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A lawyer acting for a dissident group of investment funds with holdings in collapsed Sino-Forest is challenging the deal with its former auditors, Ernst & Young, in court.Adam Dean/The Globe and Mail

Big investors who lost billions when Sino-Forest Corp. collapsed amid fraud allegations are at odds over a massive proposed settlement reached with the company's former auditors, Ernst & Young LLP.

The class-action lawyers who brokered the tentative deal and those acting for a group of investment funds who oppose it are both vying for support from burned investors in the company ahead of a hearing next month, when the settlement goes before an Ontario Superior Court judge in Toronto for approval.

The controversial deal would see Ernst & Young pay $117-million to settle allegations from investors that it failed to properly scrutinize the Toronto-based Chinese forestry company's books. The accounting firm does not admit to any wrongdoing as part of the deal.

But last month's agreement was signed just days before the Ontario Securities Commission announced its own allegations against E&Y in the Sino-Forest affair, prompting critics to question the deal. Concerns have also been raised about a provision of the deal that would bar investors from opting out of the settlement and suing E&Y on their own.

The back-and-forth is the latest chapter in what could be one of the largest scandals to hit Canada's capital markets. At one time, the Toronto Stock Exchange-listed company had a market capitalization of more $6-billion and claimed to have $3-billion in forestry assets in China.

Toronto lawyer Won Kim of Kim Orr Barristers PC, acting for a dissident group of investment funds with holdings in Sino-Forest – Invesco Canada Ltd., Northwest & Ethical Investments LP and Comité Syndical National de Retraite Bâtirente Inc. – is challenging the E&Y deal in court, and has requested leave to appeal it before the Ontario Court of Appeal.

On behalf of his clients, Mr. Kim has also been trying to secure support from other burned investors.

That has prompted lawyers with Siskinds LLP and Koskie Minsky LLP, who brokered the E&Y deal on behalf of all Sino-Forest investors included in the potential $9.18-billion class action against the company, to strike back.

On New Year's Eve, they sent a letter to Sino-Forest investors about Kim Orr's claims, dismissing them as "disinformation" and "meritless." They also organized a round of conference calls for Sino-Forest investors, including one held on Wednesday.

In their Dec. 31 letter, Siskinds and Koskie Minsky say the E&Y deal is the largest settlement with an auditor in a securities class action in Canadian history, and the fifth largest in the world.

They also boast that Paulson & Co., the U.S. hedge fund with the largest holdings in Sino-Forest before the fraud allegations surfaced in June, 2011, is among the investors supporting the settlement.

Siskinds and Koskie Minsky defend the E&Y deal as "historic," and say it was achieved "despite a range of challenges," including a liability limit under Ontario law they say "may well be less than $10-million" and Sino-Forest's move to seek court protection from its creditors last year, freezing litigation against the company.

They also defend the deal's provision that would bar investors from opting out and suing E&Y on their own, saying this is common in insolvency proceedings and that E&Y is paying a "substantial premium" to put this court fight over Sino-Forest completely behind it.

Mr. Kim referred a request for comment to one of his clients, John Mountain, the senior vice-president for legal affairs at Northwest & Ethical Investments LP, who called much of the memorandum from Siskinds and Koskie Minsky "smoke and mirrors."

He said it was premature to settle before the release of the OSC allegations and before the plaintiffs' lawyers have been able to compel E&Y to hand over documents.

Mr. Mountain argued that the $117-million settlement, once legal fees are carved out, would represent a mere fraction of the losses suffered by investors: "What you are left with is about a penny on every dollar that every investor lost. So, yes, on one hand, it sounds like a huge amount of money, but on the other hand, it is a pittance."

Dimitri Lascaris, the lead lawyer from Siskinds LLP on the case, said in an interview that he hoped critics of the deal could be convinced the settlement was a good one, given how hard it is under Ontario law to sue auditors in this kind of case: "When you take those realities into account, as difficult as they are, this is a very, very good outcome."