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Lawsuit against Sino-Forest frozen in its tracks

Carson Block, founder of short-selling research firm Muddy Waters, speaks during an interview with Reuters in Washington, April 2, 2012. Mr. Block, 35, is perhaps the best known member of a group of short-selling investors and financial bloggers who allege fraudulent accounting practices among some China-based companies with U.S. or Canadian stock listings.

Benjamin Myers/Reuters/Benjamin Myers/Reuters

A move by embattled Sino-Forest Corp. to head into bankruptcy protection and attempt to sell its subsidiaries could frustrate investors pursuing a potential multibillion-dollar class-action lawsuit against the company.

The case against Sino-Forest, which faces fraud allegations, could be the largest and most high-profile investor class-action suit in Canadian history. But as of last Friday, it was frozen in its tracks, after the company's lawyers sought the shelter of the Companies' Creditors Arrangement Act.

Under the CCAA, all litigation against the company in question is typically temporarily stayed while it restructures its overdue debts. However, lawyers for plaintiffs in putative class actions can try to persuade a judge to lift such a stay and let their case proceed.

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In the Sino-Forest case, lawyers for aggrieved investors will have a chance to do so on April 13, when the company's restructuring plans are back in Ontario Superior Court before Mr. Justice Geoffrey Morawetz.

But Dimitri Lascaris, a lawyer with Siskinds LLP in London, Ont., who represents investors in their lawsuit against Sino-Forest, would not say whether the plaintiffs would make such a move.

"We will have some things to say at that hearing to be sure," Mr. Lascaris said in an interview, noting that companies hit by such allegations often end up in bankruptcy protection. "… We're considering our options and we will take all steps we deem necessary to protect the interests of the class members."

It's the latest twist in the story of Sino-Forest, once Canada's largest publicly traded forestry company before its stock price was pulped last June after a little-known short-seller, Carson Block, and his research firm, Muddy Waters LLC, alleged the company was a "multibillion-dollar Ponzi scheme." Those allegations have not been proven in court, and Sino-Forest has launched a $4-billion libel lawsuit against Mr. Block.

The freezing of the investors' lawsuits against Sino-Forest is particularly problematic for the plaintiffs in the wake of a recent Ontario Court of Appeal ruling.

That case, involving failed metals company Timminco Ltd., determined that claims filed on behalf of investors who bought shares on the stock exchange had a strict three-year time limit to obtain a required "leave," or go-ahead from a judge.

In the Sino-Forest case, both sides agreed to temporarily stop that clock until early next year. But even with this breathing room, a lengthy delay in the CCAA proceedings could still hurt the plaintiffs' claims.

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Just last week, Mr. Justice Paul Perell of the Ontario Superior Court had ruled that this leave motion was to be heard in the fall, along with arguments about whether the lawsuit could go ahead as a class action.

One option for the plaintiffs could be to request a limited lifting of the stay to allow for investors to seek only this special leave, which is required under the Ontario Securities Act and is meant to allow courts to screen out frivolous claims.

Then there is the issue of what would be left once the CCAA process is complete and company's subsidiaries are sold. Its plan is to try to sell its subsidiaries for at least $1.5-billion, or 82 per cent of the $1.8-billion in outstanding debt it owes.

Assuming a buyer can be found, this would leave a holding company at the top, with no assets and a dwindling amount of cash, facing legal challenges that, in addition to Mr. Lascaris's lawsuit, include investigations by the RCMP and the Ontario Securities Commission.

Derrick Tay is the lawyer acting for the court-appointed monitor in the Sino-Forest CCAA proceedings, FTI Consulting Canada Inc. He told court last week the move was necessary to preserve what was left of the business' value before it went under completely.

Suppliers would continue to refuse to pay Sino-Forest subsidiaries, and customers would stay away, he said, until a sale lifted the shadow of the allegations and transferred the viable parts of the business to safe hands.

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"Because of this cloud that hangs over everything, the business has ground to a halt," Mr. Tay, a partner with Gowling Lafleur Henderson LLP and a frequent participant in blockbuster bankruptcy cases, told the court.

Whether Sino-Forest's assets are sold or not, shareholders and their claims in a class-action suit would typically come behind the claims of debtholders.

But the investors' lawsuit also targets the "deep pockets" of Sino-Forest's big-name auditors and Bay Street underwriters, including major Canadian and U.S. banks. And even if the company were reduced to a shell, settlements or court-ordered awards could be paid out by insurers.

In the meantime, Mr. Tay acknowledged in court, finding a buyer for Sino-Forest's controversial assets could be difficult: "No one's kidding themselves. Finding a buyer will not be easy."



Sino-Forest Corp., the Toronto-listed forestry company collapsing under fraud allegations, has accused Blake Cassels & Graydon LLP of overcharging for its services.

In early March, before Sino-Forest's lawyers went to court to seek protection from the company's creditors, the company demanded that $650,000 worth of Blakes legal bills be reviewed.

The legal work was actually done by Blakes for Credit Suisse (Canada) Inc. last year, in connection with Credit Suisse's participation in three underwriting agreements with Sino-Forest when the company was raising money in the markets in 2007 and 2009.

According to Sino-Forest court documents, those deals included provisions that require Sino-Forest to cover the costs of certain claims or investigations. And Credit Suisse is among those facing a probe by the Ontario Securities Commission in connection with the regulator's investigation of Sino-Forest.

But Sino-Forest has refused to pay the bills, charged between August and December, 2011, calling them "excessive, particularly given Blakes' peripheral role and limited contribution to the OSC Investigation."

Sino-Forest alleges that Blakes "has billed Sino-Forest for various work seemingly unrelated to the OSC Investigation," such as "research on undisclosed legal issues, drafting legal memoranda, and engaging in numerous phone discussions and meetings on undisclosed matters with unidentified persons."

The forestry company alleges the bills "vastly exceed" those submitted by other law firms for its other underwriters, and that Blakes overstaffed the case.

"On more than one occasion, Blakes billed for the attendance of three lawyers at a preparatory meeting with undisclosed persons," the court filing reads. "Sino-Forest is concerned that this may be indicative of how Blakes staffed the file generally."

A spokesman for Sino-Forest declined to comment, saying the matter was before the courts. A spokeswoman for Blakes also declined to comment.

Jeff Gray

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About the Author
Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. From 2010 to 2016, he was the law reporter in Report on Business, covering Bay Street law firms and white-collar crime. He won an honourable mention at the National Magazine Awards for investigative journalism in 2010. More

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