Our team acted for one of the parties in Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, where Justice Morawetz of the Ontario Superior Court of Justice approved Ernst & Young LLP’s $117 million settlement relating to class action lawsuits commenced by jilted investors following the downfall of former stock market darling, Sino-Forest Corporation. The $9.2B class action involves significant fraud allegations that call into question Sino-Forest’s structure, reporting and revenues, as well as the practices of its auditors and underwriters. In addition to garnering attention as the largest auditor settlement to date in a Canadian securities class action, this landmark decision is noteworthy for the Court’s approval of a comprehensive third-party release and a ‘no opt-out’ settlement feature granted in favour of Ernst & Young. The Court also approved a controversial framework that would make similar settlements available for future settling defendants – a feature some critics characterize as extraordinary relief in cases where there are underlying fraud allegations.
The settlement, which was approved in the context of the Sino-Forest’s insolvency restructuring proceedings under the Companies’ Creditors Arrangement Act (CCAA), has expanded the use of third party releases within CCAA proceedings and, if left undisturbed, has arguably set a game-changing precedent. Going forward, in a class action involving one or more financially distressed defendants, solvent co-defendants may look to the CCAA as a form of class action management tool. This case suggests that in such scenarios, the court is willing to offer gold-plated releases and the invaluable certainty of ‘no opt-out’ settlement provisions, even in cases involving extensive allegations of fraud. Such settlements are not available when facilitated exclusively under the Canadian class action regime.
A group of objectors comprising six investment funds opposed the proposed Ernst & Young settlement from the outset, and sought to appeal the decision. The Ontario Court of Appeal, however, found no basis to interfere with the lower court decision and analysis. Leave to appeal to the Supreme Court of Canada is being sought.