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A Sino-Panel factory is seen in Gaoyao, Southern China on June 28, 2011.Adam Dean/The Globe and Mail

An attempt by a group of institutional investors in scandal-plagued Sino-Forest Corp. to derail a $117-million settlement between the collapsed company's burned shareholders and its auditors has been rejected by the Ontario Court of Appeal.

Lawyers acting for Invesco Canada Ltd., Northwest & Ethical Investments LP and Comité Syndical National de Retraite Bâtirente Inc., all of which held shares in Sino-Forest, tried to block the settlement, which would see auditors Ernst & Young LLP get out of a class-action lawsuit that alleged they were negligent in their scrutiny of the Toronto-based Chinese forest company's books.

Lawyers for these investors have argued the settlement unfairly precluded them from opting out of the class-action and suing E&Y on their own, as the deal was concluded during Sino-Forest's insolvency proceedings. 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.

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 Ontario Court of Appeal ruling issued Wednesday concludes there is "no basis" to hear a challenge of the decision made earlier this year by Justice Geoffrey Morawetz, the judge who approved the settlement. It points out that the opposing investors held just 1.6 per cent of Sino-Forest shares.

John Mountain, the senior vice-president for legal affairs at Northwest & Ethical Investments LP, said in an e-mail that his group is disappointed and reviewing its options.

Kirk Baert, a class-action lawyer with Koskie Minsky LLP acting for the majority of Sino-Forest shareholders, welcomed the ruling. He said the court found that the deal's opponents "had not put forward any reason whatsoever that would warrant interference" with the lower court's decision.

Sino-Forest had a market capitalization of $6-billion before a short seller alleged the company was a "Ponzi scheme" in June, 2011, causing its shares to plummet. Its spectacular collapse cost investors billions and raised issues about the way Chinese companies that list on Canadian exchanges do business.

The deal with E&Y was approved as part of Sino-Forest's restructuring, which saw its remaining assets handed to its debt holders after no suitable buyer could be found.

But it may not be the end of the legal battle over the E&Y settlement. Lawyers for the dissident investors, who represent just 1.6 per cent of Sino-Forest's shareholders, have also launched a parallel challenge directly to the Court of Appeal, and the court is scheduled to hear a motion to quash that move on Friday.

Meanwhile, 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 fraud allegations before the Ontario Securities Commission, and the RCMP launched an investigation in the case.

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