Sino executives’ appeal of OSC decision dismissed by Ontario court

An Ontario court has dismissed an appeal from four former Sino-Forest Corp. executives of regulatory disciplinary decisions handed down against them by the Ontario Securities Commission (OSC).

The Divisional Court has rejected an appeal from Allen Chan, Alfred Hung, Albert Ip and George Ho seeking to overturn an OSC hearing panel’s 2017 decision that they violated securities rules, and a 2018 sanctions decision from a different panel permanently banning them from the industry and imposing monetary penalties.

One-time Chinese forestry giant and TSX listing Sino-Forest collapsed in 2011 amid questions about the legitimacy of its assets and the accuracy of its accounting practices from short-selling firm Muddy Waters.

In subsequent regulatory proceedings, the OSC ordered more than $80 million in penalties and disgorgement, along with other sanctions, after finding that the firm and its executives violated securities rules in Ontario.

On appeal, the four executives questioned whether the OSC decisions were reasonable; whether there was bias; and whether the panel considered “Chinese business and cultural practices” in deciding that they intended to deceive investors, among other matters.

For instance, they argued that some of the issues with documenting the company’s transactions reflect common Chinese business practices, rather than efforts to mislead investors.

“The appellants submit that the reason some business arrangements of Sino-Forest were not put in writing until after the purported agreements had been reached is because the appellants’ relations with others were governed by the Chinese concept of guanxi,” the court said in its decision. “The appellants suggest that guanxi refers to the concept of drawing on connections in order to secure favours in personal relations.”

However, the court rejected the argument, finding that the OSC panel did consider the impact of Chinese business and/or cultural practices.

“There was ample support for the panel’s conclusion that the appellants had the intention to commit fraud and deceive investors,” the court said in its decision.

“In arriving at this conclusion, the merits panel was not rejecting Chinese business and cultural practices, but simply saying that while such practices might explain the appellants’ behaviour, they cannot excuse illegal acts, as the appellants, as senior executives, had a responsibility to ensure that Sino-Forest complied with Ontario securities law,” it added.

The court also dismissed allegations of bias by the hearing panel chair, and found that the sanctions ordered by the panel were reasonable.

“The sanctions panel identified the principles at play and explained the reasons for the decision, and there is no principled basis upon which to interfere with their decision,” it said. “The sanctions panel has wide discretion to impose a sanction, provided there is a principled reason for so doing.”

On Tuesday, the OSC issued a release commenting on the court’s decision.

“This is an important decision, upholding the commission’s approach in one of the largest corporate frauds in Canadian history,” said Jeff Kehoe, director of enforcement at the OSC. “The court’s decision further strengthens our resolve to work across international borders to investigate and prosecute those who seek to harm our markets and investors.”