports negligently misrepresented that the financial statements were presented in conformance with Canadian GAAP and that its audits complied with Canadian GAAS.  In addition, the Complaint alleges that, among other things, the underwriters for Sino-Forest's $600 million note offering in October 2010 were negligent in performing their due diligence in connection with the offering and sale of securities to the public.

As part of Sino-Forest’s insolvency proceedings in Canada, on March 20, 2013, the Ontario Superior Court of Justice approved a global settlement of the claims asserted against E&Y that had been reached by Canadian counsel on November 28, 2012.   The U.S. Plaintiffs have agreed to the settlement, which requires, among other things, that E&Y pay $117 million (CAD) to resolve claims asserted against it in class action litigations filed by plaintiffs in both Canada and the United States.

On April 15, 2013, Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”) entered an order recognizing the Canadian proceeding as a foreign main proceeding under Chapter 15 of the United States Bankruptcy Code.  On  September 23, 2013, E&Y filed a motion in the Bankruptcy Court to have the Canadian settlement order recognized and enforced in the U.S. under Chapter 15.  On November 26, 2013, the Bankruptcy Court issued an order recognizing the Ontario Superior Court’s E&Y settlement, giving it full force and effect in the United States.  Motions for fee approval and of the claims and distribution protocol filed by Plaintiffs in the Bankruptcy Court were approved on December 27, 2013 and entered on January 4, 2014.

Plaintiffs obtained a settlement from David H. Horsely on June 13, 2014, which was approved by the court on July 31, 2014.  Then Plaintiffs entered into a settlement agreement with the underwriters for $32.5 million, which was ultimately approved by Justice Morawetz on October 30, 2015.  On March 29, 2016 the court approved the settlement between class action Plaintiffs and the independent directors that had been filed on February 22, 2016.

Plaintiffs entered into a proposed settlement agreement with BDO Limited on July 28, 2016 and with the directors on September 27, 2016. The motions to preliminarily approve both settlements were approved on November 16, 2016, however the orders granting final approval of these settlements are still pending.

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