The first of the OSC’s no-contest settlements occurred in October. Ernst & Young LLP (“Ernst & Young”) entered into a no-contest settlement agreement with the OSC in respect of allegations related to its auditing of Sino-Forest Corp. (“Sino-Forest”) and Zungui Haixi Corp. (“Zungui”) (the “Settlement Agreement”).
At the hearing to approve the settlement held on September 30, 2014, Ernst & Young agreed to make a voluntary payment to the OSC in the amount of $8 million in total, allocated as follows:
- $6.5 million for the Sino-Forest Proceeding, of which $1.5 million is to be allocated to the Commission’s costs of the investigation, and the balance shall be designated for allocation to third parties or for investor education, in accordance with subsections 3.4(2)(b)(i) or (ii) of the Securities Act; and
- $1.5 million for the Zungui Proceeding, of which $600,000.00 is to be allocated to the Commission’s costs of the investigation, and the balance is to be designated for allocation to third parties or for investor education, in accordance with subsections 3.4(2)(b)(i) or (ii) of the Securities Act.
In its reasons, the OSC panel stated that the $8 million payment likely exceeded penalties that could have been imposed on Ernst & Young following a contested hearing. The terms of the settlement were described as unprecedented in Canada and consistent with SEC practices.
The OSC Staff’s core allegation against Ernst & Young was that it had failed to conduct audits of year-end financial statements of a reporting issuer operating in the People’s Republic of China (“the PRC”) in accordance with generally accepted auditing standards (“GAAS”), resulting in breaches of the Securities Act.
The Commission stated that it took into consideration a number of mitigating factors in the Settlement Agreement, including:
- Ernst & Young settled class action lawsuits relating to its audits of the financial statements of Sino-Forest before the Ontario Superior Court of Justice (the “Ontario Court”), Quebec Superior Court and United States District Court for the Southern District of New York and relating to its audits of the financial statements of Zungui before the Ontario Court by paying a total of $119 million to shareholders and noteholders of Sino- Forest and shareholders of Zungui;
- OSC Staff did not allege, and found no evidence of, dishonest conduct by Ernst & Young; and
- Ernst & Young co-operated in the investigation by providing Staff with an affidavit sworn by one of its partners.
The full text of the Settlement Agreement can be read here.
Please click here to read a previous Securities Snapshot publication on no-contest settlements.