Skip to main content

The Globe and Mail

Ontario court approves $10.8-million settlement in Zungui Haixi class-action

Settlements approved by the Ontario Superior Court of Justice call for Chinese food manufacturer Zungui Haixi to pay $8.1-million, Ernst & Young to pay $2-million and underwriters CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities and Mackie Research Capital to pay $750,000.


An Ontario court has approved three settlements valued at $10.85-million in a class-action lawsuit filed in 2011 against Zungui Haixi Corp., auditors Ernst & Young LLP and several underwriters involved in the Chinese footwear maker's initial public offering.

The IPO raised $39.8-million and led to its shares being listed on the TSX Venture Exchange.

The approved settlements resolve the claim filed by two Zungui Haixi investors who alleged the IPO prospectus and some disclosures by the manufacturer of sportswear and casual footwear were false or misleading.

Story continues below advertisement

The settlements end the dispute but aren't admissions of liability, wrongdoing or fault since all the defendants deny the allegations.

The settlements approved by the Ontario Superior Court of Justice call for Zungui to pay $8.1-million, Ernst & Young to pay $2-million and underwriters CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities and Mackie Research Capital to pay $750,000.

The court also awarded legal fees, expenses and taxes with interest totalling $2.81-million that will be paid before the remaining $8.04-million settlement is distributed to class members. Legal fees totalling $2.25-million represent about 20.75 per cent of the gross $10.85-million settlement.

Eligible investors who acquired Zungui shares between Aug. 11, 2009, and Aug. 22, 2011, who haven't opted out of the settlement by the Aug. 7 deadline must apply for compensation by Jan. 6.

The amount distributed will depend on several factors, including how many people make a claim.

Several people or groups are excluded from making claims, including the defendants and their families, subsidiaries, officers, directors and anyone who acquired Zungui shares in exchange for shares in Southern Trends International Holding Co. Ltd. for work done on the IPO.

The law firm of Siskinds LLP represented plaintiffs Jerzy Zaniewicz and Edward Clarke.

Story continues below advertisement

The Ontario Securities Commission conducted hearings in July into allegations of shortcomings by Ernst & Young in its audits of Zungui Haixi. The regulator claimed that the auditors failed to sufficiently heed "multiple red flags" about the revenue and earnings of the disgraced Chinese manufacturer and retailer.

The OSC stopped trading in the company's shares in September 2011 after E&Y suspended an audit and advised the company's audit committee that an independent investigation was warranted.

Subsequently the company's chairman, Fengyi Cai, and the chief executive, Yanda Cai, were permanently barred from trading securities in Ontario, with the OSC saying they had "demonstrated from their conduct that they are fundamentally ungovernable."

The OSC also permanently prohibited both from becoming or acting as directors or officers of any publicly traded company in the province. They were also ordered to pay $63,667 in costs to the commission.

Last year, Zungui Haixi and its top executives were banned for life from participating in Ontario's capital markets after the OSC ruled they broke provincial securities laws. Zungui Haixi, which manufactured running shoes in China but listed its shares on the TSX Venture Exchange, had been accused of failing to meet required standards for a public company, including failing to file audited financial statements on time, failing to maintain an audit committee and failing to co-operate with an investigation.

Report an error

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨