June 1, 2018. Ian Liverovich has joined Morganti & Co., P.C. as an associate. His focus will be representing institutional and retail investors in claims relating to cross-border commodity, financial market, and securities manipulation. Ian previously worked in Washington, D.C. and articled at DLA Piper (Canada) LLP.
INVESTORS’ RIGHTS AGAINST FRAUDSTERS HAVE BEEN UPHELD.
June 1, 2018. In SFC Litigation Trust v. Allen Tak Yuen Chan, 2018 ONSC 1429, the Ontario court was presented with a dispute from a litigation trust created for [add] against Mr. Chan, whom was the former chief executive officer and chairman of the Board of Sino-Forest Corporation. He was alleged to have orchestrated a massive fraud, which was exposed by short-seller Muddy Waters. Mr. Chan, his former colleagues at Sino-Forest, and most of Bay Street denied any wrongdoing and aggressively attacked Muddy Waters as the fraudster. Id., at paragraph 359. The court correctly sided with Muddy Waters and the Litigation Trust; on the balance of probabilities Mr. Chan was a fraud. Id., at paragraphs 361 with 535, 578, 780, 916-917, et. seq., with numerous paragraphs peppered with the court’s view that Mr. Chan and his evidence lacked credibility.
The truth-be-told, it was, indeed, Sino-Forest that was the fraud. Its own Independent Committee of the Board was unable to disprove any of Muddy Water’s allegations, unable to establish that Sino-Forest held good title to $2.99 billion of standing timber plantations in China, and unable to confirm alleged counterparties to trading transactions. Ultimately, Sino-Forest restructured under the Companies’ Creditors Arrangement Act and the SFC Litigation Trust was created to recover assets to pay the bondholders. This Litigation Trust advanced fraud and breach of fiduciary duty claims against Mr. Chan. A trial was held and the court found in favour of the SFC Litigation Trust and assessed $2.6 billion in damages.
The court confirmed that individual shareholders have no cause of action in law for any wrongs done to the corporation. Rather, the corporation must advance the claim(s) or by way of a derivative action. Id., 2018 ONSC 1429, at paragraph 129. As such, the court focused on the Litigation Trust’s claims against Mr. Chan, in his individual capacity, resulting in the damages caused to Sino-Forest. Id., at paragraph 152.
The court went on to identify that the Litigation Trust’s standard to meet was a preponderance of evidence as to show whether the conclusion that plaintiff seeks to establish (i.e., here fraud) is substantially the most probable of the possible views of the facts. Id., at paragraph 162. The court proceeded to confirm that to advance a claim for fraud, the plaintiff investor must plead and provide evidence that (1) the defendant made a false representation; (2) the defendant had some level of knowledge of the falsehood of the representation; (3) the false representation caused the plaintiff to act; and (4) the plaintiff’s actions resulted in a loss. Id., at paragraph 173.
From Morganti & Co.’s perspective, it is encouraging to read a court’s opinion that was, simply, intellectually honest and thorough with its reasons. We will definitely be relying upon this decision in the future.