Sino-Forest underwriters settle for $32.5-million

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A group of big-name Bay Street financial institutions that underwrote stock and debt issues for Sino-Forest Corp. have agreed to pay $32.5-million to burned investors in the onetime Chinese forestry giant, which collapsed amid fraud allegations in 2011.

Former shareholders in Sino-Forest, once a $6-billion company that traded on the Toronto Stock Exchange, launched a $9-billion class-action lawsuit not just against the firm, some of its executives and its auditors, but also its underwriters – key "gatekeepers" who they alleged had failed to do enough due diligence on Sino-Forest.

In a settlement deal filed on Monday with the Ontario Superior Court, the underwriters "make no admissions of liability and deny any liability" in the plaintiffs' claims. But the $32.5-million payment releases them from needing to defend themselves in the class action, which continues against the company, a list of its executives and one of its former auditors, BDO Ltd.

A lawyer for the plaintiffs said the settlement amount would be the largest ever paid in Canada solely by a group of underwriters in a securities case, and that the deal could make banks and other financial institutions take a closer look at the offerings they participate in.

"I think now that underwriters can expect in the future that where there are alleged claims of failures of due diligence … they are going to have make meaningful payment to the people who are injured," said Dimitri Lascaris of Siskinds LLP in London, Ont., a lawyer for Sino-Forest investors.

However, according to numbers in the plaintiffs' statement of claim, the underwriters actually charged more than $50-million in commissions on their Sino-Forest offerings.

The settlement still has to be approved by a judge. If it goes through, the plaintiffs' legal team stands to take 17.5 per cent of the settlement, or $5.69-million. A lawyer for the underwriters could not be reached for comment.

The settlement agreement also says that certain underwriters – Credit Suisse Securities (Canada) Inc., TD Securities Inc., Dundee Securities Ltd. and Merrill Lynch Canada Inc. – have agreed to hand over "non-privileged documents and information" relevant to the case involving BDO.

The list of underwriters also included: RBC Dominion Securities Inc., Scotia Capital Inc., CIBC World Markets Inc., Canaccord Genuity Corp. and Maison Placements Canada Inc.

The existence of the settlement, but not the dollar amount, came to light earlier this month when proceedings in the class action were adjourned against the underwriters to allow for a court to approve the deal. It has not yet been approved but a hearing is expected soon.

Last week, a judge approved the rest of the class action, allowing it to proceed to trial after the defendants dropped their opposition to having it "certified" as a class action and having it given the leave from a judge required by the Ontario Securities Act to continue.

The settlement with the underwriters, who had made millions in fees underwriting Sino-Forest stock and debt issues, is the latest in a string of large multimillion-dollar settlements in the case.

A court approved a massive $117-million settlement with former Sino-Forest auditors Ernst & Young LLP in 2013. Last year, the plaintiffs settled with former Sino-Forest chief financial officer David Horsley for $5.6-million.

Sino-Forest and some of its former directors and officers are currently facing a hearing before the Ontario Securities Commission, which has alleged that they committed fraud. The company collapsed after a short-seller alleged in 2011 that it was a "Ponzi scheme" that could not account for its stated $3-billion in timber holdings in China. Sino-Forest and its former officers and directors have denied the allegations, which have not been proven in court.

As it faced investigations from securities regulators and lawsuits from investors, it sought bankruptcy protection. Its remaining assets were handed to its debt holders after buyers could not be found.