Michael Ford
Commercial Litigation

Case shows institutional investors may want more than passive role in class actions

The recent objection by a group of investors to a deal settling allegations made by Sino-Forest Corp. investors against auditor Ernst & Young LLP may indicate a growing trend of institutional investors seeking to exercise their right to opt-out of class actions, says Toronto commercial litigation lawyer William Pepall.

The $117 million deal, first announced in 2012, aimed to settle allegations made against Sino-Forest’s auditor in a $9.18-billion class-action lawsuit launched against Sino Forest’s former executives, auditors and underwriters.  The claim alleged that Ernst & Young failed to properly scrutinize the embattled forestry company’s books. Read Globe and Mail

Although the Ontario Superior Court of Justice recently approved the E&Y settlement as part of Sino-Forest’s restructuring, a group of investors tried to block the settlement, arguing that it “unfairly precluded them from opting out of the class-action and suing Ernst & Young on their own,” according to reports.  Read Decision

“This case and others like it demonstrate that institutional investors may not be content to be passive members of a plaintiff securities action class; they may seek to be representative plaintiffs in their own right or exercise opt-out rights and pursue individual claims,” says Pepall, a partner with Lerners LLP.

It is interesting, says Pepall, that the context for the approval of an auditor settlement in this case was the Companies’ Creditors Arrangement Act (CCAA) rather than the class action process.

“It was specifically noted that there is no right to opt out of a CCAA process, including, in this case the settlement of a claim against a third party found to be interrelated to the claims against the entity in CCAA,” he explains.

“Provided the claim is linked to the CCAA matter, as this one was, and the CCAA settlement approval factors are met, settlements may be approved in the CCAA context over the objections of class members who might otherwise exercise opt-out rights,” he adds.

Although, with the settlement in this case, the audit firm was able to cap its exposure to civil claims brought by securities holders, says Pepall, the settlement does indicate the exposure professionals face in providing services to entities which become insolvent.

“When the issuer of securities and financial statements is insolvent or in CCAA, related litigation is made more difficult for third party professionals such as auditors and underwriters; their unsecured indemnities and claims against the issuer will not likely have value and their exposure to lawsuits by holders of securities is heightened; they become the targeted source for settlement or judgment collection,” he explains.

Although there is a leave to appeal requirement in CCAA decisions, Pepall says he would not be surprised to see an attempt to appeal in this case.

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