Pensions File $6.5 Billion Lawsuit Against Sino-Forest

(September 1, 2011) — Two pension funds have filed a $6.5 billion class-action lawsuit against timber company Sino-Forest Corp, along with its head executives and auditor Ernst & Young.

The suit was filed by trustees of 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. Both schemes purchased shares in Sino-Forest from March 19, 2007, to June 2, 2011, the period covered by the lawsuit, when the forestry firm raised more than $2.7 billion in the capital markets. During this period, the underwriters and auditors also earned large fees for their services, the suit explained.

The suit alleged that the officers and directors of Sino-Forest misrepresented financial statements, backdated stock options, and overstated forest holdings in China and elsewhere, Bloomberg reported. Additionally, it claimed that 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, totaling nearly $3 million.

“Since 2003, Sino-Forest has raised approximately $2.986 billion from public investment and/or debt securities issues, including four public offerings between 2004 and 2009, which approximately raised $1.05 billion,” the complaint says.

Trading in Sino-Forest, which had previously been accused of overstating its timberland holdings and production, 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.”

Sino-Forest has also been a top holding for John Paulson–founder and president of New York-based hedge fund Paulson & Co. In July, the Advantage Plus Fund, Paulson’s flagship, reported that it lost 11% in June as a result of huge losses with Sino-Forest. The firm dropped about 73% from its closing price on June 1. Paulson & Co. subsequently sold the entire stake in Sino-Forest as of June 17.