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.

 

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Photo of John Pirie John Pirie

John Pirie leads the Firm’s Canadian Litigation and Government Enforcement Group. He acts for clients in complex litigation and investigations. Mr. Pirie’s practice includes a significant fraud law and asset recovery component, often involving matters in the financial services industry. He routinely acts for our clients in coordination with other Baker McKenzie offices globally. Mr. Pirie has expertise concerning asset recovery strategies and emergency relief measures related to fraud, including Mareva injunctions, Anton Piller orders, Norwich Pharmacal orders, global asset tracing and fraudulent conveyance proceedings. Mr. Pirie has acted as lead counsel on an array of reported cases in this field, and he has been recognized in Lexpert’s Annual Guide to the Leading Canada/US Cross-Border Litigation Lawyers, and in the Legal 500 for Dispute Resolution (Canada). He appeared in the Supreme Court of Canada on a case ranked by Lexpert Magazine as Canada’s #1 business decision for 2007. Mr. Pirie has previously been named one of Lexpert’s Rising Stars, a “top 40” award that recognizes Canadian lawyers with an outstanding record of success.

Photo of David Gadsden David Gadsden

David Gadsden has deep experience in fraud and financial crime matters.  He is counsel on multijurisdictional fraud investigations, including related civil disputes and regulatory proceedings.  David acted as counsel for a primary defendant in the Sino-Forest litigation, the largest securities fraud class action in Canada.  He is known for his pragmatic advice on fraud prevention and investigations, and has extensive expertise in ‘Ponzi scheme’ litigation and asset recapture, including cross-border tracing, Anton Piller orders and Mareva injunctions.  David has been recognized as a “Litigator to Watch” in Lexpert’s annual Guide to the Leading US/Canada Cross-border Litigation Lawyers in Canada and has been ranked in Legal 500 for dispute resolution.