Chinese duo to settle Canadian lawsuit with underwriters in Sino-Forest case

Chinese firms Commerce & Finance and Jingtian & Gongcheng are understood to have reached an intention to settle an ongoing legal action in Canada with 11 financial institutions.

The two firms were facing a lawsuit by 11 financial institutions which are themselves facing several multi-billion dollar class actions in Canada and the US over their handling of fundraising transactions by the scandal-plagued Sino-Forest Corporation.

Sources close to the matter have recently confirmed that Beijing-based Commerce & Finance and Jingtian & Gongcheng and the financial institutions have agreed on an intention to settle the matter out of court.

The negotiations were said to have started in December 2013 and terms have been agreed on in principle. However, a formal sign-off on the final settlement is expected to take place in the summer, as the financial institutions need to go through their respective internal review and approval processes.

It is unclear whether the settlement involves monetary compensation to the underwriters, and, if so, what would that amount be.

The two Chinese firms were put under fire last year for their roles as the PRC legal counsel in a number of fundraising transactions by Sino-Forest between 2007 and 2010, including both debt and equity offerings, that raised more than $2bn (14 October 2013).

The Chinese forestry company, once traded on the Toronto Stock Exchange and worth $6bn, collapsed following fraud allegations initiated by US short-selling firm Muddy Water in 2011.

The 11 securities firms and financial institutions in this matter, which underwrote the transactions, face a number of claims. These include a potential $9bn lawsuit filed by Canadian firms Siskinds and Koskie Minsky on behalf of burned investors in Sino-Forest against the company’s former auditors, consultants and underwriters.

On 31 May 2013, the 11 companies – Credit Suisse Securities (Canada), TD Securities, Dundee Securities, RBC Dominion Securities, Scotia Capital, CIBC World Markets, Merrill Lynch Canada, Canacoord Financial, Maison Placements Canada, Credit Suisse Securities (USA) and Merrill Lynch, Pierce, and Fenner & Smith (successor by merger to Banc of America Securities) – filed a statement of claim against the two Beijing-based firms in Ontario Superior Court of Justice, alleging negligence and breach of duty.

The underwriters’ lawsuit against the Chinese firms claimed contribution and indemnity for any liability they may have in the class action or other litigation in relation to Sino-Forest, and sought damages from the Chinese firms.

In reaction to the Canadian lawsuit, in December 2013 Commerce & Finance and Jingtian & Gongcheng launched a suit in Beijing against three members of Sino-Forest’s independent committee, two of the 11 financial institutions, Credit Suisse Securities and Bank of America Merrill Lynch, and Jun He, PRC adviser to the independent committee during its investigations of the fraud allegations at Sino-Forest (12 December 2013).

The lawsuit before the Third Intermediate People Court of Beijing asked that the defendants cough up a total of RMB250m (£25m) for allegedly defaming their right of reputation.

The dispute raises questions over the Chinese legal qualification belonging to the Jun He partner who led the investigation and advice to the independent committee, and whether his legal opinion should be valid.

As a consequence of such allegations, the Chinese Ministry of Justice has reportedly started an investigation into all top-tier Chinese firms over the Chinese qualification of their partners.

A source speculated that as part of the settlement agreement, the 11 underwriters would drop their claims against Commerce & Finance and Jingtian & Gongcheng in Canada, while the two Chinese firms will in return drop their legal action in Beijing.

Commerce & Finance, Jingtian & Gongcheng and Jun He could not be reached at the time of reporting.

The Sino-Forest case is one of the very first cases in which well-established Chinese law firms are being pursued by global clients in such a high-profile and big-ticket matter. Read last year’s feature China: Forest Fire for an in-depth analysis on this case and its far-reaching repercussions on capital markets practices in China.