* OSC staff allege breach of Ontario Securities Act
* Ernst & Young says its work was up to standard
* Sino-Forest collapsed after short-seller's allegations
* Sino-Forest investors settle for C$117 million
By Allison Martell and Solarina Ho
TORONTO, Dec 3 Canadian regulators said on
Monday Ernst & Young had conducted improper audits of
Sino-Forest Corp in the years before fraud allegations brought
down its client, and the accounting firm said it reached a
settlement in a class-action suit by Sino shareholders.
Dimitri Lascaris, a partner at Siskinds LLP and co-lead
counsel for the investor class action, said he believes the
auditor settlement, at C$117 million ($118 million), was the
biggest of its kind in Canadian history.
The news came on the same day as the Ontario Securities
Commission announced formal allegations against the auditor and
about a year and a half after short-seller Carson Block first
accused Sino-Forest of grossly exaggerating its assets.
Block's report touched off a firestorm that led to the
company's delisting and insolvency, as well as a flurry of
regulatory actions and lawsuits.
The OSC's staff allege that Ernst & Young's audits for 2007
to 2010 failed to measure up to industry standards in verifying
the ownership and existence of Sino-Forest assets, the regulator
said. It also said the firm should have applied more
professional skepticism to their audits.
"Investors rely on auditors to conduct their audits in
accordance with professional standards, particularly when
foreign companies are listing on Canadian exchanges," said Tom
Atkinson, OSC's director of enforcement. "If auditors fail to
abide by Canadian auditing standards and securities laws, we
will hold them accountable."
In an emailed response, Ernst & Young Canada denied the
allegations, saying it was confident its work on the Sino-Forest
audits "met all professional standards." The firm resigned as
Sino-Forest's auditor in April.
Separately, U.S. regulators charged the Chinese affiliates
of five top accounting firms, including Ernst & Young, with
violating U.S. securities law.
The Securities and Exchange Commission alleged that the
firms refused to produce audit documents in connection with
accounting fraud investigations into some U.S.-listed Chinese
Sino is the most prominent in a series of North
American-listed companies with Chinese operations whose
accounting or disclosure practices came under suspicion last
year. The scandals have hurt investor confidence and led to
sharp declines in the equity valuations of many Chinese
companies listed in the United States and Canada.
In addition to Ernst & Young, the class-action suit names
Sino-Forest itself, company executives, financial institutions
and others. The settlement requires court approval.
"We have many defendants left, and we are now going to focus
our attentions on ensuring that all of them are held accountable
for their role in this matter," he said.
In a separate statement on the class action, Ernst & Young
said the settlement did not include any admission of liability,
and confirmed that it was for C$117 million.
"Upon approval, the settlement will reduce the uncertainty
and future burden on our business, and allow us to focus on our
people and our clients," it said.
The Sino-Forest affair has prompted criticism of Canada's
regulatory regime as being lax in its oversight of companies
listed in Canada.
On Monday, Lascaris, one of the country's leading securities
class action lawyers, sounded an optimistic note.
"We finally have a legal regime in Ontario which provides a
clear path to recovery against auditors and other experts," he
Changes to the Ontario Securities Act that came into effect
in late 2005 make it easier to bring securities class actions,
including those against auditors. But the lawsuits are still
relatively rare in Canada, and the new law has faced few
REGULATORS SCHEDULE HEARING
OSC's Atkinson said in the release that a major focus in the
Sino-Forest investigation has been whether auditors and other
advisers acted properly.
While the investigation is not over, the regulator is
unlikely to take action against any additional parties involved
with Sino-Forest, spokeswoman Carolyn Shaw-Rimmington said.
"At this stage and based on the evidence presently
available, we do not anticipate initiating proceedings against
additional parties," she said.
The OSC said there would be a hearing on its allegations on
Jan. 7, 2013. In cases like this one, staff at the regulator
argue the case before OSC commissioners, who can choose to
impose monetary penalties and other sanctions.
"The evidence we will present to the OSC will show that
Ernst & Young Canada did extensive audit work to verify
ownership and existence of Sino-Forest's timber assets," said
the statement from Ernst & Young.
Trading in shares of Sino-Forest, once the biggest forestry
company on the Toronto Stock Exchange, was halted in August
2011. The shares were formally delisted in May 2012, and the
company is now insolvent.
Sino-Forest filed for protection under the Companies'
Creditors Arrangement Act, the equivalent of U.S. Chapter 11
filing, in March.
On Monday, the company said its creditors had voted to
approve its reorganization plan, under which the creditors will
acquire all of its forestry assets.