Sino-Forest probe appears to spare underwriters

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The day the Ontario Securities Commission dropped its bombshell of allegations against Ernst & Young LPP over the accounting firm's handling of scandal-plagued Sino-Forest Corp.'s books, the regulator also said it did not expect to pursue anyone else.

That means that the Bay Street underwriters that helped the Ontario-based, Toronto-listed Chinese timber firm raise $3-billion in capital from investors are unlikely to face any regulatory action – despite recent warnings from the OSC that so-called gatekeepers need to better vet companies from China and other emerging markets.

"The investigation into this matter is ongoing," OSC spokeswoman Carolyn Shaw-Rimmington said in an e-mail to The Globe on Monday. "However, at this stage and based on the evidence presently available, we do not anticipate initiating proceedings against additional parties."

After Sino-Forest faced allegations last year from a short-seller that it was a "Ponzi-scheme," the OSC and the RCMP announced they were investigating. In July, the OSC issued formal allegations against Sino-Forest and six former executives. On Monday, the OSC announced formal allegations against Ernst & Young, saying the firm's work for Sino-Forest did not meet "relevant industry standards."

The OSC's word that others will likely not be hauled before the regulator does not not leave Sino-Forest's list of big-name Bay Street underwriters completely off the hook, however.

Lawyers acting for burned shareholders who lost billions have filed one of Canada's largest potential shareholder class action cases, which names not just the company and key executives, but its auditors and underwriters, and demands $9-billion.

Just days before the OSC allegations against E & Y were unveiled, the accounting firm agreed to settle the claims against it in the class-action litigation as well, paying out a massive $117-million. No such settlement has been revealed for the underwriters.

The underwriters named in the potential class-action against Sino-Forest include: Credit Suisse Securities (Canada) Inc., TD Securities Inc., Dundee Securities Corp., RBC Dominion Securities Inc., Scotia Capital Inc., CIBC World Markets Inc., Merrill Lynch Canada Inc., Canaccord Financial Ltd., Maison Placements Canada Inc., Credit Suisse Securities (USA) LLC, and Merrill Lynch, Pierce, Fenner & Smith Inc.

With a report from Janet McFarland