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Sino-Forest investors face off over deal with auditors

A timber plantation owned by Sino-Forest in Tang Kong village, near Gaoyao, southern China. A group of investment funds is planning to try to derail a $117-million settlement reached between lawyers acting for the majority of shareholders in Sino-Forest and the company’s former auditors, Ernst & Young LLP, which has been accused of failing to properly scrutinize Sino-Forest’s books.

Adam Dean/The Globe and Mail

A simmering feud between factions of investors in Sino-Forest Corp., the Mississauga-headquartered Chinese timber firm that collapsed amid allegations it was a multibillion-dollar fraud, will boil over on Monday in a Toronto courtroom.

A group of investment funds is planning to try to derail a $117-million settlement reached between lawyers acting for the majority of shareholders in Sino-Forest and the company's former auditors, Ernst & Young LLP, which has been accused of failing to properly scrutinize Sino-Forest's books.

The battleground is the courtroom where Sino-Forest sought court protection from its creditors last year.

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As part of the tangled talks over the company's restructuring, an agreement was reached to transfer Sino-Forest's remaining forestry assets to its debtholders. But as part of that deal, class-action lawyers for investors suing Sino-Forest, its former executives, auditors and underwriters, agreed to settle with their claims against E&Y in December. E&Y has denied any wrongdoing.

Just days later, the Ontario Securities Commission, which has already launched proceedings against Sino-Forest and some of its key former executives, revealed that it was going after E&Y for the way it handled Sino-Forest's books.

That news raised questions among some investors about whether the $117-million E&Y settlement was large enough.

Lawyers acting for the group of dissident investors, which includes Invesco Canada Ltd., Northwest & Ethical Investments LP and Comité Syndical National de Retraite Bâtirente Inc., came forward to try to block the settlement, calling it a "pittance." They object to the condition that the deal would preclude other investors from suing E&Y over their Sino-Forest losses in the future.

Normally, in a class-action settlement, class members are allowed to "opt out" and sue on their own, although in practice that rarely occurs. But this deal with E&Y, which is being approved as part of a restructuring under the Companies' Creditors Arrangements Act, these opt-out rights would be cancelled.

Allowing this would be "an unnecessary frustration of investors' legal autonomy that would shatter international confidence in Canada's capital markets and be contrary to public policy," argue lawyers for the funds with Toronto firm Kim Orr Barristers PC in a court filing.

Dimitri Lascaris, the lead lawyer for Siskinds LLP on the Sino-Forest case, argues the deal with E&Y is a good one for burned investors, and is the richest settlement ever paid in a class-action by an auditor in Canada.

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Both sides have reached out to big Sino-Forest investors who lost millions, trying to win supporters and slamming the other firm's approach. Kim Orr had originally launched its own potential class action against Sino-Forest, but lost a battle for control of the case last year to Siskinds and Koskie Minsky LLP, in what is known as a "carriage fight" before a judge.

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