CANADA - Two pension funds have filed a C$6.5bn ($6.5bn) class action lawsuit against China-based timber company Sino-Forest and its auditor Ernst & Young.
The suit, filed by the Labourers' Pension Fund of Central and Eastern Canada and the trustees of the International Union of Operating Engineers Local 793 Pension Plan for Operating Engineers in Ontario, claims the company misrepresented financial statements, backdated stock options and overstated forest holdings.
Both schemes bought shares in Sino-Forest between March 2007 and June 2011, during which time the firm raised more than $2.7bn in the capital markets. They say during this time, "the underwriters were paid lucrative underwriting commissions and E&Y and (Beijing-based consultant) Pöyry garnered millions of dollars in fees to bless Sino's reported results and assets. To their great detriment, the class members relied upon these supposed gatekeepers."
The suit also claims former Ernst & Young partners and employees were among directors and management at Sino-Forest and that Ernst & Young's "independence was impaired by the significant non-audit fees it was paid" from Sino-Forest from 2008 to 2010, totalling almost $3m.
"On June 2, 2011, Muddy Waters, a short seller and research firm, issued its first research report in relation to Sino, and unveiled the scale of the deception that had been worked upon the class members", the complaint said.
"Muddy Waters' initial report effectively revealed, among other things, that Sino had materially misstated its financial results, had falsely claimed to have acquired trees that it did not own, had reported sales that had not been made, or that had been made in a manner that did not permit Sino to book those sales as revenue under GAAP, and had concealed numerous related party transactions. These revelations had a catastrophic effect on Sino's stock price."
The publication of the report resulted in Sino-Forest dropping about 73% from its closing price on June 1 and trading in the firm was halted last week by Canadian regulators, who claimed that the firm's officers and directors committed acts they "know or reasonably ought to know perpetuate a fraud."
Neither Sino-Forest or Ernst & Young was available for comment.
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