CITATION: Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, 2017 ONSC 5026
COURT FILE NO.: CV-11-431153CP
DATE: 20170824
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
THE TRUSTEES OF THE LABOURERS’ PENSION FUND OF CENTRAL AND EASTERN CANADA, THE TRUSTEES OF THE INTERNATIONAL UNION OF OPERATING ENGINEERS LOCAL 793 PENSION PLAN FOR OPERATING ENGINEERS IN ONTARIO, SJUNDE AP-FONDEN, DAVID GRANT and ROBERT WONG
Plaintiffs
– and –
SINO-FOREST CORPORATION, ERNST & YOUNG LLP, BDO LIMITED (formerly known as BDO MCCABE LO LIMITED), ALLEN T.Y. CHAN, W. JUDSON MARTIN, KAI KIT POON, DAVID J. HORSLEY, WILLIAM E. ARDELL, JAMES P. BOWLAND, JAMES M.E. HYDE, EDMUND MAK, SIMON MURRAY, PETER WANG, GARRY J. WEST, PÖYRY (BEIJING) CONSULTING COMPANY LIMITED, CREDIT SUISSE SECURITIES (CANADA), INC., TD SECURITIES INC., DUNDEE SECURITIES CORPORATION, RBC DOMINION SECURITIES INC., SCOTIA CAPITAL INC., CIBC WORLD MARKETS INC., MERRILL LYNCH CANADA INC., CANACCORD FINANCIAL LTD., MAISON PLACEMENTS CANADA INC., CREDIT SUISSE SECURITIES (USA) LLC and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (successor by merger to Banc of America Securities LLC)
Defendants
Garth Myers for the Plaintiffs
David Barbaree for the Defendant Allen T.Y. Chan
Proceeding under the Class Proceedings Act, 1992
HEARD: August 24, 2017
PERELL, J.
REASONS FOR DECISION
1. Introduction
[1] The Defendant Kai Kit Poon, along with the Defendant Allen T.Y. Chan, were the co-founders of Sino-Forest Corporation. In a securities class action arising out of the cataclysmic collapse and subsequent bankruptcy of Sino-Forest, Mr. Poon has been noted in default. This is a motion for a default judgment against Mr. Poon for $322,390,000.
[2] Since this action was certified as a class proceeding, the court has approved settlement agreements between the Plaintiffs and:
a. W. Judson Martin, William E. Ardell, James P. Bowland, James M.E. Hyde, Edmund Mak, Simon Murray, Peter Wang, and Garry J. West (Orders of Regional Senior Justice Morawetz dated March 29, 2016 and November 16, 2016);
b. BDO Limited (Order of Regional Senior Justice Morawetz dated November 16, 2016); and
c. Credit Suisse Securities (Canada) Inc., TD Securities Inc., Dundee Securities Corporation, RBC Dominion Securities Inc., Scotia Capital Inc., CIBC World Markets Inc., Merrill Lynch Canada Inc., Canaccord Financial Ltd., Maison Placements Canada Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (successor by merger to Banc of America Securities LLC) (Order of Regional Senior Justice Morawetz dated October 30, 2015).
[3] Each of the settlement approval orders contained Pierringer-style bar orders which provided that all claims for contribution, indemnity or other claims over are barred, prohibited and enjoined. The bar orders provide that if the court determines that there is a right of contribution and indemnity, the Settling Class Members shall not be entitled to claim or recover from the Non-Settling Defendants that portion of any damages.
[4] The only remaining Defendants that have not settled with the Plaintiffs are: (a) Mr. Poon; (b) Mr. Chan; and (c) Sino-Forest. This motion is without prejudice to any of the defences that Mr. Chan and Sino-Forest may advance.
[5] The motion for judgment against Mr. Poon is made pursuant to Rule 19.05 of the Rules of Civil Procedure. Under this rule, Mr. Poon is deemed to admit the allegations in the Statement of Claim. The issues on this motion are: (a) what is the the degree or percentage of liability attributable to Mr. Poon; and (b) whether the unliquidated damages claim for $322,390,000 is supported by the evidence.
[6] For the reasons that follow, I grant judgment as requested.
2. Factual Background
[7] The Plaintiffs, who are The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada (the “Labourers Fund”), The Trustees of the International Union of Operating Engineers Local 793 Pension Plan for Operating Engineers in Ontario (the “OE Fund”), Sjunde Ap-Fonden (“AP7”), David Grant, and Robert Wong, brought this action on behalf of purchasers of Sino-Forest’s securities (notes and shares) from March 19, 2007 to June 2, 2011 (the “Class Period”). During the Class Period, Sino-Forest raised $2.7 billion pursuant to seven public offerings of securities. The Plaintiffs allege that Sino-Forest made misrepresentations in numerous documents.
[8] Sino-Forest operated forest plantations in the People’s Republic of China (“PRC” or “China”). Sino-Forest was incorporated in 1994 under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, and continued under the Canada Business Corporations Act, R.S.C. 1985, c. C-44, in 2002. It was a “reporting issuer” in all provinces of Canada. Sino-Forest had shares outstanding that were listed for trading on various exchanges including the TSX. Sino-Forest also had various debt instruments, derivatives, and other securities that were traded in the secondary market in Canada and elsewhere.
[9] Mr. Poon was Sino-Forest’s President and a Director.
[10] On November 21, 2016, pursuant to a court order, Mr. Poon’s Statement of Defence was struck, and he was subsequently noted in default. He is, therefore, deemed to admit all of the allegations in the Second Fresh as Amended Statement of Claim, including the allegations that ground a claim for statutory liability pursuant to Part XXIII.1 of the Securities Act, R.S.O. 1990, c. S.5. Therefore, Mr. Poon is deemed to admit the following:
a. He was a co-founder of Sino-Forest and at all material times from 1994, was the President of the company. He was also a Director of Sino-Forest from 1994 to May 2009.
b. As at May 1, 1995, shortly after Sino-Forest became a reporting issuer, he held 18.3% of Sino Forest’s outstanding common shares and 37.5% of its preference shares.
c. As of April 29, 2011, he held 0.42% of Sino-Forest’s common shares.
d. He made in excess of $34.4 million through the sale of Sino-Forest shares.
e. After the release of the Muddy Waters report and the subsequent investigation, Sino-Forest announced by way of a press release on October 9, 2012 that he ceased to be Sino-Forest’s President, and ceased to hold positions in Sino-Forest and certain of its subsidiaries.
f. While he was a Director, Sino-Forest released documents that contained misrepresentations. These documents are defined in the Statement of Claim as the Impugned Documents.
g. The Impugned Documents, including documents for which he is liable, contained misrepresentations with respect to the following:
misrepresentations relating to Sino-Forest's financial statements' compliance with GAAP (Generally Accepted Accounting Principles);
misrepresentations relating to Sino-Forest's history and fraudulent origins;
misrepresentations relating to Sino-Forest's forestry assets;
misrepresentations relating to Sino-Forest's related party transactions;
misrepresentations relating to Sino-Forest's relations with forestry bureaus and its purported title to forestry assets in the PRC;
misrepresentations relating to Sino-Forest's relationships with its AIs;
misrepresentations relating to Sino-Forest's cash flow statements; and
misrepresentations relating to risks to which Sino-Forest was exposed.
[11] The Statement of Claim pleads the following allegations against Mr. Poon:
a. Mr. Poon had a statutory obligation as a Director under Canadian statutory law to supervise the management of the business and affairs of Sino-Forest;
b. As co-founder and President of Sino-Forest, Mr. Poon was intimately aware of Sino-Forest's operations and, as a long-standing officer, had an obligation to ensure proper disclosure;
c. Mr. Poon authorized, permitted or acquiesced in the release of the Impugned Documents;
d. Mr. Poon knowingly caused Sino-Forest to make misrepresentations in the historical narrative in the Prospectuses relating to Sino-Forest's: (a) joint venture with the Leizhou Forestry Bureau named Zhanjiang Leizhou Eucalyptus Resources Development Co. Ltd., revenue from which was non-existent or grossly overstated; and (b) investment in Shanghai Jin Xiang Timber Ltd., which was fictitious; and
e. Mr. Poon knowingly caused Sino-Forest to make misrepresentations in the Impugned Documents concerning Sino-Forest's plantation acquisitions through Jiangxi Zhonggan Industrial Development Company Limited, which were materially smaller than Sino-Forest represented.
[12] As a result of Mr. Poon's knowledge of the misrepresentations and his role as co-founder, President and Director of Sino-Forest and consequently his involvement in the day-to-day affairs of Sino-Forest, the Plaintiffs take the position that Mr. Poon is responsible for 10% of liability incurred by the Defendants.
3. Evidence of Damages
[13] The Plaintiffs rely on the expert evidence of Frank C. Torchio in support of their claim for damages. Mr. Torchio of Rochester, New York, is the President of Forensic Economics Inc. Forensic Economics Inc. is a consulting firm providing financial-economic analysis in securities litigation and business disputes. Mr. Torchio has a M.B.A. (Economics and Finance, 1981) from the University of Rochester and a B.A. (Mathematics, 1978) from Niagara University. He is a member of the part-time faculty at the University of Rochester.
[14] Mr. Torchio opined that, using the statutory formula contained in s. 138.5(1) of the Securities Act, aggregate damages associated with Sino-Forest shares purchased on the secondary market during the class period are $3,223.9 million.
[15] In calculating aggregate damages, Mr. Torchio relied on the following methodology:
a. Sino-Forest's shares were traded on the secondary market during the class period.
b. Damaged shares purchased during the class period could be identified based on total trading volume and then applying a mathematical model called a "trading model", which uses algorithms and statistical analyses to determine which shares that were purchased during the class period were held through to the end of the class period. A trading model is a mathematical model that estimates the portion of total trading volume during the relevant period that is retained and the portion of trading volume that represents the turnover of those retained shares.
c. Based on this model, there were 225.1 million shares of Sino-Forest purchased during the class period and retained until the end of the class period.
d. Once the number of damaged shares is calculated, the next step is to determine how much each of those shares was damaged. Section 138.5(1) of the Securities Act contains a formula to calculate damages depending on when the share was sold; i.e.:
for shares purchased during the class period and sold between June 2, 2011 and June 16, 2011 (10 days following the corrective disclosure), damages are calculated as the difference between the purchase price and the sale price;
for shares purchased during the class period and sold after June 16, 2011, damages are calculated as the lesser of:
i. the purchase price minus the sale price; and
ii. the purchase price minus $4.49, which is the per share average closing price from June 3, 2011 through June 16, 2011.
e. Based on the trading model methodology and the damages methodology, the damages are $3,233.9 million for shares purchased during the class period on the secondary market and not sold prior to June 2, 2011, the date of the alleged corrective disclosure.
4. Judgment on the Common Issues
[16] Although 34 common issues were certified by order of this Court dated January 20, 2015, the Plaintiffs request judgment on the following common issues that determine Mr. Poon's liability under Part XXIII.1 of the Securities Act to purchasers of shares during the class period as follows:
Were There Misrepresentations?
(2) Did the Defendants make misrepresentations, including a failure to make timely disclosure, and if so, who made these representations, when, where and how?
ANSWER: Yes. See Schedule "C".
Statutory Liability — Secondary Market under the Securities Legislation
(6) If the answer to (2) is “yes”, do the misrepresentations give rise to liability under section 138.3 of the Securities Act, R.S.O. 1990, c. S.5, or the equivalent securities legislation in other provinces? If so, for which Defendants, for which misrepresentations for each Defendant and for what time period?
ANSWER: Yes. All of the misrepresentations identified in the Impugned Documents in Schedule "C" for Mr. Poon, for the class period.
(7) If the answer to (6) is “yes”,
i. Did each of the Individual Defendants who were not Directors at the time of the misrepresentations authorize, permit or acquiesce in the release of each of the documents containing such misrepresentations?
ANSWER: Mr. Poon authorized, permitted or acquiesced in the release of each of the documents containing misrepresentations.
ii. Did each of Sino-Forest, Chan, Poon, or BDO know of each of the misrepresentations at the time they were made? If not, were these Defendants wilfully blind to each of the misrepresentations at the time that they were made and does wilful blindness constitute knowledge for the purposes of subsection 138.7(2) of the Securities Act or the equivalent securities legislation in other provinces?
ANSWER: Mr. Poon knew of each of the misrepresentations at the time they were made.
(8) What are the damages payable by each Defendant found liable under section 138.3 of the Securities Act or the equivalent securities legislation in other provinces?
ANSWER: Mr. Poon is liable for $2,256,730,000 under section 138.3 of the Securities Act.
5. Procedural Background
[17] Rule 19.02(1)(a) of the Rules of Civil Procedure provides that a defendant who has been noted in default is deemed to admit the truth of all allegations of fact in the statement of claim. Rule 19.02(1)(a) states:
CONSEQUENCES OF NOTING DEFAULT
19.02 (1) A defendant who has been noted in default,
(a) is deemed to admit the truth of all allegations of fact made in the statement of claim; …
[18] Rules 19.05(1) and (2) provide that where a defendant has been noted in default, the plaintiff may move for judgment, and that the motion shall be supported by evidence given by affidavit if the claim is for unliquidated damages; the rules state:
BY MOTION FOR JUDGMENT
19.05 (1) Where a defendant has been noted in default, the plaintiff may move before a judge for judgment against the defendant on the statement of claim in respect of any claim for which default judgment has not been signed.
(2) A motion for judgment under subrule (1) shall be supported by evidence given by affidavit if the claim is for unliquidated damages.
[19] Rule 19.06 provides that a plaintiff is entitled to judgment only where the facts admitted as true entitle him or her to judgment; the rule states:
FACTS MUST ENTITLE PLAINTIFF TO JUDGMENT
19.06 A Plaintiff is not entitled to judgment on a motion for judgment or at trial merely because the facts alleged in the statement of claim are deemed to be admitted, unless the facts entitle the Plaintiff to judgment.
[20] In J. v. B. (W.), 2004 CanLII 8541 (ON CA), [2004] O.J. No. 2312 (C.A.) at paras. 1, 15, the Court of Appeal held that the court has jurisdiction to apportion fault in a multi-party action against persons who were originally named as party defendants but who, as a result of settlements, will not be parties at the time of apportionment.
6. Analysis and Discussion
[21] The Plaintiffs submit that the deemed admissions and the evidence of Mr. Torchio entitle them and the Class Members to judgment against Mr. Poon. I agree.
[22] Where a responsible issuer releases a document that contains a misrepresentation, s.138.3 of the Securities Act provides a right of action against, among others, each director of the responsible issuer at the time the document was released, and each officer who authorized, permitted or acquiesced in the release of the document, as follows:
Liability for secondary market disclosure
Documents released by responsible issuer
138.3 (1) Where a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against,
(b) each director of the responsible issuer at the time the document was released;
(c) each officer of the responsible issuer who authorized, permitted or acquiesced in the release of the document; …
[23] For a finding of statutory liability against Mr. Poon, it must be established that: (a) Sino-Forest is a reporting issuer that released documents containing misrepresentations while Mr. Poon was a director or officer; and (b) Mr. Poon authorized, permitted or acquiesced in the release of the document. Each of these elements are pleaded in the Statement of Claim and are deemed to be true. The admissions that are deemed to be true ground a finding of statutory liability against Mr. Poon pursuant to Part XXIII.1 of the Securities Act.
[24] The statutory right of action pursuant to Part XXIII.1 of the Securities Act contains a liability limit for directors and officers of the greater of: (a) $25,000 or (b) 50 percent of the aggregate of the director's or officer's compensation from the responsible issuer and its affiliates. However, the liability limit does not apply if the person authorized, permitted or acquiesced in making the misrepresentation while knowing that it was a misrepresentation: Securities Act, s.137.7(2). The Plaintiffs have pleaded, and it is deemed to be true, that Mr. Poon knew that the Impugned Documents contained misrepresentations; and, therefore, there is no statutory limit to Mr. Poon's liability.
[25] Mr. Torchio’s evidence establishes that based on the statutory formula set out in the Securities Act, total damages sustained by purchasers of Sino-Forest's shares on the secondary market are $3,223,900,000.
[26] Consequently, the deemed admissions entitle the Plaintiffs and the Class Members to judgment against Mr. Poon for his liability in the amount of $322,390,000, representing 10% of total liability to the class.
7. Conclusion
[27] The Plaintiffs are entitled to a default judgment against Mr. Poon of $322,390,000 plus prejudgment and postjudgment interest.
Perell, J.
Released: August 24, 2017
CITATION: Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, 2017 ONSC 5026
COURT FILE NO.: CV-11-431153CP
DATE: 20170824
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
THE TRUSTEES OF THE LABOURERS’ PENSION FUND OF CENTRAL AND EASTERN CANADA, THE TRUSTEES OF THE INTERNATIONAL UNION OF OPERATING ENGINEERS LOCAL 793 PENSION PLAN FOR OPERATING ENGINEERS IN ONTARIO, SJUNDE AP-FONDEN, DAVID GRANT and ROBERT WONG
Plaintiffs
– and –
SINO-FOREST CORPORATION, ERNST & YOUNG LLP, BDO LIMITED (formerly known as BDO MCCABE LO LIMITED), ALLEN T.Y. CHAN, W. JUDSON MARTIN, KAI KIT POON, DAVID J. HORSLEY, WILLIAM E. ARDELL, JAMES P. BOWLAND, JAMES M.E. HYDE, EDMUND MAK, SIMON MURRAY, PETER WANG, GARRY J. WEST, PÖYRY (BEIJING) CONSULTING COMPANY LIMITED, CREDIT SUISSE SECURITIES (CANADA), INC., TD SECURITIES INC., DUNDEE SECURITIES CORPORATION, RBC DOMINION SECURITIES INC., SCOTIA CAPITAL INC., CIBC WORLD MARKETS INC., MERRILL LYNCH CANADA INC., CANACCORD FINANCIAL LTD., MAISON PLACEMENTS CANADA INC., CREDIT SUISSE SECURITIES (USA) LLC and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (successor by merger to Banc of America Securities LLC)
Defendants
REASONS FOR DECISION
PERELL J.
Released: August 24, 2017