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Judge urged to lift freeze on Sino-Forest litigation

In a 2011 file photo, lawyer Emily Cole, acting for former Sino-Forest chief executive officer and co-founder Allan Chan, is shown leaving the offices of the Ontario Securities Commission.

Brett Gundlock/The Globe and Mail

Lawyers acting for burned investors in Sino-Forest Corp. argued Monday that a court-imposed freeze on litigation around the scandal-plagued company should be lifted to green light parts of their multimillion-dollar lawsuit against Sino-Forest's underwriters and auditors, as well as three of its former executives.

The freeze order came with Sino-Forest's move into bankruptcy protection in March, as it sought unsuccessfully to sell its assets, and is typical in such cases. But nothing about the fraud allegations – which have levelled the company, prompted regulatory and police investigations and cost investors billions – is typical, lawyers for the plaintiffs told an Ontario Superior Court judge on Monday.

If the allegations made by the Ontario Securities Commission and others are true, lawyer Dimitri Lascaris told the court, "this may well constitute one of the most damaging frauds in the history of Canada's capital markets."

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Acting for a group of Sino-Forest investors, Mr. Lascaris has sued not just Sino-Forest but its auditors, Ernst & Young LLP and BDO Ltd. along with a list of Sino-Forest's Bay Street underwriters, alleging they were negligent in failing to discover the company's alleged fraud. But the litigation freeze, known as a stay order, that was imposed on Sino-Forest when it sought protection from its creditors, also applied to the auditors and underwriters.

Mr. Lascaris argued Monday that the stay should be partly lifted to allow him to at least seek the leave he needs to sue under the Ontario Securities Act and to have the claims certified or approved by a judge as suitable for a class action. Both had been scheduled for next month before the freeze order.

In addition, Mr. Lascaris also wants the stay lifted for claims against former Sino-Forest chief executive officer and co-founder Allan Chan, former president and co-founder Kai Kit Poon, and former chief financial officer David Horsley.

Mr. Lascaris said it was urgent to go ahead now, not only because of recent court rulings putting a three-year deadline on such lawsuits, but because of allegedly incomplete documentation from China and the company, which means much of the case will rely on the memories of key witnesses.

"With each passing month, the recollection of witnesses is becoming a little more stale," Mr. Lascaris, of Siskinds LLP, told the court.

Up until late Friday, Sino-Forest itself opposed this partial suspension of the stay. But after the plaintiffs agreed not to oppose the company's current proposed restructuring plan, a lawyer for Sino-Forest said the company would not try to block the plaintiffs' move to partly lift the stay.

Meanwhile, creditors are meeting next month to vote on the company's restructuring plan, which would see debt holders own the company's assets, and must be approved by those holding two-thirds of Sino-Forest's debt. However, lawyers for the auditors and underwriters are also challenging a ruling that would see their indemnity claims against Sino-Forest ranked far below those of debt holders before the Ontario Court of Appeal next month.

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Lawyers for the auditors and underwriters argued Monday that it made no sense to lift the stay before the restructuring was finished. Lawyers for Ernst & Young and BDO told the court that fighting the leave and certification motions without the involvement of Sino-Forest itself would leave them at a disadvantage.

Lawyer Emily Cole, acting for Mr. Chan, said the move would leave her client without access to key documents and witnesses.

"It is simply not fair to isolate Mr. Chan, Mr. Poon and Mr. Horsley and proceed solely against them," Ms. Cole said.

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