Ernst & Young Reaches Settlement with Sino Forest

By Michael Foster, Big4.com Blogger

Ernst & Young will pay $117 million to compensate shareholders who claim that they were defrauded by overstated claims by Chinese-Canadian firm Sino Forest.

Shareholders had filed a class-action lawsuit claiming that Ernst & Young had failed to adequately identify misstatements regarding the firm’s financial health.

Originally, Sino Forest was accused of fraud by Muddy Water Research, a market research firm, which claimed that the company was virtually worthless. In June 2011, Muddy Waters released a report claiming that Sino Forest was little more than a Ponzi scheme, causing shares in the company to plummet by over 80 per cent while the firm’s credit rating fell twice in the ensuing weeks. The firm also hired PwC to do an independent audit of the company’s assets and liabilities.

After PwC was unable to gather all data on the firm in 2011, the firm filed for bankruptcy in Canada and threatened to sue Muddy Waters.

Meanwhile, shareholders who felt that Sino Forest’s original auditor, Ernst & Young, had failed to identify problems in the company’s asset statements, sued the firm in addition to a separate suit against Sino Forest.

Although the sharedholders’ representatives and the Big4 firm have agreed to a settlement, several investors have publicly objected to the decision, such as Northwest and Ethical Investments, Trimark Investments, and Comite Syndical National de Retraite Batirente. Dissenting investors have said that the agreement will make it impossible for them to sue the audit firm individually for their own losses.