Borrelli v. Chan | Mar 14, 2018

CITATION: Borrelli v. Chan, 2018 ONSC 1429

COURT FILE NO.: CV-14-10684-00CL

DATE: 20180314

ONTARIO

SUPERIOR COURT OF JUSTICE

)

BETWEEN:

COSIMO BORRELLI, in his capacity as ) Robert Staley, Alan Gardner, Jonathan G.

trustee of the SFC LITIGATION TRUST

) Bell, William A. Bortolin and Jason Berall

) for the Plaintiff

Plaintiff )

)

– and –

)

ALLEN TAK YUEN CHAN

) Robert Rueter, Sara J. Erskine, Malik Martin

) and David Barbaree for the Defendant

Defendant )

)

) HEARD: March 6-10, 13-16, 20, 21, 23, 24,

) 27-29, and 31, April 3-7, 10-13, 18-22, 24-

) 28, May 2-4, 8 and 9, June 8 and 9 and July

) 24-28, 2017

PENNY J.

Table of Contents

Overview........................................................................................................................................... 4

Background....................................................................................................................................... 5

Mr. Chan’s Role at Sino-Forest ................................................................................................ 5

Standing Timber Model ............................................................................................................ 6

The Relative Growth and Significance of Sino-Forest’s Business Models.............................. 8

Sino-Forest’s Cash Raises on the Capital Markets................................................................... 8

The Muddy Waters Report........................................................................................................ 8

The Independent Committee Investigation and Other Consequences of the Muddy Waters

Report........................................................................................................................................ 8

The CCAA Proceedings and the Formation of the Sino-Forest Litigation Trust ................... 12

Page: 2

Emerald’s Attempts to Sell Sino-Forest’s Assets ................................................................... 15

Document Gathering............................................................................................................... 19

Preliminary Issues........................................................................................................................... 20

Class Action Duplication........................................................................................................ 21

Affirmation ............................................................................................................................. 28

Standard of Proof.................................................................................................................... 31

Document Translation............................................................................................................. 31

Issues............................................................................................................................................... 32

Credibility ....................................................................................................................................... 34

Use of Non-Sino-Forest Email Accounts ....................................................................................... 37

Use of Nominees............................................................................................................................. 43

The Nominee Documents ....................................................................................................... 44

The Nominees and Managers.................................................................................................. 55

Conclusion on the Use of Nominees....................................................................................... 62

The BVI Model Fraud..................................................................................................................... 63

Overview................................................................................................................................. 63

Shortcomings in the BVI Model Purchase Contracts and Underlying Documents................ 65

Shortcomings in the BVI Model Sales Contracts and Underlying Documents...................... 76

Contracts and Other Documents Were Created After the End of Each Quarter..................... 79

BVI Model Counterparties Provided No Supporting Documentation During the IC

Investigation............................................................................................................................ 80

No Evidence of the Existence of Counterparties from Site Visits.......................................... 81

Mr. Chan and Inside Management’s Control of Contracting Parties...................................... 81

High Profits with No Value Added......................................................................................... 87

The BVI Model Versus the WFOE Model ............................................................................. 87

The Poyry Reports .................................................................................................................. 88

The Jingtian & Gongcheng Legal Opinions ........................................................................... 90

The Area Verification Exercise .............................................................................................. 91

The WFOE Standing Timber Fraud................................................................................................ 98

The Wood Log Trading Cash Gap Fraud ....................................................................................... 99

Overview................................................................................................................................. 99

Were the Contracts Affirmed?.............................................................................................. 100

Page: 3

The Limitations Defence....................................................................................................... 101

The Cash Gap Fraud Allegation ........................................................................................... 106

Diversion of USD Cash into BVI Standing Timber Assets.................................................. 108

The Disappearance of Wood Log Customers Owing $93.4 Million after June 2, 2011....... 110

Unusual Relationships with Wood Log Trading Counterparties.......................................... 110

The Wood Log Deposit Fraud ...................................................................................................... 111

Overview............................................................................................................................... 111

Prompt Sky............................................................................................................................ 112

Trevista and Spring Field...................................................................................................... 114

Elderbridge............................................................................................................................ 124

Xunxiang............................................................................................................................... 128

PT Anka ................................................................................................................................ 132

Conclusion ............................................................................................................................ 133

March Maple................................................................................................................................. 133

Greenheart..................................................................................................................................... 134

Overview............................................................................................................................... 134

The Formation of Fortune and Montsford ............................................................................ 139

Yosanda Administered Fortune and Montsford’s Affairs .................................................... 144

2007: GRHL in Financial Distress........................................................................................ 145

The 2007 Rights Issue........................................................................................................... 147

Sale of Montsford and Fortune’s Sino-Forest Shares........................................................... 151

Application of the Facts to the Law.............................................................................................. 153

Fraud ..................................................................................................................................... 153

Breach of Fiduciary Duty...................................................................................................... 154

Negligence/ Duty of Care ..................................................................................................... 156

Damages........................................................................................................................................ 156

Causation............................................................................................................................... 156

Determining the Quantum of Damages ................................................................................ 158

Costs.............................................................................................................................................. 180

Appendix A................................................................................................................................... 181

Page: 4

Overview

[1] This is an action by the SFC Litigation Trust against Allen Chan. Mr. Chan was the chief

executive officer and chairman of the Board of Sino-Forest Corporation from 1994 to 2011. The

claim is for damages of $2.6 billion for fraud, breach of fiduciary duty and negligence.

[2]

Sino-Forest was a publicly traded company listed on the Toronto Stock Exchange. It

suffered a catastrophic failure in 2011 following the publication of a negative analyst’s report by

Muddy Waters. The Muddy Waters Report accused Sino-Forest of being a Ponzi scheme, rife

with fraud, theft and undisclosed related-party transactions.

[3]

An Independent Committee of the Board was ultimately unable to disprove the principal

Muddy Waters allegations. It was unable to establish that Sino-Forest held good title to $2.99

billion of standing timber plantations in mainland China which were recorded as assets in Sino-

Forest’s audited financial statements. It was unable to establish that Sino-Forest’s counterparties

in many standing timber and wood log trading transactions were arm’s-length, partly because

most of these counter parties disappeared or ceased to exist after publication of the Muddy Waters

Report. The Independent Committee uncovered evidence that Mr. Chan and other members of

senior management were involved in the management and control of some of these counterparties.

[4]

As a result of information disclosed to the Ontario Securities Commission by Sino Forest

and the Independent Committee, the OSC issued a cease trade order and later commenced

enforcement proceedings against Sino-Forest and its senior management. This included Mr.

Chan, George Ho, Alfred Hung, Albert Ip and Simon Yeung, all officers of Sino-Forest.

[5]

Sino-Forest’s secured debtholders initially tried to sell the assets of Sino-Forest but were

unsuccessful. Sino-Forest eventually obtained a stay and restructuring orders under the

Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. By virtue of a plan of compromise

approved by the Ontario Superior Court of Justice, the debtholders acquired the tangible assets of

the company, which they later sold. Sino-Forest’s rights of action were assigned to the SFC

Litigation Trust. Cosimo Borrelli was appointed by the debtholders as Litigation Trustee.

[6]

This action was commenced in April 2014. A trial was held in March, April and May

2017, with final argument taking place in July 2017. During the course of the trial, I attended in

Hong Kong as a commissioner and took the evidence of a number of witnesses who lived there

and in mainland China. A list of the witnesses who testified during the trial and on commission is

attached as Appendix A to these Reasons.

Page: 5

[7]

For the reasons that follow, the action for fraud and breach of fiduciary duty is allowed. I

assess damages in the amount of $2,627,478,000.¹

Background

[8]

Sino-Forest Corporation was a reporting issuer in the province of Ontario. Its shares

traded on the Toronto Stock Exchange. Sino-Forest’s registered office was located in

Mississauga, Ontario, and its executive office was located in Hong Kong. In these Reasons, I will

use the term Sino-Forest to describe the Sino-Forest group, including operating subsidiaries,

unless the context requires otherwise.

[9]

Sino-Forest was an integrated forest plantation operator and forest products company with

assets predominantly in the People’s Republic of China (“PRC”). Its principal businesses

included the ownership and management of forest plantations, the buying and selling of standing

timber, wood logs and wood products and the complementary manufacturing of downstream

wood products.

[10] By the end of 2010, Sino-Forest was focused on three core business segments. Standing

timber operations and log trading were the primary revenue contributors, while manufacturing and

other operations enhanced the value of the fibre operations by producing downstream products.

[11] Additionally, through a series of transactions that took place between July 2007 and

September 2010, Sino-Forest acquired an indirect majority interest in the Greenheart Group, a

Hong Kong listed investment holding company. Greenheart Group owned forestry rights and

managed hardwood forest concessions in the Republic of Suriname and pine plantations in New

Zealand.

Mr. Chan’s Role at Sino-Forest

[12] Mr. Chan was a cofounder of Sino-Forest and was, from 1994 to 2011, its chief executive

officer and chairman of the Board. Thomas Maradin, William Ardell and Brian Hyde all

described Mr. Chan as a very hands-on CEO. Mr. Chan had ultimate control over nearly all

aspects of Sino-Forest’s operations. Mr. Chan’s co-founder, K.K. Poon, by contrast, was

described as “a figurehead.” Operationally, Mr. Chan approved all plantation purchases and not

only approved but signed all plantation sales contracts. Similarly, Mr. Chan approved, and in

many cases signed, all of Sino-Forest’s wood log trading contracts. Mr. Chan has never taken the

position that, if there was a fraud, it was perpetrated by other members of senior management or

other Sino-Forest employees without his knowledge. Rather, it has been Mr. Chan’s position

throughout this litigation, and throughout the trial, that there was no fraud and no breach of

¹Unless otherwise stated, all references to currency are in USD, which is the currency in which

Sino-Forest reported its financial results. In very approximate terms, from 2004 to 2011, Hong

Kong dollars were in a relationship to USD of about 7 or 8:1 and RMB was in a relationship to

USD of about 6 or 7:1.

Page: 6

fiduciary duty. Mr. Chan maintains that neither he nor any member of senior management have

done anything wrong. He further maintains that all Sino-Forest’s trading in standing timber

plantations and wood logs was bona fide, producing valuable assets as reported in the company’s

audited financial statements.

Standing Timber Model

[13] From 2005 onward, Sino-Forest utilized two models for its standing timber business in the

PRC. One involved subsidiaries incorporated in the British Virgin Islands (“BVIs”) and the other

involved subsidiaries incorporated in the PRC as wholly foreign owned enterprises (“WFOEs”).

BVI Model

[14] Sino-Forest’s BVI model was designed to circumvent restrictions on foreign companies

carrying on business in the PRC. Foreign companies were not permitted to have PRC bank

accounts, operate or sell timber plantations, or own land use rights in the PRC.

[15] Under the BVI model, Sino-Forest’s BVI subsidiaries acquired standing timber from

Suppliers. The Suppliers were represented as third party aggregators who acquired the standing

timber rights from other suppliers or from original timber owners such as village collectives.

[16] The BVI subsidiaries (BVIs) did not acquire land use rights in the PRC. Instead, by means

of standing timber purchase contracts, they acquired the rights to standing timber in the PRC.

[17] The BVIs did not sell standing timber directly to end-user customers. Instead, the BVIs

conducted the sale of standing timber through “authorized intermediaries” (“AIs”). The AIs

effectively served as the BVIs’ customers under the BVI model.

[18] The BVIs did not directly pay the Suppliers or receive payments from the AIs. Instead,

the AIs were instructed by Sino-Forest’s management to make “set-off payments.” Under these

arrangements, the AIs were supposed to make payments directly or indirectly to the Suppliers for

amounts owed by the BVIs to those Suppliers. As a result, no cash actually flowed through the

BVI’s or through Sino-Forest’s bank accounts. The AIs were also responsible for the payment of

all taxes applicable to the sale transactions. Sino-Forest received no concrete evidence, however,

that these taxes had been paid.

[19] There were a number of negative features of the BVI Model. Chief among them was that

profits on the purchase and sale of standing timber plantations were “locked up” in the PRC. This

was because the BVIs, not being able to have bank accounts or conduct active business in the

PRC, could not monetize the value of their holdings in standing timber and transfer that value out

of the PRC. They could only plough trading profits back into the acquisition of more standing

timber.

Page: 7

WFOE Model

[20] Commencing in 2004, the PRC’s Ministry of Commerce permitted foreign investors to

invest in PRC-incorporated trading companies (WFOEs) and to participate in the commodity

distribution industry, including the purchase of standing timber and land use rights throughout the

PRC. Prior to this time, WFOEs were prohibited from engaging in the commodity distribution

industry.

[21] It was generally acknowledged within Sino-Forest management that, after the law changed

to permit the use of foreign-owned PRC companies to own forestry assets, the WFOE model was

“better” for Sino-Forest than the BVI model. Unlike Sino-Forest’s BVIs, Sino-Forest’s WFOEs

could acquire plantation land use rights. WFOEs were able to harvest the timber and sell both

logs and standing timber directly to end customers, meaning that WFOEs did not need to use AIs.

Also, unlike BVIs, WFOEs could open PRC bank accounts, meaning that WFOEs could directly

pay Suppliers and receive payments directly from customers. Accordingly, WFOEs did not need

to utilize the set-off payments that were implemented under the BVI model. Profits on WFOE

enterprises were not “locked up” in the PRC.

[22] Although WFOEs did not need to use AIs, Sino-Forest’s WFOEs continued to sell forestry

assets to AIs using set-off arrangements (rather than end-users, who would pay cash) due to the

longstanding relationships the AIs had with Sino-Forest.

[23] The plantation land use rights regime also allowed WFOEs to plant standing timber

plantations – an activity that the BVIs could not undertake with only standing timber rights. Sino-

Forest therefore began operating “planted plantations” through the WFOE side of the business.

The trading of standing timber alone was known as “purchased plantations,” which was done

through both BVIs and WFOEs. The planting of forests and holding them through to

maturity/harvest was what was referred to as planted plantations. There is no allegation of

impropriety with respect to the WFOE planted plantation business.

[24] After the law changed in 2004, Sino-Forest began looking for mechanisms to transfer

assets held in the BVI model to the WFOE model. This process was called “on-shoring.”

Between 2004 and 2011, Sino-Forest conducted four small “pilot test” on-shoring transactions, all

of which took place in 2009. No successful method was discovered to achieve “on-shoring” by

June 2011.

Wood Log Trading Model

[25] Under the wood log trading model, a Sino-Forest BVI subsidiary purchased logs from a

Supplier outside the PRC. To pay for those logs, the BVI subsidiary obtained a U.S. dollar

denominated letter of credit, typically payable within 90 days. Sino-Forest guaranteed the letter

of credit. The Supplier delivered the logs and the Sino-Forest BVI would resell the logs to a Sino-

Forest customer.

Page: 8

The Relative Growth and Significance of Sino-Forest’s Business Models

[26] Sino-Forest’s financial statements reported exceptional growth from 2003 until the second

quarter of 2011. Between the 2003 and 2010 financial year ends, Sino-Forest’s total reported

assets increased by 1,268% and its total reported revenues increased by 624%.

[27] The BVI standing timber model was, by far, the predominant contributor to the Sino-

Forest Group’s reported assets, revenue and profit. The BVI model accounted for about: (a) 49%

of the Sino-Forest’s total reported assets from 2005 to 2006; (b) 70% of the Sino-Forest’s total

reported assets from 2007 to 2010; and (c) 94% of the Sino-Forest Group’s reported profits from

2007 to 2010. The growth of the BVI model assets was critical to Sino-Forest’s success. By

contrast, the impact of the WFOE and wood log trading models on the Sino-Forest’s revenues and

profits was relatively inconsequential. In 2011, the WFOE model incurred a net loss.

Sino-Forest’s Cash Raises on the Capital Markets

[28] Between August 2004 and October 2010, Sino-Forest raised approximately $2.929 billion

through debt financing in the form of senior notes and a loan (totalling $1.855 billion) and equity

financing (totalling $1.074 billion). Sino-Forest incurred share issue costs of $42.053 million and

debt issue costs of $60.813 million. Sino-Forest also made debt principal repayments of $237.670

million between 2009 and 2011. The net cash proceeds available from the capital raises therefore

totalled $2.588 billion.

The Muddy Waters Report

[29] On June 2, 2011, a short seller, Carson Block, and his research company, Muddy Waters

LLC, released a report on Sino-Forest (the “Muddy Waters Report”). The Muddy Waters Report

alleged that Sino-Forest committed several frauds and described Sino-Forest as a “multi-billion

dollar Ponzi scheme ... accompanied by substantial theft.”

[30] Among other things, the Muddy Waters Report alleged that: (a) Sino-Forest did not hold

the full amount of timber assets that it reported; (b) Sino-Forest overstated its revenue; and (c)

Sino-Forest had engaged in undisclosed related-party transactions, including with Yuda Wood,

Sino-Forest’s largest supplier of standing timber between 2007 and 2010. It was alleged that

Yuda Wood was secretly controlled by Sino-Forest insiders.

The Independent Committee Investigation and Other Consequences of the Muddy Waters

Report

The Independent Committee Investigation

[31] The day the Muddy Waters Report was released, Sino-Forest’s Board appointed an

Independent Committee (the “IC”) to investigate the allegations made in the Muddy Waters

Report. The IC was composed of three independent, outside Canadian directors of Sino-Forest:

Messrs. Bowland, Ardell, and Hyde. The IC, in turn, retained independent legal and financial

Page: 9

advisors in Canada, Hong Kong and the PRC to investigate the issues raised in the Muddy Waters

Report. The IC advisors were deployed to Hong Kong and the PRC to carry out their

investigation.

[32] The IC issued three reports setting out its findings. The IC advisors also released their

own reports. As set out in the IC’s first report dated August 10, 2011, the IC focused its review

on the existence and value of Sino-Forest’s reported timber holdings and Sino-Forest’s

relationship with its Suppliers and customers under the BVI model.

[33] From the outset of its investigation, the IC and its advisors sought the full cooperation and

support of Sino-Forest’s senior inside management. This included Mr. Chan, Alfred Hung,

George Ho, Albert Ip, Simon Yeung, Yosanda Chiang (Mr. Chan’s executive assistant) and

others. I will use the term “Inside Management” collectively to refer to these people. There is an

issue about the degree and extent to which Inside Management co-operated with the IC and its

advisors.

[34] In 2010, Sino-Forest recorded $1.4 billion in revenue from plantation fibre operations of

which $1.3 billion was generated through BVI standing timber trading. Over 90% of 2010

income (of $620 million) was generated from BVI standing timber trading. While wood log

trading generated significant revenue (over $450 million in 2010), this segment of Sino-Forest’s

functions only accounted for $15.8 million of income. Wood log trading, therefore, was a low

profit margin investment compared to BVI standing timber model. Thus, Sino-Forest’s core

activity was trading in standing timber plantations using the BVI model; this was the central

driver of asset value, revenue and income for Sino-Forest.

[35] The starting point for the IC investigation was to determine whether Sino-Forest owned

the billions of dollars of BVI standing timber assets recorded in its audited financial statements.

Accordingly, the IC asked to see the contracts underlying the BVI assets. The purchase contracts

stated that plantation rights certificates and villagers authorization were attached, which would

have confirmed Sino-Forest’s legal title to the standing timber. However, the plantation rights

certificates and villagers authorization were not attached to any of its BVI standing timber

contracts and Sino-Forest did not have any of these documents.

[36] Instead, to confirm Sino-Forest’s “title” to its BVI standing timber, Sino-Forest had what

were described as forestry bureau confirmations. The IC advisors set out to speak to the forestry

bureaus to confirm the legitimacy of the confirmations. However, management expressed strong

concerns about approaching the forestry bureaus, claiming that the confirmations were

“confidential” and “could embarrass the forestry bureau officials.”

[37] The IC advisors then sought to obtain new confirmations from the forestry bureaus.

However, new confirmations were only issued in four instances. In those four instances, the new

confirmations did not confirm ownership of the BVI standing timber assets but only recognized

the contractual relationship between Sino-Forest and its Supplier.

Page: 10

[38] Since Sino-Forest did not have any of the documentation necessary to establish title to the

BVI standing timber or that its transactions with its BVI counterparties actually took place (since

no cash flowed through Sino-Forest’s accounts under the BVI model), the IC sought to set up

meetings with Sino-Forest’s BVI Suppliers and AIs to see if they had documentation to establish

the validity of Sino-Forest’s BVI standing timber assets. All of the Suppliers and AIs who were

asked, refused or were otherwise unable to produce any documentation of ownership or banking

records indicating they had paid or received payment by way of the set offs directed by Sino-

Forest.

[39] The IC also discovered documentary evidence of close relationships between Sino-Forest

and some of its BVI standing timber counterparties, including a company called Yuda Wood. Mr.

Chan and other members of Inside Management were interviewed by the IC advisors from August

24 to 26, 2011 regarding these documents. The answers given were unsatisfactory to the IC and

its advisors; the documents were provided to the OSC.

The OSC Temporary Cease Trade Order Requiring Mr. Chan and Inside Management to Resign

[40] On August 26, 2011, the OSC issued a temporary cease trade order. The order set out the

OSC’s allegations, including that: (a) Sino-Forest appeared to have engaged in significant non-

arm’s length transactions; (b) Sino-Forest and certain of its officers and directors appeared to have

misrepresented some of its revenue and/or exaggerated some of its timber holdings; and (c) Mr.

Chan and others appeared to be perpetrating a fraud. As a result, the OSC ordered, among other

things, that all trading in the securities of Sino-Forest cease and that Mr. Chan and senior

management resign.

[41] Following the OSC’s temporary order, Mr. Chan stepped down as Chairman and CEO of

Sino-Forest and was given the title Founding Chairman Emeritus. In that capacity, Mr. Chan

remained on Sino-Forest’s premises and occupied his usual office. Although he gave up his

executive authority, Mr. Chan remained available to assist with the investigation when required.

[42] On August 28, 2011, Sino-Forest issued a press release announcing the change in Mr.

Chan’s role and that the members of senior management had been placed on administrative leave.

The Failure to Issue Sino-Forest’s Third Quarter 2011 Financial Statements and Default Under the

Notes

[43] November 14, 2011 was the deadline for Sino-Forest to release its third quarter 2011

financial statements (Q3 Results). As the deadline approached, Sino-Forest’s Audit Committee

consulted with its advisors about whether to defer the release of the Q3 Results until certain issues

could be resolved to the satisfaction of the Board and Sino-Forest’s auditor.

[44] The Audit Committee’s primary concern was that Sino-Forest’s management remained

unable to provide satisfactory explanations of documents appearing to indicate that there were

connections between Sino-Forest and certain of its AIs and Suppliers. The Audit Committee did

not have sufficient comfort that the financial statements could be presented fairly and accurately.

Page: 11

The Audit Committee, therefore, made a recommendation against release of the Q3 Results. On

November 15, 2011, Sino-Forest issued a press release stating that it was deferring the release of

the Q3 Results for a 30 day period.

[45] Sino-Forest’s failure to file the Q3 Results and provide a copy of the Q3 Results to the

noteholders through their trustee under senior and convertible note indentures by November 14,

2011, constituted a default. Under the indentures, an event of default would occur if Sino-Forest

failed to cure that breach within 30 days in the case of the senior notes, and 60 days in the case of

the convertible notes, after having received written notice of default from the relevant indenture

trustee.

[46] On December 12, 2011, Sino-Forest issued a press release explaining that it was not going

to be in a position to release the Q3 Results within the 30-day period set out in its November 15

press release. Sino-Forest further announced in that, in the circumstances, there was no assurance

that it would ever be able to release the Q3 Results, or, if able, when the release might occur.

[47] Sino-Forest then failed to make a $9.775 million interest payment on the 2016 convertible

notes that was due on December 15, 2011. This failure constituted another event of default under

the indentures.

[48] On December 18, 2011, Sino-Forest announced that it had received written notices of

default in respect of its senior notes due 2014 and its senior notes due 2017. The notices, which

were sent by the trustees under the senior note indentures, referenced Sino-Forest’s previously-

disclosed failure to release the Q3 Results on a timely basis. Sino-Forest reiterated in the

December 18, 2011 press release that it did not expect to be able to file the Q3 Results or cure the

default within the 30-day cure period.

[49] In response to the receipt of the notices of default, on December 16, 2011 the Board

established a Special Restructuring Committee of the Board (the Restructuring Committee),

comprised exclusively of directors independent of management of Sino-Forest, for the purpose of

supervising, analyzing, and managing strategic options available to Sino-Forest. The members of

the Restructuring Committee were Ardell, who was appointed Chair of the Restructuring

Committee, and Garry West.

[50] Following further discussions with its external auditors, E & Y, on January 10, 2012 Sino-

Forest issued a press release cautioning that its “historic financial statements and related audit

reports should not be relied upon.”

The Third Report of the IC

[51] In its third and final report released on January 31, 2012, the IC disclosed that the issues it

examined, including timber asset verification and related party transactions and relationships,

“proved very difficult to definitively resolve.”

Page: 12

The CCAA Proceedings and the Formation of the Sino-Forest Litigation Trust

The Restructuring Support Agreement

[52] Following extensive negotiations, Sino-Forest and an ad hoc committee of noteholders

agreed on a framework for a consensual resolution of Sino-Forest’s defaults and the restructuring

of its business. These parties entered into a Restructuring Support Agreement on March 30, 2012

(the “Support Agreement”).

[53] The Support Agreement contained summary terms and conditions for a going concern

restructuring of Sino-Forest whereby ownership of Sino-Forest’s business would be transferred to

the noteholders, who had first priority security interests over the shares of Sino-Forest’s

subsidiaries. The Support Agreement provided that, prior to entering into the restructuring

transaction, Sino-Forest would undertake a sale process (the “CCAA Sale Process”).

[54] The CCAA Sale Process was intended to function as a market test through which third

parties would propose to acquire Sino-Forest’s business operations through a CCAA plan. This

would enable Sino-Forest and its stakeholders to determine if the value of Sino-Forest’s assets

exceeded the debt owed to the noteholders (thus rendering it unfair to transfer ownership to the

noteholders under the restructuring transaction). Accordingly, the restructuring transaction would

only proceed if the CCAA Sale Process was unsuccessful.

[55] On March 30, 2012, Sino-Forest filed for and obtained protection under the CCAA. Under

the Initial Order of Mr. Justice Morawetz (as he then was), FTI Consulting Canada Inc. (“FTI”)

was appointed as the Monitor. Justice Morawetz also granted a Sales Process Order authorizing

Sino-Forest to conduct the CCAA Sale Process.

The OSC Enforcement Notice

[56] On April 5, 2012, Sino-Forest received an Enforcement Notice from the OSC. On April

17, 2012, Sino-Forest announced that: (a) it had terminated the employment of Hung, Ho, and

Yeung; (b) Ip, who had previously resigned, would no longer be serving as a consultant; and (c)

Mr. Chan had voluntarily resigned as Founding Chairman Emeritus.

[57] On May 22, 2012, Sino-Forest received the OSC’s Statement of Allegations. The OSC

alleged that Mr. Chan and senior management “engaged in a complex fraudulent scheme to inflate

the assets and revenue of Sino-Forest” and that Mr. Chan “also committed fraud in relation to

Sino-Forest’s purchase of a controlling interest in a company now known as Greenheart Group

Limited.”

The Failed CCAA Sales Process

[58] Sino-Forest retained the global investment bank Houlihan Lokey Capital (“Houlihan”) to

act as its financial advisor for the CCAA Sales Process.

Page: 13

[59] Under the Sales Process, Sino-Forest and Houlihan, under the supervision of the Monitor,

solicited non-binding letters of intent for the sale of Sino-Forest’s assets. To be considered, a

letter of intent had to offer consideration not less than 85% of approximately $1.8 billion, being

the aggregate principal amount of the notes plus all accrued and unpaid interest on the notes up to

and including March 20, 2012.

[60] Houlihan, in consultation with Sino-Forest and the Monitor, selected a group of 85

potential buyers and provided those parties with a “teaser” letter. That led to the negotiation of

confidentiality agreements with 14 parties who indicated an interest in purchasing Sino-Forest’s

assets. Interested parties were granted access to a robust data room containing everything in Sino-

Forest’s possession, including legal documents, financial statements, BVI and WFOE contracts,

plantation rights certificates for WFOE plantations, forestry bureau confirmations for BVI

plantations, verification reports, reports from an independent forestry consultant, Indufor Asia

Pacific Ltd. (“Indufor”), and PRC-based legal opinions with respect to Sino-Forest’s ownership of

its forestry assets.

[61] Only four bidders submitted non-binding letters of intent. None of the four letters came

close to the threshold of 85% of $1.8 billion (i.e., $1.53 billion). The offers set out in the four

letters of intent were:



$200-300 million cash;

$550-650 million worth of debt and equity;

$115 million of cash and a to-be-determined amount of equity in a new company

that would own the assets; and



$100 million of cash and the cash that remained in Sino-Forest’s bank accounts at

the time of the sale, which at the time of the offer was $364 million.

[62] Since none of the letters of intent came close to the threshold of 85% of Sino-Forest’s

noteholder debt, Sino-Forest issued a press release on June 10, 2012, announcing that the CCAA

Sale Process was terminated. The Monitor concurred that the termination of the CCAA Sales

Process was appropriate.

Difficulties in Collecting Sino-Forest’s Receivables and Confirming the Existence and Legitimacy

of Sino-Forest’s Purported Counterparties

[63] As of March 30, 2012 (the date of the Initial Order), Sino-Forest’s accounts receivable

totalled approximately $1.1 billion comprised of: (a) $76.9 million owing to WFOE subsidiaries

of Sino-Forest; (b) $887.4 million owing to BVI subsidiaries of Sino-Forest from AIs purportedly

arising from the sale of standing timber; and (c) $126.2 million owing to BVI subsidiaries of Sino-

Forest from wood log trading customers.

Page: 14

[64] One of the Monitor’s roles was assisting with the collection of receivables. According to

Sino-Forest’s financial statements from 2005 until the second quarter of 2011, Sino-Forest had

always collected 100% of its receivables. After the commencement of the CCAA proceedings,

the Monitor did not collect a single BVI or wood log trading receivable and only collected

approximately $100,000 of the total outstanding receivables.

[65] As part of the Monitor’s efforts to locate and verify the existence of Sino-Forest’s standing

timber assets, the Monitor sought to contact BVI standing timber Suppliers to verify what Sino-

Forest had purchased and identify the location of the standing timber. However, the Monitor had

little success making contact with any of the Suppliers.

Write-Down of Wood Log Deposits

[66] In the course of Sino-Forest’s wood log trading business, Sino-Forest made deposits from

time to time. The majority of these deposits were written down following the commencement of

the CCAA proceedings. In particular, Sino-Forest recorded an impairment charge of $108

million, representing roughly 70% of the outstanding wood log deposits as of December 31, 2011.

[67] The remaining balance related primarily to deposits paid to a company called Xunxiang

for the supply of redwood. Despite efforts made throughout the CCAA proceedings, the Monitor

was unable to secure the redwood or the return of the deposits.

The Area Verification Process

[68] During the course of the IC investigation, Sino-Forest engaged Indufor, a forestry

consulting company, to undertake an area verification of Sino-Forest’s claimed forestry estate.

After the commencement of the CCAA proceedings, Indufor continued its work under the

oversight of the Monitor.

[69] Indufor required maps in order to carry out its area verification work. Indufor obtained

93% of the necessary maps for WFOE planted plantations and 44% of maps for WFOE purchased

plantations with land leases. However, no maps for WFOE purchased plantations without land

leases were forthcoming. More importantly, given the magnitude of the BVI standing timber

business, maps for only 1% of BVI plantations were ultimately obtained. The BVI maps that

Indufor was able to obtain did not come from Sino-Forest’s records or directly from forestry

bureaus but were produced by Sino-Forest’s management.

[70] As a result of the inability to obtain the required maps for the BVI assets, Sino-Forest

eventually instructed Indufor to discontinue further area verification work on the basis that,

without the maps, it was impossible to verify the location and existence of the assets. The

Monitor and the bondholders agreed with the decision to terminate Indufor’s area verification

process.

Page: 15

The Noteholders’ Forestry Experts had no More Success than Indufor

[71] The ad hoc committee of noteholders also retained their own forestry experts, Chandler

Fraser Keating (“CFK”). CFK issued a report in September 2012. It concluded there was

virtually no one who knew the exact location of the forests and that the forestry bureaus would not

be able to assist as there was insufficient documentation in the sale and purchase agreements for

anyone to locate the forests.

The CCAA Plan and the Formation of Emerald and the Litigation Trust

[72] On December 10, 2012, the Court granted an order sanctioning Sino-Forest’s Plan of

Compromise and Reorganization (the “Plan”). Under the Plan, effective January 30, 2013 all of

Sino-Forest’s assets, including its interest in its directly owned subsidiaries, were transferred to

Emerald Plantation Group Limited (“EPGL”), a wholly-owned subsidiary of Emerald Plantation

Holdings Limited (“EPHL”). Both entities were created for the purpose of holding Sino-Forest’s

assets following the implementation of the Plan.

[73] In addition, most of Sino-Forest’s litigation claims were transferred to a Litigation Trust.

Mr. Borrelli was appointed as trustee of the Litigation Trust.

Emerald’s Attempts to Sell Sino-Forest’s Assets

[74] Prior to the implementation of the Plan, on September 8, 2012, Paul Brough was appointed

as the Chief Restructuring Officer of Sino-Forest. It was envisaged at the time that Brough would

become the CEO of EPHL.

[75] For the purposes of planning the repayment of Sino-Forest’s debts through a restructuring,

one of Brough’s primary tasks was categorizing Sino-Forest’s assets into “good bank” and “bad

bank” assets. The “good bank” assets were those that had value and were potentially saleable or

realizable. The “good bank” assets primarily included:



the cash balances of the WFOE subsidiaries in the PRC which had been transferred

to them as loans or to provide share capital;

the WFOE plantations held primarily by subsidiaries of Sino-Wood and, to a lesser

extent, by subsidiaries of Sino-Panel where plantation rights certificates were

available;



certain of the manufacturing facilities in the PRC, primarily owned by Sino-Wood;

the nursery business in the PRC;

various properties located in the PRC; and

Page: 16



Sino-Forest’s interest in Greenheart Group Limited (“Greenheart”) and

Greenheart’s subsidiary, Greenheart Resources Holdings Limited (“GRHL”).

[76] The “bad bank” assets comprised the balance of Sino-Forest’s assets, to which no value

was ascribed for the purpose of identifying sources of repayment. The “bad bank” assets included

the BVI standing timber assets and related receivables. The key issues with the BVI standing

timber assets and associated receivables, from Brough’s perspective, were:



the inability of Sino-Forest’s and the many professionals’ to locate the vast

majority of the BVI standing timber;



the lack of any evidence of ownership of the BVI standing timber; and

the difficulties that would arise from any attempt to realize value from the BVI

standing timber, even if the assets could be located and title proved.

Write-down of the BVI Standing Timber Assets and Receivables

[77] EPHL’s first published interim financial statements were for the period December 14,

2012 (the date of EPHL’s incorporation) until June 30, 2013. Although unaudited, the financial

statements were prepared to provide a true and fair view of the assets of EPHL in accordance with

accounting standards. EPHL’s board also consulted with EPHL’s auditors, KPMG, about the

proposed carrying value of the assets.

[78] EPHL’s board resolved that no value would be ascribed to the BVI standing timber assets

and associated receivables in the interim financial statements. EPHL’s board also considered it

prudent to write down the value of certain forestry assets, and wrote off receivables and deposits

arising from the wood log trading business formerly conducted by Sino-Forest.

[79] Similarly, in EPHL’s annual financial statements for the year ended December 31, 2013,

which were audited, a zero value was attributed to the BVI standing timber assets and related

receivables.

EPHL Seeks to Sell its Assets

[80] The goal of EPHL’s board was to achieve maximum recovery for EPHL’s shareholders

(who are Sino-Forest’s former noteholders) by addressing the issues with the business and selling

it for the highest achievable value in the circumstances.

[81] After Sino-Forest’s assets were transferred to EPHL on January 30, 2013 under the Plan,

the EPHL board resolved that the best course of action was to dispose of EPHL’s assets en bloc

through a sale of EPGL.

Page: 17

The Goldnet Deal

[82] On May 13, 2013, EPHL signed a sale agreement with Goldnet Worldwide Limited for the

sale of EPHL’s shares in EPGL. Goldnet was introduced through Mr. Chan, who attended a

number of meetings in relation to the proposed sale.

[83] The discussions with Goldnet continued for a number of months but made little progress

towards a conclusion. During this time, there was a monthly cash burn of about $10 million to

fund the continued holding of Sino-Forest’s assets. The “good bank” assets were not being put up

for sale or being realized.

[84] Very little of the $10 million monthly cash burn was spent on BVI assets because, unlike

other aspects of Sino-Forest’s business, there were no ongoing expenses with respect to the BVI

assets. The only expense that related to the BVI assets was insurance, which Brough stopped

because he did not think the assets existed.

[85] In September 2013, after four months during which little progress had been made, EPHL’s

board terminated the sale agreement as Goldnet had failed to secure financing necessary to

complete the transaction.

The Sale of Greenheart to Newforest

[86] Following the termination of the Goldnet deal, EPHL sought to dispose of the former

Sino-Forest assets on a piecemeal basis.

[87] A formal agreement for the sale of Greenheart was entered into on October 31, 2014

between EPHL and Newforest Limited (“Newforest”). Newforest is 40% owned by Gateway

Asia Resources Limited, which is a wholly-owned company of Danny Wu, and 60% owned by

Sharpfield Holdings Limited, which is a wholly-owned subsidiary of Chow Tai Fook Enterprises

Limited. Mr. Chan acted as a consultant to Newforest during the negotiation of the deal.

[88] Upon the closing of the sale in May 2015, EPHL received $108.5 million for its interest in

the Greenheart business.

The Sale of EPGL to New Plantation and the Recovery Assets Program Agreement

[89] Following the completion of the Greenheart sale, EPHL conducted a marketing campaign

and reached out to potential buyers to explore a sale of the remainder of EPHL’s assets. A

number of miscellaneous assets worth approximately $36.383 million were sold.

[90] After extensive negotiations over the course of 2015, on December 2015, EPHL signed a

term sheet with New Plantations Limited (“New Plantations”), which is also owned by Danny Wu

and Chow Tai Fook. The agreement for the acquisition of EPGL between New Plantations and

EPHL was executed on April 21, 2016. Similar to the Greenheart deal with Newforest, Mr. Chan

was an advisor to New Plantations during the negotiation of this deal.

Page: 18

[91] Under the terms of the EPGL Acquisition Agreement, New Plantations agreed to pay

EPHL:



net consideration of $208,284,666 in cash (although $208,306,736 was actually

received after minor adjustments);

deferred consideration of $23 million to be paid 12 months after completion net of

any claims by New Plantations; and

approximately $5,036,570 which had been frozen by certain Court orders, upon

recovery of those funds.

[92] In connection with the sale of EPGL, EPHL also entered into a Recovery Asset Program

Agreement with New Plantations dated June 7, 2016 (the “RAPA”). Under the RAPA, if New

Plantations successfully recovers any of EPGL’s assets that were written down to zero, New

Plantations is obligated to pay a portion of the recovered amounts to EPHL. In connection with

the RAPA, New Plantations paid a non-refundable advance payment to EPHL of $2.5 million.

[93] The zero-value assets covered by the RAPA are categorized either as “General Recovery

Assets” or “Special Recovery Assets”:

[94] The General Recovery Assets include BVI standing timber, BVI standing timber

receivables, wood log receivables, wood log deposits, Sino-Panel receivables, and a tax refund.

Under the RAPA, if New Plantations recovers any General Recovery Assets, EPHL is entitled to

(net of costs) 40% of the first $50 million, 30% of the next $150 million, and 20% of any

recoveries in excess of $200 million.

[95] The Special Recovery Assets include the proceeds from an arbitration award in favour of

Sino-Forest against a company called Xunxiang. The Xunxiang arbitration proceeds were

categorized as a Special Recovery Asset because EPGL had already received an arbitral award

and frozen $12.5 million of Xunxiang’s assets by means of a Mareva injunction. The other

Special Recovery Assets are WFOE plantations to be received pursuant to claim settlements and

proceeds of ongoing legal proceedings in relation to individual wood-log purchase contracts,

which EPHL considered more likely to be recoverable in the near term. Under the RAPA, if New

Plantations recovers any Special Recovery Assets, EPHL is entitled to 80% of the proceeds (net of

costs).

[96] As required by the RAPA, EPHL and New Plantations have quarterly meetings in which

New Plantations updates EPHL on the progress under the RAPA. To date, other than the frozen

$12.5 million on account of the Xunxiang arbitration award (80% of that amount is $10 million),

there have been no recoveries net of costs under the RAPA.

Page: 19

Document Gathering

[97] Steven Henderson was one of the lead forensic accountants for PWC which was retained

as an advisor by the IC. He testified that, early in the IC process, PWC identified 23 key

custodians who were likely to have information that would be important to the investigation. This

included Ip, Hung, Mr. Chan, Ho, K.K.Poon and Yosanda Chiang. In general terms, PWC

worked with Sino-Forest’s information technology employees to understand how Sino-Forest’s

system worked, what personal devices each of the custodians might have and what other methods

of communication the custodians used. PWC then collected that information and imaged it.

[98] PWC found that Sino-Forest had two separate IT systems, one in China and one in Hong

Kong. In China, there were several separate servers which were not integrated. As Sino-Forest

did not have one overall central server, the data collection exercise was time-consuming and

difficult. Notwithstanding these difficulties, by August 2011 the IC advisors were able to capture,

assemble and organize a massive amount of data including:

(a) corporate particulars for all the Sino-Forest subsidiaries and corporate searches of the

authorized intermediaries (AIs) and other third parties;

(b) electronic data from Sino-Forest servers, backup tapes and user computers and personal

devices of more than 120 Sino-Forest personnel;

(c) BVI timber purchase and sale contracts;

(d) WFOE purchase and sale contracts;

(e) plantation rights certificates for WFOEs;

(f) forestry bureau confirmations;

(g) valuation reports;

(h) Sino-Forest legal advice; and

(i) other information about various business segments.

[99] All of the imaged hard drives and devices were provided to Bennett Jones LLP, then

counsel to Sino-Forest, on July 25, 2012. Bennett Jones was in possession of the books and

records of Sino-Forest as a result of their representation of Sino-Forest following the Muddy

Waters Report.

[100] Upon Mr. Borrelli’s appointment on January 30, 2013, he obtained all the books and

records that were in the possession of Bennett Jones, as well as documents from EPHL and other,

publicly available, sources.

Page: 20

[101] The information received by Mr. Borrelli included:

(a)

forensic images of electronic storage media taken from Sino-Forest’s Canadian and

Hong Kong offices. This included storage media imaged from hard drives from

servers desktops and laptops and from hand-held devices such as Blackberries.

These images were catalogued by reference to the custodian of the relevant

electronic storage medium and stored on hard drives;

(b)

various documents collated by the IC; and copies of paper documents that had been

located in Sino-Forest’s Canadian and Hong Kong offices.

[102] Documentation from EPHL included:

(a)

copies of paper documents located in Sino-Forest Canadian and Hong Kong offices

and warehouses located in Hong Kong and in the PRC;

(b)

various Sino-Forest files and mail servers kept at EPHL’s Hong Kong and

Guangzhou offices.

[103] The defendant did not take issue with the authenticity of the documents introduced at trial

or with the “chain of custody.” Certain objections were made about the use to which many of

these documents could be put, mostly on the basis of hearsay and/or fairness grounds. I made

rulings before, during and after the trial on the issues of admissibility.

[104] I should add, while on the subject of documents, that this proceeding was conducted as a

“paperless” trial. As a result of a pretrial endorsement made by me, all of the evidence in chief

was prefiled by way of affidavit. Examinations in chief were relatively short, with most of the

viva voce evidence focused on cross-examination. While a few paper exhibits were filed, virtually

all of the documentary evidence was both filed and used during the trial in electronic form only.

Paper exhibits, even with joint books of documents, would have vastly complicated and extended

the length of the trial. The use of electronic material was, therefore, essential to the timely

completion of the trial. I wish to express my gratitude to all of the lawyers, and their technology

support personnel, for their part in having the trial proceed electronically on a relatively seamless

basis. The trial was also conducted using “real time” court reporting. This took place both in

Toronto and while taking commission evidence in Hong Kong. I also wish to express my

gratitude to all the reporters for their tireless efforts and high quality work.

Preliminary Issues

[105] Before turning to the main allegations in this case, it is necessary to address four important

issues, each of which affects, in one way or another, the overall analysis of the conduct and the

impugned transactions in issue. Those issues are:

a) class action duplication;

b) affirmation;

Page: 21

c) the standard of proof; and

d) document translation.

Class Action Duplication

[106] The defendant’s argument about duplication arises from the plaintiff’s status as an

assignee, having only claims belonging to Sino-Forest which were specifically assigned to the

plaintiff by the CCAA Plan Sanction Order. The defendant argues that the Litigation Trust claims

do not include claims advanced in another proceeding, the noteholder and investor class action,

and that the amended statement of claim in this case asserts claims which are duplicative of the

claims advanced in that class action. For this reason, he argues, the plaintiff’s claims must be

dismissed.

[107] The starting point for this argument is not contentious. The plaintiff’s status is determined

by the CCAA Plan Sanction Order and the Litigation Trust Agreement. The plaintiff itself pleads

(in paras 12 and 13 of the amended statement of claim) that the Litigation Trust Agreement and

the CCAA Plan Sanction Order transferred certain “Litigation Trust Claims” to the Litigation

Trust. Those claims included all claims which “have been or may be asserted by or on behalf of”

Sino-Forest against any third parties other than, i) any claim released by Article 7 of the CCAA

Plan or, ii) any “Excluded Litigation Trust Claims.” An Excluded Litigation Trust claim is a

claim Sino-Forest and the noteholders agreed, before the Plan implementation date, would be

excluded from the claims transferred to the Litigation Trust.

[108] How these provisions apply on the facts, however, is highly contentious indeed.

[109] The “purpose and effect” of the Plan is set out in s. 2.1:

The purpose of the Plan is:

(a) to effect a full, final and irrevocable compromise, release, discharge,

cancellation and bar of all Affected Claims;

(b) to effect the distribution of the consideration provided for herein in respect of

Proven Claims;

(c) to transfer ownership of the Sino-Forest business to Newco and then from

Newco to Newco II, in each case free and clear of all claims against Sino-

Forest and certain related claims against the Subsidiaries, so as to enable the

Sino-Forest Business to continue on a viable, going concern basis; and

(d) to allow Affected Creditors and Noteholder Class Action Claimants to benefit

from contingent value that may be derived from litigation claims to be

advanced by the Litigation Trustee.

Page: 22

[110] Section 4.4 of the Plan compromises most claims against Sino-Forest but contemplates the

preservation of certain class action claims against specified defendants, which include Mr. Chan.

Section 4.4(b) of the Plan provides:

Notwithstanding anything to the contrary in section 4.4(a), Noteholder Class

Action Claims as against the Third Party Defendants (x) are not compromised,

discharged released cancelled or barred, (y) shall be permitted to continue as

against the Third Party Defendants and (z) shall not be limited or restricted by this

Plan in any manner as to quantum or otherwise (including any collection or

recovery for such Noteholder Class Action Claims that relates to any liability of the

third-party defendants for any alleged liability of Sino-Forest)…

[111] There is a proviso in paragraph 4.4(b)(i) which, in effect, limits the Noteholder Class

Action Claims that are preserved against the Third Party Defendants to $150 million.

[112] The Litigation Trust Agreement, in the “Preliminary Statement” at p. 1, confirms that the

Litigation Trust claims and the class action claims are two distinct claims, that the class action

claims are not being transferred to the Litigation Trust and that Litigation Trust claims shall not be

advanced in the class action:

For greater certainty: (x) the claims being advanced or that are subsequently

advanced in the Class Actions are not being transferred to the Litigation Trust; and

(y) the claims transferred to the Litigation Trust shall not be advanced in the Class

Actions.

[113] In the event of any conflict between the Plan and the Litigation Trust Agreement, the Plan

prevails.

[114] The amended statement of claim in this action alleges that through a combination of

activities ranging from sloppy record keeping and general mismanagement through to outright

fraud and theft, Mr. Chan and members of Inside Management, and other Sino-Forest employees

in Hong Kong and China, caused Sino-Forest to materially overstate the value of Sino-Forest’s

revenues and assets and concealed personal profits made by them as a result of their fraudulent

activities. It is alleged that Mr. Chan and other members of Inside Management, among other

things:

(a) had operational and de facto control over allegedly arm’s-length purchasers of Sino-

Forest’s timber, known as authorized intermediaries (AIs) and the suppliers of that timber

(Suppliers), which control was never disclosed to Sino-Forest, its auditors or its directors;

(b) knew that Sino-Forest’s AI’s and Suppliers were incapable of performing the obligations

required of them by their contracts;

(c) withheld and hid information from Sino-Forest’s auditors;

Page: 23

(d) caused Sino-Forest to significantly overpay for assets sold by companies Mr. Chan

secretly controlled;

(e) prepared certified and/or published false or materially misleading financial statements and

public disclosure documents;

(f) concealed their unlawful activities from Sino-Forest through the use of personal non-

company email accounts and by issuing instructions to hide transactions from the Sino-

Forest accounting department;

(g) forged Sino-Forest contracts to evade restrictions imposed by Chinese regulators;

(h) entered into transactions that evidenced a circular flow of funds which lacked any

commercial or business purpose;

(i) caused monies to be paid out by Sino-Forest and/or its subsidiaries for no proper purpose;

and

(j) prepared and/or published false information in connection with certain debt or equity

issues.

[115] The claim pleads that by controlling the Suppliers, AI’s and other nominee companies,

Mr. Chan and Inside Management carried out transactions which either overstated the economic

substance of the transactions or were entirely fictitious.

[116] The claim also pleads that Mr. Chan personally profited from these insider relationships

with the related party Suppliers, AI’s and other nominee companies.

[117] The claim goes on to allege, in general, that Mr. Chan and Inside Management caused

Sino-Forest to enter into a number of transactions that were fraudulent and/or devoid of any

legitimate business purpose.

[118] The claim pleads that Mr. Chan and Inside Management perpetrated a massive fraud

through the papering of hundreds of fictitious transactions. Much of the claim is then devoted to

particularizing a list of some 17 types of transactions that are alleged to have been fraudulent.

[119] Also of importance to the defendant’s argument on this issue is para 226 of the amended

statement of claim, under the heading “Damages,” which provides:

Between 2007 and 2010, Sino-Forest raised in excess of $2.1 billion and CAD$800

million in Canada’s debt and capital markets. The monies raised were cash held by

Sino-Forest. Based upon Chan’s fraudulent misrepresentations and conduct

described above, this cash was spent on Sino-Forest’s business operations. Sino-

Forest believed it was using this money to buy trees, not to facilitate a fraud. Even

where amounts were “legitimately” expended, such as for example, the leasehold

Page: 24

costs for office space, such amounts were expended with the reasonable

expectation that they were to be used as offices for a legitimate enterprise, not a

fraud that only served to enrich Chan and his cabal. Sino-Forest had in excess of

$3 billion in cash and it lost every penny “investing” in Chan’s fictitious and

fraudulent business model. Chan is liable for the full amount of these damages,

further particulars of which will be provided prior to trial.

[120] The class action defines members of the class as persons who acquired Sino-Forest

securities (defined as common shares, notes and other securities) from 2007 to 2011. The class

action claim, in essence, is that Sino-Forest’s publicly disclosed annual reports and financial

statements, prospectuses and offering memoranda contained material misrepresentations which

induced the class members to purchase and hold Sino-Forest securities. The misrepresentation

allegations stem, in large measure, from the failure to disclose much of the same information that

is pleaded as the acts of fraud alleged against Mr. Chan in the Borrelli action. The damages

claimed are the amount of the capital raised by the various debt and equity issues that took place

between 2007 and 2011.

[121] Specifically, the defendant argues that the class action claim asserts that Sino-Forest held

itself out as a legitimate business operating in the commercial forestry industry in the PRC and

elsewhere. It also asserts that Mr. Chan used Sino-Forest’s “illusory success” to justify his lavish

salaries, bonuses and other perks. The allegations in the class action include:

(a) the disclosure documents failed to disclose that from its very founding, Sino-Forest was a

fraud and its assets were grossly overstated (paras. 98-104);

(b) Sino-Forest fraudulently overstated its forestry assets, in particular those assets in Yunnan,

Suriname, and Jiangxi (paras. 105-121);

(c) Sino-Forest knowingly failed to disclose related party transactions including that Yuda

Wood and its Suppliers were related parties (paras. 124-142);

(d) misrepresentations relating to Sino-Forest’s relations with forestry bureaus and its

purported title to forestry assets in the PRC – including payments to officials to obtain

forestry bureau confirmations, that Sino-Forest possessed Plantation Rights Certificates

and that Sino-Forest relied upon BVI contracts to demonstrate its ownership of standing

timber which under PRC laws are void and unenforceable (paras. 143-157);

(e) Sino-Forest knowingly misrepresented that Sino-Forest’s AIs were not related parties,

misrepresented the tax related risks arising from Sino-Forest’s use of AIs and that Sino-

Forest’s profit margins with AIs were legitimate (paras. 143-172);

(f) Sino-Forest materially overstated its cash flow statements and in particular overstated the

purchase of timber assets (paras. 177-183);

Page: 25

(g) Sino-Forest failed to disclose that no proceeds were paid to it by its AIs (paras. 187-188);

and

(h) Mr. Chan’s (and the other defendants’) conduct was oppressive to the security holders who

had a reasonable and legitimate expectation that Mr. Chan would use his powers to direct

the company in Sino-Forest’s best interests and not contrary to Sino-Forest’s Code of

Business Conduct (paras. 274-277).

[122] Thus, the defendant argues, a) the same or similar facts as those pleaded in the Litigation

Trust action give rise to the allegations of misrepresentation by the class action plaintiff’s, and b)

the Litigation Trust and the class-action plaintiffs seek the same damages, i.e., the amount of

money raised by Sino-Forest in the capital markets.

[123] The defendant that argues the “bargain” struck when the Plan was approved was that Sino-

Forest would be released of all claims in exchange for a transfer of its assets to Emerald and the

assignment of its claims to the Litigation Trust. The assignment of Sino-Forest’s claims,

however, did not include claims made in the class action. Further, the Litigation Trust

Agreement, by providing that the class action claims were not being transferred to the Litigation

Trust, was an agreement that the class action claims were “excluded litigation trust claims.” By

structuring its claim as a claim for misrepresentation giving rise to damages measured by the

amount Sino-Forest raised on the capital markets, the Litigation Trust claim is duplicative of the

class action. This offends p.1 of the Litigation Trust Agreement because the Litigation Trust

cannot make a claim that is made in the class action; it offends section 4.4(b) of the Plan because

the Litigation Trust claims “limit or restrict” the class action claims. The Litigation Trust claim is

said to limit or restrict the class action claim because of the principle against double recovery.

The Litigation Trust and the class action plaintiffs have sued for the same pot of money – the

amount Sino-Forest raised through its debt and equity issues. If such an award were made to the

Litigation Trust in this case, it could not be made again in the class action. That would be a

limitation or restriction on the class action claim.

[124] The defendant argues that because this action is precluded by the terms of the Litigation

Trust Agreement and the Plan, the action must be dismissed.

Analysis

[125] The Plan asserts as one of its fundamental purposes to allow creditors and noteholder class

action claimants “to benefit from contingent value that may be derived from litigation claims to be

advanced by the Litigation Trustee.” The Plan contemplates claims by the Litigation Trust for the

benefit of creditors and noteholders.

[126] By the same token, the Plan preserves claims against third party defendants (which

includes Mr. Chan) by the class action claimants. The Plan acknowledges that there are causes of

action that belong only to the Litigation Trustee and causes of action that belong only to the class

action claimants.

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[127] The claims transferred to the Litigation Trustee are the claims of Sino-Forest for wrongs

done to Sino-Forest. The claims in the class action are claims of investors and lenders who allege

they were induced to acquire shares or advance loans by the fraudulent misrepresentations of

Sino-Forest through its management. The class action, therefore, alleges wrongs done to the

individual shareholder or noteholder.

[128] Importantly, and entirely consistent with the provisions of the Plan described above,

nothing in the Plan released Mr. Chan and the other identified third party defendants from claims

by Sino-Forest. Similarly, the Plan did not release Mr. Chan and the other identified third party

defendants from claims in the class action (albeit only to a maximum limit of $150 million).

[129] It is a fundamental principle of corporate law that individual shareholders (and

debtholders) have no cause of action in law for any wrongs done to the corporation. If an action is

to be brought in respect of such losses, it must be brought either by the corporation itself or by

way of derivative action: Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, at

para 59; Livent Inc. v. Deloitte & Touche LLP, 2014 ONSC 2176, at paras. 355-365; Foss v.

Harbottle, (1843), 67 ER 189. Shareholders cannot raise individual claims in respect of a wrong

done to the corporation. Where, however, a separate and distinct claim, such as the tort of

fraudulent or negligent misrepresentation, can be raised with respect to a wrong done to a

shareholder qua individual, a personal action may well lie.

[130] A fair and comprehensive reading of the class action claim (Exhibit 68) leads me to the

conclusion that it is a securities class action alleging wrongs done to the individual shareholders

and noteholders. The misrepresentations (false and negligent) alleged are representations to the

individual shareholder or noteholder. The damage is said to be that, in reliance on the false

representations made in public disclosure documents approved by management and issued by

Sino-Forest, the shareholders and noteholders advanced funds to Sino-Forest which they

otherwise would not have advanced. The false nature of the representations was eventually

discovered, rendering Sino-Forest unable to repay its debts and Sino-Forest’s shares valueless.

[131] By contrast, the Litigation Trust claim is a claim by Sino-Forest for wrongs done and

breaches of duty owed specifically by Mr. Chan to the corporation. Only Sino-Forest could assert

those claims absent leave to commence a derivative action, which has never been done.

[132] The claims of the plaintiff’s in the two proceedings are, in my view, distinct and not

duplicative. They involve different parties asserting different claims founded on analytically

distinct theories of liability. The Plan contemplated these two proceedings and is structured

(along with the Litigation Trust Agreement) accordingly. In my view, therefore, the Litigation

Trust claim against Mr. Chan is not, in the language of the Litigation Trust Agreement, “a claim

being advanced in the class action.” The Litigation Trust claim does not, in the language of

section 4.4 (b) of the Plan, “limit or restrict” the class action in any way.

[133] It appears to me that the defendant has confused the issue of who has the right to assert

which “claims” under the governing agreements and court orders with the issues of the underlying

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factual matrix (that is, the acts or conduct constituting the alleged false misrepresentations or

fraud) and how damages arising from those claims are calculated.

[134] The fact that specific acts or conduct of, say, Mr. Chan may invoke liability to different

plaintiffs based on different breaches of duty or theories of liability does not mean the claims are

the same or are necessarily duplicative. Likewise, the fact that the Litigation Trust has chosen to

calculate its damages as the loss to the corporation of the benefit of the money it raised in the

capital markets does not make its “claim,” based on alleged breaches of duty owed to the

corporation, the same as the claim in the class action. It is true that the class action claimants seek

damages calculated as a subset of those same capital raises. The loss to those claimants, however,

is said to be the money they individually advanced to Sino-Forest on the basis of the allegedly

false representations. The loss to the corporation is that money available to it to conduct its

legitimate businesses (regardless of where the money came from) was dissipated in the pursuit of

a fraudulent scheme to enrich Mr. Chan and other members of Inside Management, to the

detriment of the corporation and in breach of Mr. Chan’s duties to it.

[135] The trial in this action has been concluded. The class action, I am advised, has not

progressed beyond the pleadings stage. To the extent a court, in the future, concludes that a dollar

of recovery in the Litigation Trust action is recovery of the same dollar sought in the class action,

this seems to me to be a problem of double recovery, which ought to be dealt with if and when it

actually arises.

[136] The Supreme Court of Canada addressed the issue of the potential for double recovery in

Pro-Sys Consultants Limited v. Microsoft Corporation, 2013 SCC 57, [2013] 3 S.C.R. 477, at

para. 39. Citing Multiple Access Limited v. McCutcheon, [1982] 2 S.C.R. 161, the court said that

“courts are well able to prevent double recovery in the theoretical and unlikely event of plaintiffs

trying to obtain the same relief twice.” There are a number of judicial “tools” available to prevent

double recovery. The court, however, adopted with approval the statement of Donald J.A. of the

British Columbia Court of Appeal, dissenting in Sun-Rype Products Ltd. v. Archer Daniels

Midland Co., 2011 BCCA 187, 331 D.L.R. (4^th) 631, at para. 30, to the effect that the double

recovery rule “should not in the abstract bar a claim in real-life cases where double recovery can

be avoided.”

[137] There has been no evidence in this trial to suggest that a future court dealing with the class

proceedings or for that matter, the distribution of funds from the Litigation Trust (were it to be

successful in this action and make recovery), could not preclude double or multiple recovery of

claims to the same funds.

[138] I agree with the plaintiff that the effect of the defendant’s argument on this point is not to

preclude him being found liable twice for the same thing but to preclude him from being found

liable at all.

[139] Even if I were wrong in my conclusion on this issue, the appropriate remedy would not be

to dismiss the plaintiff’s action. I say this because of the proviso in section 4.4(b)(i) of the Plan,

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which limits the class action claim “carve out” from the general release to $150 million. In the

Litigation Trust action, damages are sought in the amount of $2.6 billion. At most, therefore, the

class action would prevail only to the extent of $150 million. The relationship of potentially

competing damage awards between the Litigation Trust and the class action and the distribution of

any recovery, in the event these claims are successful, is again a matter best left for resolution if

and when a problem arises. Competing claims to the first $150 million of recovery would not,

however, constitute a bar to the Litigation Trust action in its entirety.

Affirmation

[140] The defendant argues that Sino-Forest affirmed all the contracts with Suppliers and AIs

which the Litigation Trust now claims, as against Mr. Chan, were fraudulent. The defendant

argues that the contract law principle of affirmation prohibits a party from affirming a contract

and later taking the position that the contract was fraudulent so as to make a claim for damages for

that fraud. The argument goes as follows.

[141] The defendant argues that Sino-Forest affirmed all of the contracts with Sino-Forest’s

subsidiaries, whether loan agreements between Sino-Forest and the subsidiaries, or the operating

contracts that the subsidiaries had with third party suppliers (such as Suppliers and AIs). All of

the contracts, including the standing timber contracts, the WFOE contracts, the wood log trading

contracts, and the alleged suspicious transactions were affirmed by Sino-Forest when it conveyed

those contracts, as assets, to EPHL and then EPGL under the Plan.

[142] After the Plan Implementation Date, EPGL had the exclusive right to enforce all contracts

of Sino-Forest subsidiaries. The noteholders negotiated and agreed to the division of the Sino-

Forest assets. They are commercially sophisticated parties who wanted the benefit of the assets

held by the Sino-Forest subsidiaries, including the contracts those subsidiaries entered into and the

loans that they received from Sino-Forest. EPGL took steps to recover under the contracts - the

Xunxiang contract is an example where EPGL pursued and won an arbitration award for damages

under a Sino-Forest subsidiary trading contract. EPGL would not have been entitled to pursue

that claim had all of the rights to those agreements not been transferred to it free and clear.

[143] EPHL and EPGL subsequently conveyed the assets of EPGL through two transactions –

the sale of Greenheart in 2015 to Newforest and the sale of the EPGL shares (the company that

holds all of the contracts claimed by the plaintiff to be fraudulent) to New Plantations. As part of

the sale of the shares of EPGL, the noteholders entered into the RAPA to monetize these contracts

and to share in the proceeds. EPHL’s CEO, James Dubow, represented to the shareholders of

EPHL that there would be a recovery under the RAPA, but just not within the near term.

[144] The defendant argues that Sino-Forest, having transferred these contracts free and clear to

EPHL and EPGL for fair value, has affirmed the contracts. The contracts were further affirmed

when EPGL and EPHL transferred these contracts to Newforest and New Plantations, again for

valuable consideration.

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[145] Thus, the defendant argues that the repeated affirmation of the loan agreements and the

contracts of the Sino-Forest subsidiaries at issue in this litigation results in the Litigation Trust

being barred from seeking damages from Mr. Chan on the allegation that the contracts were

entered into by fraud and/or false representation.

Analysis

[146] The principle of affirmation is one of long-standing. In Brown v. West, 1846 CarswellOnt

2, 1 E. & A. 117, the Upper Canada Court of Error and Appeal dealt with a case where a party

acquired property, learned of a fraud in the transaction, but nevertheless held onto the property

and leased it to another. The court rejected his action for rescission based on the fraud. The court

said (at page 9):

We could not possibly hold that there is no consideration for the note which he has

given, while he thus retains the possession of his purchase, and has done so for

more than two years, receiving rent from a tenant, to whom he has made a lease

since his knowledge of the alleged fraud.

[147] The Court cited Campbell v. Fleming, 1 Ad. & Ell. 40, where Parke J. said:

After the plaintiff knowing of the fraud, had elected to treat the transaction as a

contract, he lost his right of rescinding it.

[148] The Court also cited the reasons of Patterson J. in the same case, who wrote:

In this case the plaintiff has paid the money and he now demands it back on the

ground of the money having been paid on a void transaction; to entitle him to do

so, he should at the time of discovering the fraud have elected to repudiate the

whole transaction. Instead of doing so, he deals with that for which he now says he

never legally contracted.

To similar effect is Betrand v. Racicot, [1979] 1 S.C.R. 441, and McCarthy v. Kenny, [1939] 3

D.L.R. 556, at paras. 41-43, 49-50 and 65-66.

[149] The defendant says the plaintiff is trying to do in this case what the courts have said cannot

be done. Sino-Forest has conveyed its rights to all of the contracts for fair value as part of the

Plan; yet these are the same contracts which the plaintiff now alleges in this action were

fraudulent.

[150] The defendant urges upon me that I should not permit a situation where the plaintiff is

allowed to sue Mr. Chan on the basis that he caused Sino-Forest to enter into a series of fraudulent

contracts, when Sino-Forest has, at the same time, assigned those contracts for fair value to EPHL.

EPHL and EPGL have further complicated the problem by re-assigning these contracts to

Newforest and New Plantations, and entering into the RAPA, which provides for recovery to

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EPHL and EPGL in the event New Plantations is able to successfully realize on these allegedly

“fraudulent” contracts.

[151] I am unable to agree that the principle of affirmation has any application to the

circumstances of this case. There are several reasons for this.

[152] First, the Litigation Trustee is not suing Sino-Forest’s subsidiaries or their counterparties

(Suppliers and AIs) in various timber contracts with those subsidiaries. Sino-Forest Corporation

was not a party to those contracts. Sino-Forest is suing its fiduciary, Mr. Chan, for fraud, breach

of fiduciary duty and negligence. At its core, the claim is that Mr. Chan and other members of

Inside Management caused Sino-Forest subsidiaries to enter into fraudulent contracts with related

parties in order to deceitfully inflate the value of Sino-Forest and divert funds acquired by virtue

of that inflated value away from Sino-Forest to themselves.

[153] Neither Sino-Forest nor the Litigation Trust were ever in the position of having to make an

“election.” They are not asserting and have never asserted claims of a contractual nature against

Mr. Chan. The principle of affirmation means, effectively, that after a contract is affirmed, it

cannot be rescinded, McCarthy, supra, at paras. 65-66. In connection with the Litigation Trust’s

claims against Mr. Chan, the only contract to affirm or rescind was the employment contract,

which is largely irrelevant to these proceedings.

[154] The defendant tries to argue that the transfer of Sino-Forest’s assets to its creditors under

the CCAA Plan is analogous to Sino-Forest’s affirmation (in the sense used in the cases of an

“election” to sue for rescission or to affirm the contract) of all third-party contracts with all of the

subsidiaries that were transferred under the Plan.

[155] I cannot agree with that submission. No evidence or law was cited to support this

proposition. It is entirely illogical on its face. Sino-Forest was not a party to those contracts. The

affirmation/rescission choice was for the subsidiaries, as the contracting party, to make, not Sino-

Forest.

[156] Similarly, I am unable to accept that suing Mr. Chan for fraud and breach of fiduciary

duties he owed to Sino-Forest is analogous to one of the subsidiaries suing a Supplier or AI for

rescission of a timber contract. The two are factually, legally and analytically distinct.

[157] Finally, even if the analogies advanced by the defendant were apt, the law is clear that the

principle of affirmation merely precludes an action to rescind an affirmed contract; it does not

preclude an action for damages for fraud, McCarthy, supra, at paras. 65-66.

[158] For these reasons, I conclude that the plaintiff’s action is not barred by the principle of

affirmation.

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Standard of Proof

[159] I agree with the defendant that the plaintiff’s case is largely one of circumstantial

evidence, which requires inferences to be drawn. This is because (unlike direct evidence, where

the only issue is whether the trier of fact accepts the evidence as true) there is an “inferential gap”

between the facts proved and the facts sought to be inferred. There is nothing wrong with

circumstantial evidence. It is perfectly admissible, but the inference drawing process is

conceptually different and that difference must be recognized.

[160] Permissible inferences can only be based upon proven facts. Even then, only inferences

which logically and reasonably flow from proven facts are permissible inferences. An inference

which does not proceed logically and reasonably from proven facts is speculation.

[161] The line between a reasonable inference and impermissible speculation is drawn by the

laws of logic. If there is logical probability that an inferred fact follows from proven evidence, the

trier of fact is given the opportunity to draw the conclusion. If there is a reasonable probability

that the conclusion flows from the proven fact, the inference may be drawn.

[162] Ultimately, however, the court must act on such a preponderance of evidence as to show

whether the conclusion the plaintiff seeks to establish is substantially the most probable of the

possible views of the facts, Clarke v. The King, (1921) 61 S.C.R. 608 at para. 34.

[163] The defendant suggests that a higher onus exists in cases involving allegations of fraud. I

do not agree. As I discussed in Indcondo Building Corporation v. Sloan, 2014 ONSC 4018, 121

O.R. (3d) 160, at para. 59, the Supreme Court of Canada decision in C. (R.) v. McDougall, [2008]

3 S.C.R. 41 established that in civil matters there is only one standard of proof. Although some

cases involve more serious consequences by virtue of the nature of the allegations made in them,

the seriousness of the allegations does not alter the standard of proof in civil cases. There is only

one standard of proof in all civil cases and that standard is ‘proof on a balance of probabilities.’

Document Translation

[164] I will also say a word about document translations. Many of the documents filed in the

trial proceedings are in Chinese. The plaintiff had every document on which it specifically

intended to rely at trial translated into English by professional translators. These translations were

proved by way of affidavit.

[165] In the course of hearing pretrial motions, I dealt with a specific problem that arose in the

translation of a controversial document which the plaintiff has called the ‘nominee companies

caretaker list’. As I said in my February 27, 2017 ruling on this matter, translation from one

language to another is a question of expertise. In that particular instance, I ruled that a solicitor

acting for one of the parties could not be regarded as having the necessary independence to

perform the role of an expert on any matter of controversy. Since the translation of what I have

styled the Nominee Company Managers List was a matter of controversy, I held that the

solicitor’s translation could not be relied upon in evidence. As a result, the plaintiff retained an

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independent translator and her translation was put in evidence, again by way of affidavit, without

objection or any responding evidence from the defendant.

[166] It transpired during the trial from time to time that the defendant and some of the

defendant’s witnesses took issue with the plaintiff’s professional translation of a document, and

proferred their own view of what the translation should be.

[167] The defendant had all of the translated documents months before trial. If there were

material disagreements about the accuracy of the professional translations obtained by the

plaintiff, they ought to have been raised and, if necessary, addressed by the filing of competing

expert translation evidence.

[168] I did not exclude the witness’s evidence on translation matters but it must be remembered

that the defendant, as well as most of his witnesses, has a keen, personal interest in the outcome of

these proceedings. They can in no way be regarded as independent. Several of the defendant’s

witnesses are defendants in parallel proceedings in the Hong Kong court or otherwise implicated

in the alleged frauds. Further, apart from Mr. Ho, they all felt the need to testify with the

assistance of Mandarin or Cantonese interpreters. Thus, their qualifications to comment on the

validity of document translations from Chinese to English must be questioned.

[169] An example involving the evidence of Zeng exemplifies the problem. The plaintiff relies

on correspondence concerning the establishment and management of “peripheral companies.”

Zeng deposed in his examination in chief that the words “peripheral companies” used in these

documents should be translated as “outside companies.” On cross-examination, Zeng admitted

that this variation in the proposed translation originated, in fact, not from his own knowledge of

English translation from Chinese characters but from Mr. Chan’s Hong Kong lawyer, Mr. Tsang,

who helped draft Zeng’s prefiled evidence.

[170] Whenever a witness’ translation of a document differs from that of the professional

interpretation, I prefer the professional translation, in the absence of any competing professional

translation from the defendant.

Issues

[171] There are two broad issues of liability in this case:

1) whether Mr. Chan perpetuated a fraud against Sino-Forest; and

2) whether Mr. Chan breached fiduciary duties owed to Sino-Forest.

[172] The plaintiff pleaded a cause of action against Mr. Chan in negligence as well. However,

the case was not seriously advanced on the basis of negligence. No expert testimony was offered

on the standard of care of a corporate officer and director in Mr. Chan’s position. The record is

insufficient to decide this case on the basis of the claim in negligence and, in light of my

conclusions regarding fraud and breach of fiduciary duty, it is unnecessary to do so.

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[173] The tort of civil fraud has four elements:

(i)

the defendant made a false representation;

(ii)

the defendant had some level of knowledge of the falsehood of the representation;

(iii) the false representation caused the plaintiff to act; and

(iv) the plaintiff’s actions resulted in a loss.

[174] As for a breach of fiduciary duty, it must be shown that:

(i)

Mr. Chan owed fiduciary duties to Sino-Forest;

Mr. Chan breached those fiduciary duties.

(ii)

[175] The plaintiff’s allegations of breach of fiduciary duty are largely based on the same factual

underpinnings as the allegations of fraud. In short, the plaintiff alleges that Mr. Chan had an

undisclosed interest in many significant Sino-Forest transactions; that Mr. Chan preferred his own

interest to the interest of Sino-Forest; and that Mr. Chan had undisclosed conflicts of interest that

permeated his tenure as chairman and CEO.

[176] Lying beneath these two general issues are two critical factual disputes which are at the

heart of this case.

[177] The first critical disputed issue involves whether Sino-Forest’s counter-parties in the BVI

standing timber transactions, WFOE standing timber transactions and wood log trading

transactions were bona fide arm’s length parties or whether they were secretly connected to and

under the control of Mr. Chan (or other members of Inside Management at Mr. Chan’s direction).

[178] The second critical disputed issue is whether the BVI and WFOE standing timber

transactions which purported to produce an asset value in 2011 of $2.99 billion:

a) were real transactions for which valuable consideration was paid and received;

b) resulted in BVI standing timber assets that could be located and were actually owned by

Sino-Forest’s subsidiaries and could be harvested or sold on the market for valuable

consideration; and

c) had a value anywhere near $2.99 billion.

[179] I will address these issues first with a general analysis of the issue of credibility, the

inferences to be drawn from the use of non-Sino-Forest email servers by senior managers and

others, and the allegation that Mr. Chan controlled non-Sino-Forest corporations through a

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complex system of nominee shareholders and directors. I will then proceed to analyze the separate

allegations of fraud and breach of fiduciary duty which were pursued at trial. They are:

1) the BVI standing timber fraud;

2) the WFOE standing timber fraud;

3) the wood log cash gap trading fraud;

4) the wood log deposit fraud;

5) March Maple; and

6) Greenheart.

Credibility

[180] The central disputed issues of fact in this case involve inferences to be drawn from several

hundred emails and other contemporaneous documents unearthed by the Litigation Trustee during

his forensic examination, when considered in the context of all of the other evidence and the

surrounding circumstances.

[181] The plaintiff argues that the inferences to be drawn are that Mr. Chan and Inside

Management perpetuated a fraud. One of the main issues in the trial involved Mr. Chan’s attempt

to provide an explanation of the multitude of contemporaneous documents relied on by the

plaintiff. His evidence, and that of his witnesses Yosanda Chiang, George Ho, Alfred Hung and

John Zeng was largely an attempt to establish an evidentiary basis for a different, and equally

logical and reasonable inference, that Mr. Chan and Inside Management were not involved in a

fraud.

[182] It was in that context that the credibility of Mr. Chan and the other defence fact witnesses

took on particular significance.

[183] In assessing credibility, the court may consider the integrity and intelligence of the

witness, the witness’s appearance of sincerity and truthfulness in the witness stand, whether the

witness was candid, frank, forthright and responsive to questions asked or evasive or hesitant and

whether the witness was biased or had a personal interest, or lack of personal interest in the

outcome of the trial. The court may consider the witness’s memory, the capacity to remember and

the ability to describe clearly what was seen and heard, whether or not the witness has any

particular reason to assist him in recalling the precise event and what was said and whether or not

there were inconsistencies in the witness’s testimony at trial or in what the witness said at trial and

on a prior occasion under oath or otherwise. A series of inconsistencies may cause the trier of fact

to doubt the reliability of the evidence.

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[184] Where oral testimony conflicts with reliable documentary evidence, the documentary

evidence may appropriately be preferred. In Bradshaw v. Stenner, 2010 BCSC 152, [2010] B.C.J.

No. 1953, at para. 188, the B.C. Supreme Court said:

Most helpful in this case has been the documents created at the time of events,

particularly the statements of adjustments. These provide the most accurate

reflection of what occurred, rather than memories that have aged with the passage

of time, hardened through this litigation, or been reconstructed.

[185] Thus, one must subject a witness’ testimony to an examination of its consistency with

probabilities that surround other evidence. Does it match with other proven or undisputed facts of

the case? Documents created at the time of events are very helpful as they can provide the most

accurate reflection of what occurred, rather than memories that have aged with the passage of

time, harden through litigation or been reconstructed. The inability to produce relevant

documents to support one’s case is also a relevant factor that negatively affects credibility.

[186] One of the leading authorities on evaluating witness credibility is Faryna v. Chorny,

[1951] B.C.J. No. 152 (B.C.C.A). The B.C. Court of Appeal confirmed at para. 10 that the test of

witness credibility is essentially one of probabilities:

The credibility of interested witnesses, particularly in cases of conflict of evidence,

cannot be gauged solely by the test of whether the personal demeanour of the

particular witness carried conviction of the truth. The test must reasonably subject

his story to an examination of its consistency with the probabilities that surround

the currently existing conditions. In short, the real test of the truth of the story of a

witness in such a case must be its harmony with the preponderance of the

probabilities which a practical and informed person would readily recognize as

reasonable in that place and in those conditions.

[187] The assessment of the credibility of a witness is “more of an art than science,” and cannot

be reduced to a set of rules. However, the following questions may appropriately be considered as

a guide:

 Whether the witness’s evidence is internally consistent, logical and

plausible. In other words, does it “make sense”?

 Whether there is independent evidence that corroborates or contradicts the

witness’ testimony? The absence of such evidence may also be significant.

 Whether the witness changes his or her evidence during direct and cross-

examination, or between examination for discovery and trial, or is

otherwise inconsistent in recalling events?

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 Whether the witness exhibits sincerity and candour, or is biased, reticent

and evasive? Demeanour, alone, however, cannot be determinative of

credibility. Indeed, demeanour alone is now well-recognized as a

particularly unhelpful indicator of credibility.

[188] Applying these principle to the facts of this case, I have drawn the following conclusions:

 Mr. Chan and his other fact witnesses are not disinterested parties. Nearly

all are implicated as co-conspirators in Mr. Chan’s fraud. Even those that

are not being actively sued by the Litigation Trust in parallel proceedings

other jurisdictions would logically be concerned about their reputations or

participation in the events giving rise to this litigation.

 Mr. Borrelli of course, as plaintiff (albeit in a representative capacity), also

has an obvious interest in the litigation.

 Mr. Chan and his witnesses were keenly aware of which issues were

contentious, and became noticeably more combative and evasive when

testifying about these issues. Mr. Chan had a particular propensity for

avoiding answers to difficult questions by offering his speculations on the

motives or conduct of others, claiming he had no knowledge and quibbling

over translation matters.

 Also, despite being provided in advance of his cross-examination with

specific notice of the many documents ultimately put to him, Mr. Chan

often avoided answering questions about these documents by saying he

would need to investigate matters further.

 I found the evidence of Mr. Chan, and his other fact witnesses, to be

contrived. Mr. Chan and his fact witnesses appeared to adopt similar

strategies for explaining away problematic documents. Several of the same

approaches were adopted throughout their testimony. Their evidence

changed in response to new evidence or when confronted with

inconsistencies or other problems with their account of events.

 They were often evasive, and often retreated into quibbling about

translation or different possible meanings that were usually immaterial.

They also often blamed subordinates for being obviously “wrong” or not

understanding what they were talking about.

 Their explanations were frequently implausible on their face, lacking any

ring of truth, and/or unsupported by any contemporaneous documentary

evidence.

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 Mr. Chan’s evidence, in particular, was frequently impeached by prior

inconsistent testimony given under oath on discovery or in affidavits sworn

in earlier proceedings in this case.

 Frequently, inculpatory contemporaneous communications were dismissed

as “proposals” when nothing about them is suggestive of a proposal and

where other documents made it clear they were more than “proposals”.

 The defence witnesses also frequently tried to explain away an

unexpectedly close relationship between supposedly arms’ length parties

that seemed improper or, at least, highly suspicious, by saying they were

“doing a favour” for a friend or by invoking Chinese law or custom such as

guanxi (the role of trust and mutually beneficial relationships in business

dealings) or by simply saying, “that’s how we do things in China.”

 Most of all, however, looming over the testimony of Mr. Chan, Yosanda,

Ho, Zeng and Hung, in particular, is the sheer, flat out inconsistency of

their interpretations of contemporaneous documents with the plain meaning

of the content of those documents and the improbability of their

explanations.

[189] The plaintiff’s witnesses were largely professional people. Hyde, Engen, Maradin,

Henderson, Brough and Dubow were all personally involved at various stages of Sino-Forest’s

operations and collapse. They have no interest in the outcome of these proceedings, however, and

little incentive to lie, misrepresent or tailor their evidence.

[190] Mr. Borrelli was not personally involved in relevant events until after the CCAA Plan. His

forensic skills were brought to bear in the analysis and organization of the documents. As

plaintiff, he is of course directly interested in the outcome of these proceedings. Mr. Borrelli

draws many inferences based on his forensic analysis of documents, financial records and other

evidence. But, as I said in an earlier ruling on an admissibility motion, inferences are for the

Court, not for the plaintiff, to draw. I have, therefore, treated all suggestions of inference by the

plaintiff, not as evidence, but as nothing more than the expression of an inference he would

respectfully ask the Court to draw based on the facts as I find them to be.

[191] In any event, the inferences that matter in this case are those which arise, not from Mr.

Borrelli himself, but from the contemporaneous documents introduced at trial, viewed in the

context of all the other evidence as a whole. It was these inferences that were the focal point of

counsel for both sides during the trial and in their arguments. And it is these inferences to which I

will turn in the succeeding sections of these Reasons.

Use of Non-Sino-Forest Email Accounts

[192] One category of circumstantial evidence from which the plaintiff invites the court to draw

the inference of fraudulent activity involves the use of non-Sino-Forest email addresses. That

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non-Sino-Forest email addresses were used, and in some cases instructed to be used, by senior

Sino-Forest employees is not in doubt. The controversy between the parties is over what, if

anything, can be inferred from the use of non-Sino-Forest email addresses by senior Sino-Forest

employees. This largely turns on an analysis of the content of the emails themselves and of the

explanations for the use of non-Sino-Forest email addresses advanced by the defendant and the

defendant’s witnesses during the trial, in the context of the evidence as a whole.

[193] In essence, the plaintiff argues that the use of non-Sino-Forest email addresses is evidence

of consciousness of guilt; that the use of non-Sino-Forest email addresses to conduct business was

done in order to conceal the communications (and related activity) from discovery by non-

insiders, professional advisors and the like. Mistakes were made: some of these emails slipped

through and were later found by the IC advisors and the plaintiff through exhaustive examination

of Sino-Forest’s electronic records.

[194] The defendant and his witnesses, most of whom were Inside Management at Sino-Forest,

used non-Sino-Forest email addresses for certain activities from time to time. They argue that

these non-Sino-Forest platforms were used to overcome server problems which interfered with

their ability to communicate while they were travelling in mainland China.

[195] The defendant argues, as well, that the so-called perpetrators of this alleged attempt at

concealment must have been incredibly inept at executing their plan because so many of these

non-Sino-Forest emails did, in fact, surface on Sino-Forest computers, or were distributed to

addressees who included at least one Sino-Forest email address. The defendant argues that the

use of personal email addresses for business, in addition to the employer’s email address, is

common and does not constitute any evidence from which an implication of wrongdoing or

culpability can reasonably be inferred.

[196] The issue comes up in many different contexts. A theme that emerges, however, from an

analysis of these emails is that Sino-Forest personnel were directed to use non-Sino-Forest email

accounts when discussing certain subjects which were regarded as particularly sensitive at the

time.

[197] An example of this can be found in an email thread dated July 9 and 10, 2011, a month

after the Muddy Waters Report was released, just as the IC investigation was getting underway.

Ho emailed Alan Cheung (who worked under Ip) using his Sino-Forest email regarding an inquiry

from PwC, which was one of the IC Advisors. Mr. Chan, Ip, and Xu Ni were copied on the email

thread. In responding to Ho’s inquiry, Cheung said: “Hi George, think it not prudent using this

mail platform. Please see reply in your other mail box.”

[198] On its face, the email is innocuous enough. It raises a question, however, about why

Cheung would say it was not prudent to use the Sino-Forest email platform and why he would tell

Ho to look at the more detailed answers to Ho’s questions in Ho’s “other mail box.”

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[199] This email also highlights another problem arising out of the use of non-Sino-Forest email

addresses. By definition, communications to non-Sino-Forest email addresses would not normally

show up on the Sino-Forest server unless they included a Sino-Forest address or were copied or

saved to a file on Sino-Forest’s computers or servers. Given the allegations in the statement of

claim and the allegations made in Mr. Borrelli’s evidence, the issue of senior management’s use

of non-Sino-Forest email addresses was clearly in play. Mr. Chan has not produced any electronic

communications involving non-Sino-Forest email addresses. Indeed, Mr. Chan has produced

almost no documents at all in this proceeding. None of the other defence witnesses, who were

parties to most of these communications, have produced or come forward with any other

communications involving non-Sino-Forest email addresses either.

[200] If these documents exist on other servers (which is admitted, and is, in any event, proven

on the evidence), it is reasonable to infer that they would have been produced if they established

that nothing untoward was afoot or that there were perfectly legitimate or innocuous reasons for

conducting these communications off the Sino-Forest servers. None, however, have been

produced. It is, therefore, purely by chance that Sino-Forest has any of these emails at all.

Peripheral Companies/haidao2.com

[201] Another sensitive subject in respect of which Sino-Forest employees were directed to use a

non-Sino-Forest email domain involved communications about “peripheral companies.”

[202] In March 2010, Yu Wen, a Sino-Forest employee, circulated to a group of other Sino-

Forest employees an email which told the recipients that, at the direction of Yeung, email

addresses with the suffix “haidao2.com” had been established for discussions regarding

“peripheral companies.” It said:

In order to regulate management of the peripheral companies, pursuant to the

recommendation of Vice President Simon Yeung, the peripheral companies’

unified domain name “haidao2.com” email is now operational and may be

activated immediately. In the future, please use these email addresses for any

email correspondence concerning the peripheral companies.

[203] The English translation of “haidao” is pirate. The term “peripheral companies” is used in

a number of communications and documents, which are discussed further below. The plaintiff

alleges that these peripheral companies were in fact non-arm’s length companies under the control

of Mr. Chan with which Sino-Forest did business.

[204] Attached to Yu Wen’s email was a list of the haidao2.com email addresses. The addresses

were provided to specified Sino-Forest employees, including Ip, Yeung, and Ho, as well as non-

Sino-Forest individuals also associated with the peripheral companies, including a former Sino-

Forest employee and friend of Mr. Chan’s, Huang Ran, who controlled Yuda Wood.

Page: 40

[205] Following Yu Wen’s email, employees of Sino-Forest and the peripheral companies used

haidao2.com and other non-Sino-Forest email address to communicate regarding the peripheral

companies.

[206] On March 23, 2011, the haidao2.com email address was used to send an email to a Sino-

Forest employee at a Sino-Forest email address stating: “[p]lease confirm receipt of the

attachment. I am also sending the scanned files from the peripheral companies.” Within an hour,

Kathy Tian of Sino-Forest, who worked for Ho, sent an email to Huang Ran (at his haidao2.com

email address), copying Ho and Ip (also at non-Sino-Forest email accounts), warning that Sino-

Forest email accounts should not be used when discussing sensitive information that is not

suitable to be disclosed to the public, such as peripheral companies:

At the end of last year, Manager Liang Yong and Yang Jun communicated a few

times, hoping to coordinate and remind employees from the peripheral companies

to be careful when sending emails to Sino-Forest email addresses. We have the

following recommendations, please consider and help coordinate:

1.

If any information is not suitable to be disclosed to the public, do not

directly email to any colleague’s Sino-Forest email address;

2.

In sending content to the Sino Forest mailbox, please avoid sensitive words;

For instance, below there appeared the words such as “peripheral companies”

again, and payment reminders from different companies have appeared in the same

inbox. Please help coordinate. Thank you!

[207] Ho’s explanation for this email during his cross-examination was that it documented “a

normal squabble between the operating guy and our operations and as well as whoever is the

outside company.” I do not accept that explanation as at all credible. Ho’s attempt to explain

away the use of non-Sino-Forest emails is contrived and unresponsive to the core issue. The

burden of the instruction is clear and explicit: Do not talk about peripheral companies on the Sino-

Forest email platform! The topic of peripheral companies was, therefore, regarded as too

sensitive a topic to be discussed on the company’s server. The implication is clear. The use of

peripheral companies was something not to be disclosed outside a select few using non-Sino-

Forest emails. Discussion of the use of peripheral companies was not to take place on Sino-Forest

servers to prevent disclosure or discovery of what was taking place. Instead, the “pirate” email

account was set up for such discussions.

Project Russia / Eminens

[208] Mr. Chan’s sister, Pauline Chan (Pauline), had a company called Eminens. Similar to the

“haidao2.com” email accounts for discussions regarding peripheral companies, certain employees

of Sino-Forest and its counterparties were provided with Eminens email accounts and a File

Transfer Protocol (“FTP”) database to use for certain projects, including Project Sugar and Project

Russia. Both those projects related to wood log trading deposits which the plaintiff alleges were

Page: 41

fraudulent. The Eminens servers were another mechanism by which discussions regarding certain

“sensitive” subject matters, such as wood log trading involving Project Sugar and Project Russia,

were kept hidden from anyone who might later be reviewing Sino-Forest’s records.

[209] In August 2009, email addresses with the suffix “@task.eminens.org” were provided to

Sino-Forest personnel including Hung, Ho, Christine Wong (Ho’s assistant), Xu Ni, and Tang Bin

(who worked under Xu Ni). The email stated that the “@task.eminens.org” email addresses

would replace the email addresses ending in “@eminens.org.” This clearly indicates that the

individuals listed on the email already had email accounts ending in “@eminens.org.”

[210] On September 23, 2009, Henry Chen (who worked under Xu Ni in Sino-Forest’s legal

department) sent an email from his Sino-Forest email address to Alex Lin (who worked under Ho)

copying the Sino-Forest Project Russia email group. The email attached meeting minutes of

certain discussions earlier that day. Ho, who was included in the Sino-Forest Project Russia email

group, responded on September 24, 2009 stating “Guys, I believe you should use the other email

address for these types of communication.”

[211] On

[email protected],

October

9,

2009,

Christine

Wong

at

Eminens

emailed

and

[email protected],

[email protected], listing the individuals that would have access to each of

those accounts. The users included Sino-Forest and non-Sino-Forest personnel. For example, the

[email protected] was for “Senior Management” and included Ip, Hung, Ho, Xu Ni from

Sino-Forest, as well as Pauline and Jack Chen (“Chen”), who worked at Eminens at the time.

[212] On January 27, 2010, Christine Wong, using her “@task.eminens.org” email address, sent

an email with the subject line “Important! FTP: Task/Share-Russia” to a number of Sino-Forest

employees at “@task.eminens.org” email addresses, although two individuals were emailed at

Sino-Forest Group email addresses. The email stated “Effective immediately, pls use the FTP

link below as our central database to upload and download data and documents relating to Russia

project and Longjiang Commercial.” After providing instructions on accessing the FTP database,

she wrote “FYI, only the following people in our team have access to the FTP. Pls do not share

the access with other people.”

[213] Again, although subjects relevant to this litigation were clearly discussed using “eminens”

email accounts and relevant documents were uploaded to the Eminens FTP, Mr. Chan admitted

under cross-examination that he did not ask his sister Pauline for any of the documents on the

Eminens servers and that none have ever been produced.

[214] A number of Mr. Chan’s witnesses attempted to explain away the use of non-Sino-Forest

email addresses by asserting that Sino-Forest email accounts did not function properly in the PRC

and that Sino-Forest’s servers were occasionally down. For example, Ho tried to explain his

September 24, 2009 email in which he stated “Guys, I believe you should use the other email

address for these types of communication” by speculating that:

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So in this case, I may have been under the – or travelling during, at that point in

time. If I can’t get hold of this e-mail, I just told them to get me other e-mail

address, whatever works for them and works for me.

[215] Ho’s explanation does not accord with the direction in his email to use other email

addresses for certain “types” of communications. In fact, there is not one email directing the use

of non-Sino-Forest emails which attributes the need to use non-Sino-Forest email addresses to

problems with Sino-Forest’s servers in mainland China. In every message in which the use of a

non-Sino-Forest email platform is raised, Sino-Forest personnel were directed to use non-Sino-

Forest email addresses in relation to certain specific subject matters, for example, where

“information is not suitable to be disclosed to the public” or where “peripheral companies” were

concerned.

[216] I find the explanations offered by the defence witnesses for the use of non-Sino-Forest

emails incredible. The suggestion that it was necessitated by poor email service in mainland

China is completely inconsistent with the plain, and explicit, language of the emails themselves.

There is no independent corroboration of malfunctioning email servers in mainland China that

interfered with the conduct of Sino-Forest’s business. The use of non-Sino-Forest emails was

restricted to a designated few for specific subject matters. The clear and stated purpose of non-

Sino-Forest email addresses was to prevent disclosure of “sensitive” subjects on Sino-Forest’s

email servers.

[217] The emails are relevant to a matter in issue in this litigation. They were not produced, or

even sought to be produced, by the defendant. There has been no explanation for this failure to

produce relevant documents.

[218] As to the defendant’s argument that the attempted “concealment” must have been

incredibly inept, given the number of emails found by the IC and Mr. Borrelli, I would say two

things. First, mistakes happen. Email use is notoriously fraught with slips and errors. Rigorous

email policy enforcement, where large numbers of users and high traffic volumes are involved, is

bound to be imperfect.

[219] Second, although there are quite a few emails using non-Sino-Forest servers that slipped

through into the Sino-Forest electronic records, it is purely by chance, as noted earlier, that these

were discovered at all. I say this because of the complete failure of the defendant or any of his

witnesses to produce any documentary records from the non-Sino-Forest servers. As a result, we

have no idea whether the “mistakes” that ended up on Sino-Forest computers and other

communication devices represent a significant or an infinitesimal percentage of the email traffic

that actually took place off of Sino-Forest’s systems. It seems likely, given the scope of the

activities involved, that what was found on Sino-Forest devices was a very small percentage of the

concealed communications.

[220] In the circumstances, and in the context of other evidence dealt with in subsequent sections

of these Reasons, I find the use of non-Sino-Forest emails was established in an attempt to conceal

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certain activities from scrutiny. These activities included the establishment and use of peripheral

companies. I find the peripheral companies were companies controlled by Mr. Chan and Inside

Management that did business with Sino-Forest. The selective activities also included certain

projects, such as Project Russian discussed below, whose purpose was to defraud Sino-Forest by

diverting Sino-Forest’s funds to non-arm’s length parties controlled by Mr. Chan or other

members of Inside Management operating under Mr. Chan’s instructions.

Use of Nominees

[221] Central to the plaintiff’s claim of fraud is the allegation that Mr. Chan secretly controlled

many companies, some of which did business with Sino-Forest, through a system of nominee

directors and shareholders. Some of these companies, such as China Square, Kun’an, Trevista

and Springfield were contracting counterparties with Sino-Forest in transactions, discussed below,

which are alleged to have been fraudulent.

[222] The basic concept was that a corporation would be incorporated and Mr. Chan’s insiders

(friends, business associates and others) would be installed as the titular officers, directors and

shareholders of these companies.

[223] Sino-Forest subsidiaries would engage in BVI standing timber and wood log trading

transactions with these companies. In the case of wood log trading, substantial funds were paid to

these corporations. The titular owners/directors of these corporations would execute undated

notices of resignation and removal as directors, and undated share transfer documents. These

signed but undated documents would be delivered for safe-keeping to Mr. Chan (through

Yosanda, Zeng and perhaps others).

[224] In this way, Mr. Chan could, whenever and for whatever reason he chose, initiate the

replacement of the titular owners/directors of these corporations with himself or someone else of

his choosing.

[225] The plaintiff relies on numerous email communications referring to the creation and

management of nominee companies and nominee shareholder documents. These emails, in some

cases, include draft nominee documents such as resolutions removing and replacing directors and

approving share transfers.

[226] The plaintiff also relies on a document created by John Zeng. John Zeng was a friend of

Mr. Chan’s. He was a PRC lawyer. His firm acted for Sino-Forest and for Mr. Chan personally.

The document in question was found on Yosanda’s computer, last printed January 20, 2011,

containing a master list of nominee companies, who controlled them, who managed them and

whether a full set of nominee documents had been signed by the nominees. This document is

styled “Status of Companies for which the Managers are Nominee Shareholders/which are

managed by the managers.” I will refer to this document in these Reasons as the Nominee

Company Managers List.

Page: 44

[227] Thus, the plaintiff alleges that Mr. Chan used a system of nominee shareholders to hide his

beneficial ownership of various companies, including many of Sino-Forest’s counterparties. The

nominee system was foundational to the fraud that Mr. Chan perpetrated on Sino-Forest and

enabled him to conceal the fraud for an extended period of time. Mr. Chan used the nominee

system to siphon cash from Sino-Forest to seemingly arm’s-length counterparties when, in reality,

those counterparties were secretly controlled by Mr. Chan. By funneling Sino-Forest’s cash to

companies held in the names of his nominees, Mr. Chan managed to impede Sino-Forest’s (and,

later, the plaintiff’s) ability to trace stolen funds to Mr. Chan. Mr. Chan also used the nominee

system to set up Sino-Forest’s BVI standing timber Suppliers and AIs, and wood log trading

suppliers and customers, thus creating the illusion of real arm’s-length counterparties that were

conducting legitimate transactions.

[228] The defence argues that the scope and sweeping nature of the control alleged to have been

exercised by Mr. Chan over this large conglomerate of companies is completely incredible and

unfounded. The defence argues that many of the companies falling into this constellation are

owned by other Chinese businessmen far wealthier than Mr. Chan and that the idea of them being

Mr. Chan’s nominees is ludicrous. The defence argues that most of the evidence relied on by the

plaintiff in support of these allegations arises from overly exuberant proposals coming from Zeng,

proposals that were never consummated or pursued. The defence argues that Mr. Chan, Zeng and

other defence witnesses provided credible, plausible explanations for the so-called inculpatory

documents relied upon by the plaintiff which demonstrate that there was no system of nominee

shareholders and no fraud.

The Nominee Documents

[229] As will be discussed in more detail below, Mr. Chan used nominee shareholders to hide

his beneficial ownership of Fortune Universe Ltd. (“Fortune”) and Montsford Ltd. (“Montsford”)

in connection with the Greenheart transactions. Lei Guangyu (“Lei”) was Mr. Chan’s nominee

for Fortune and Zeng was Mr. Chan’s nominee for Montsford. In late 2006 and early 2007,

Yosanda prepared nominee documents for both Fortune and Montsford, respectively. The

documents included:

(a)

(b)

(c)

resolutions and letters by which Lei would resign as the director of Fortune and

Zeng would resign as the director of Montsford;

an undated resolution appointing Mr. Chan as the director of each company and

Mr. Chan’s consent to act as a director;

undated resolutions and instruments of transfer by which Lei transferred his share

in Fortune to Mr. Chan for one dollar and by which Zeng transferred his share in

Montsford to Mr. Chan for one dollar; and

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(d)

undated minutes of a meeting for each of Fortune and Montsford documenting the

resignations of Lei and Zeng, the appointment of Mr. Chan, and the share transfer

to Mr. Chan.

[230] By having Lei and Zeng sign undated copies of these documents, Mr. Chan would have

had the ability to take control of Fortune and Montsford whenever he chose to do so.

[231] There is a good deal of evidence that similar arrangements had become widespread by

2010. On February 25, 2010, Zeng sent an email to Mr. Chan, copied to Pauline, explaining how

to tighten up the nominee system and exert more control over the nominees. In the opening

paragraph of the email, Zeng explained that “[r]egarding the nominee shareholding system, since

our last meeting I have been thinking about establishing a comprehensive legal documentation

system to protect the benefits of investors.” Although Zeng was proposing to improve the system,

he warned that “[a]t the end of the day, this documentation system for nominee shareholding is

only effective for ‘honourable men’, but it won’t work on those who are not honest.”

[232] The improvement developed by Zeng was the introduction of the “declaration statement of

property ownership,” which, Zeng explained, would protect Mr. Chan’s interests more effectively

than Mr. Chan’s current set of nominee documents:

Building upon above understanding, the nominee shareholding system that I

proposed comprises of two basic sets [of documents]: the first is a declaration

statement of property ownership, and the second are blank documents for share

transfers. Previously, I found that only share transfer documents are available for

your BVI companies; but actually this is not comprehensive at all. A share transfer

can only protect our interests “after” the transfer took place, but does not protect

the interests before the transfer. It is not comprehensive unless a declaration

statement of property ownership is added. (Please see the attachments)

[233] Finally, Zeng explained that Mr. Chan should include the declaration statement for all new

nominee arrangements and should attempt to get existing nominees to sign the declaration

statement as well. He said:

With respect to the actual implementation, the complete set of documents must be

signed for all new nominee shareholding arrangements. As for existing nominee

shareholding arrangements, because no declaration statement was signed, we

should ask the nominees to sign it by thinking of a reason or an excuse for it. It

may be difficult to do it without making him or her feel that we do not trust him or

her. But this can be done if the matter is properly handled. Level of acceptance by

the nominees has been taken into account when I drafted the declaration statement,

and the statement was written in a “lighter” tone wherever possible. But I don’t

want to be too hasty. Before the official implementation, I want to find a time to

discuss it with you before we proceed.

Page: 46

[234] Attached to Zeng’s February 25, 2010 email was a document titled “Proposal for

Company Share Integration Management Plan” that set out the comprehensive list of nominee

documents, the practice to be instituted, and the risks associated with the system. The practice set

out by Zeng was as follows:



for newly established companies, relevant parties shall sign the nominee

shareholder document together with the company registration document.

in the event of a change of shareholder, share or director at an existing company,

relevant parties shall sign the nominee document together with the company

registration alteration document.



in every June, each company shall submit up-to-date financial statements and a

shareholder report for the previous year to the main management body.

[235] The risks set out by Zeng were as follows:

Risks cannot be prevented completely, nominee shareholders may doing the



following actions against the interests of the nominated shareholding without the

actual investors’ knowledge:

. unauthorized disposal of assets in order to take profit from it;

. unauthorized transfer of share to a bona fide third-party

. conducting business operations against the interests of the company (e.g.

tax fraud and connected transaction against the interests of the company)

[236] Also attached to Zeng’s February 25, 2010 email was a sample declaration statement, the

new nominee document described by Zeng in his email. Among other things, the declaration

stated that “All the Shares of the Company held by the nominee shareholder is only held on behalf

of the principal” and that any gains resulting from the nominee shareholding “belong to the

principal.” The company on the sample declaration statement is Silver Field International Limited

(“Silver Field”) and the nominee shareholder is Yu Jing.

[237] A few minutes after Zeng sent the first February 25, 2010 email, he sent Mr. Chan a

follow up email stating:

Besides, regarding some of the new companies - like “the ones with the word

‘field’ in their names” in Cambodia - I already asked the nominee to sign a set of

documents. Should these documents be kept by me? By Eminens? By Yosanda?

Or you want to keep them yourself?

[238] There are several companies on the Nominee Company Managers List under Project JP

with the word “field” in the company name, including Great Field International Limited, Silver

Page: 47

Field, Great Field (Cambodia) International Company Limited, and Yellow Field (Cambodia)

International Company Limited. Zeng confirmed during his testimony that Project JP was a

“Cambodia project” and that the “fields in Cambodia as mentioned in this paragraph, they are

referring to the investment company names under Mr. Li Hua.”

[239] Under “Silver Field” on the Nominee Company Managers List, Li Hua is listed as the

manager and Yu Jing is listed as the registered shareholder and director/legal representative.

There is a checkmark under the “Documentation Signed by Nominee Shareholder(s)” column,

suggesting that Yu Jing had signed the draft declaration statement attached to Zeng’s February 25,

2010 email to Mr. Chan. This is consistent with Zeng’s statement that he had already asked the

nominee to sign a set of documents.

[240] Zeng testified during his examination-in-chief that attaching the declaration statement with

Silver Field and Yu Jing was a “mistake” and that he intended to send Mr. Chan a blank

statement. He further testified that the document “does not relate to Sino-Forest.” Under cross-

examination, he changed his story to “I thought very soon Sino-Forest would acquire Mr. Li

Hua’s company. I thought Sino-Forest would need to see such documents.” When asked why he

asked whether Mr. Chan or Yosanda should keep what he claimed to be Li Hua’s nominee

documents, Zeng asserted that there was a translation issue with the plaintiff’s professionally

certified translation and the intent was only to “show it to Sino-Forest.”

[241] Mr. Chan tried to explain the February 25, 2010 emails on the basis that he asked Zeng to

do research about the potential risks associated with having nominees hold Chinese assets on

behalf of Sino-Forest. Mr. Chan says that the real purpose of the study was related to the “on-

shoring” of BVI assets for the benefit of Sino-Forest, but that he withheld the true purpose of the

requested research from Zeng.

[242] I am unable to accept this explanation. It is utterly inconsistent with the actual words used

in the emails. There is no reference to Sino-Forest, on-shoring or hypothetical nominees holding

Chinese assets on behalf of Sino-Forest anywhere in these emails. The language of Zeng’s emails

makes it clear that the use of nominee shareholders and the supporting documents was not a

proposal. There were already signed nominee shareholder documents in place. Zeng described

the already-existing set of share transfer documents as being for “your BVI companies” not Sino-

Forest. Zeng’s “proposal” was to improve the protection afforded by the existing share transfer

documents by adding a declaration statement. His second email says he has already asked the

nominees to sign the documents. He wants to know whether Pauline’s company, Mr. Chan’s

secretary Yosanda, Zeng or Mr. Chan himself will be the caretaker of these documents.

[243] There is also not the slightest evidence that anyone else involved in trying to solve the on-

shoring problem of the BVI standing timber assets being locked up in the PRC was aware that Mr.

Chan was exploring an elaborate system of nominees, using Zeng and not telling anyone at Sino-

Forest about it.

Page: 48

Yosanda Circulates Nominee Documents

[244] Shortly after Zeng’s February 25, 2010 email, Yosanda circulated a number of nominee

documents for signing. Nominee documents were sent to Lei Guangyu with respect to a company

named Global Sugar, and to Jim Lok (“Lok”) with respect to companies named Top Revenue

International Ltd., Winning Base Investments Ltd, Winner Space Group Ltd., Winner Ally

Investments Ltd., and Willfast International Ltd. The relationship of these men to Mr. Chan will

be outlined in more detail below.

[245] Global Sugar Group Limited is listed on the Nominee Company Managers List with Lei as

a 50% shareholder and director. There is a checkmark under “Documentation Signed by Nominee

Shareholder(s).” Similarly, the five companies for which Yosanda sent nominee documents to

Lok are listed on the Nominee Company Managers List with Lok as the manager. There are

question marks under the “Shareholder”, “Director”, and “Documentation Signed by Nominee

Shareholder(s)” columns.

Zeng’s Reporting Email to Mr. Chan

[246] On April 2, 2010, Zeng sent Mr. Chan an email with the subject lines “Outline of

instructions to be sought in the meeting next week.” In this email, Zeng reported to Mr. Chan and

sought Mr. Chan’s instructions on nine subjects, including the management of Mr. Chan’s

nominee arrangements and various projects listed on the Nominee Company Managers List. I will

focus on five of these matters.

[247] The first is called: Regarding Real Estate Projects. Under this item in the email, Zeng

stated that Mr. Chan needs a “dedicated real estate team.” He further stated that they feel

“overshadowed by Pang” and cited concerns with “Lei and Li.” He ultimately sought Mr. Chan’s

permission to try a new individual – Xiao Cai of Hesheng.

[248] The first item corresponds to the Beihai Real Estate Project listed on the Nominee

Company Managers List, with Li Hua listed as the manager, director/legal representative, and one

of the shareholders. The other shareholder is Pang Zhi Zhong.

[249] Mr. Chan and Zeng testified that this item referred to a potential investment by Mr. Chan,

but that neither Mr. Chan nor Sino-Forest ever invested in it. However, there is substantial

evidence that Mr. Chan invested in the Beihai Real Estate Project and that Lei helped manage the

project, including a letter from Lei dated August 27, 2009 stating “[c]urrent status of capital

contribution: Pang Zhizhong paid RMB11.29 million and Sino-Forest (you) actually paid

RMB41.81 million.”

[250] The second item is: Re: Cambodia Project. Under this item, Zeng reported that Li Hua

“needs a capable team” and that certain matters “should be done by Li Hua’s team, but almost all

of them are currently handled by Eminens on his behalf.” Zeng further reported “[n]ow that

we’ve spent over ten million dollars on land acquisition and equipment purchases, why don’t we

Page: 49

invest a couple of million dollars to set up an efficient management team? In addition, I need

your instructions for a few more matters.”

[251] This item also corresponds to the Nominee Company Managers List. Zeng testified that

Project JP, which was listed on the Nominee Company Managers list with Li Hua as the manager,

was a Cambodia project.

[252] Mr. Chan claimed that Zeng sought Mr. Chan’s views because Zeng was doing due

diligence in Cambodia on Li Hua’s company on behalf of Sino-Forest. Zeng, however, was

unaware he was doing this due diligence, as Zeng testified that the purpose of seeking Mr. Chan’s

views was because Zeng, Mr. Chan, and Li Hua were all good friends. Zeng was actually acting

for Li Hua. Once again, the more tenable explanation is that which accords with the plain

language of the document: Zeng was seeking Mr. Chan’s instructions regarding a project

management team because Mr. Chan had invested over ten million dollars in the project. Li Hua

was Mr. Chan’s manager for this project.

[253] The third item is: Re: Suriname Project. Under this item, Zeng stated that “I need to know

your thoughts on this matter and the timetable. Another pressing issue is to decide which team we

can use. Eminens is understaffed and it might be difficult for it to undertake the project. In

addition, I also want to report to you particulars of our DD in the early stage.”

[254] Project Suriname appears on the Nominee Company Managers List with Lok listed as the

manager.

[255] Once again, Zeng and Mr. Chan had different explanations for this item. According to

Zeng, he reported to Mr. Chan on the Suriname project because Mr. Chan “was personally quite

interested” but that “at the end, Mr. Chan did not make any investments in this Suriname project.”

On the other hand, Mr. Chan testified that Project Suriname was “a proposal for Sino-Forest” –

not himself.

[256] The fourth item is: Re: Management of Your Private Investment Projects. Under this item,

Zeng reported to Mr. Chan specifically on the nominee documents and the supervision of

nominees. He wrote:

At present, there is a complete set of nominee documents for domestic and

overseas companies. Some nominees have already signed the documents. For the

next step, I need to know: 1. Who else should I contact to sign the documents? 2.

Who should keep the signed documents? If you think it is appropriate, I can set up

a special desk here and assign a dedicated staff member to follow up. 3. How to

get the follow-up done? I suggest that around June each year, all nominees should

be required to fill in a fixed form to report to you in writing on changes in equity

and changes in assets etc. in the preceding year, so that you will be kept posted

about the main investment trends. This will also ensure that the nominees are

properly supervised.

Page: 50

[257] Mr. Chan and Zeng gave various contradictory explanations for this passage, none of

which could be reconciled with the plain wording of Zeng’s email.

[258] Mr. Chan testified that this item referred to “investment potentials” in “media advertising

companies,” but that he ultimately chose not to invest. In Zeng’s affirmation, he claimed that this

item set out “the logistical arrangement for these trust documents of the shares of these advertising

companies,” which were “PRC local companies.” During his live testimony, Zeng claimed that

the documents that were “already signed” referred to the advertising companies. According to

Zeng, the rest of the paragraph was merely a suggestion just in case Mr. Chan ever invested in

other companies through nominees. However, Zeng testified that he was “not aware if Mr. Chan

had other personal investment projects that could also use such a system.”

[259] Zeng steadfastly refused to acknowledge the clear meaning of the words of his own email.

For example, the first line of this item states “Re: Management of your private investment

projects. At present, there is a complete set of nominee documents for domestic and overseas

companies.” During cross-examination, when asked if Zeng denied that “what’s clearly going on

here is you’re reporting that you have a complete set of nominee documents prepared for Mr.

Chan’s personal investments, both domestically and overseas”, Zeng responded:

I totally disagree with the speculation put forth by the plaintiff, which is unfounded

and not logical. If you read carefully the text before this paragraph and after the

paragraph, if you follow the logic and if you look for the true meaning of the text,

you would understand this is totally unfounded speculation.

[260] Despite Zeng’s refusal to acknowledge the words of his own email, this matter is plainly a

follow-up to Zeng’s February 25, 2010 email in which Zeng had explained how to improve the

nominee system. In the April 2, 2010 email, Zeng is reporting that more nominees had signed the

documents, once again asking Mr. Chan who should keep the executed nominee documents, and

once again suggesting that nominees be required to report to Mr. Chan in writing on an annual

basis to ensure proper supervision. There is no mention of domestic advertising companies. By

contrast, there is an express reference to overseas companies, which is left unexplained by both

Mr. Chan and Zeng. Moreover, the email simply cannot be read to indicate that this was nothing

more than a suggestion by Zeng in the event that Mr. Chan decided one day to invest through

nominees in projects currently unknown.

[261] The fifth item I will address from this email is: Re: Russia Project. Under this item, Zeng

reported to Mr. Chan on concerns with Ho’s performance as part of Project Russia and asked Mr.

Chan how to place Ho in a proper position.

[262] This item also corresponds to the Nominee Company Managers List, on which Ho is listed

as a manager of Project Russia. As discussed later in these Reasons in connection with the wood

log trading frauds, Zeng’s office set up a number of BVI companies under Project Russia which

appear on the Nominee Company Managers list and in respect of which Ho reported to Mr. Chan

as manager of that project.

Page: 51

Signed Nominee Documents for the Peripheral Companies

[263] On May 21, 2010, Zeng reported to Mr. Chan that he got the nominee documents signed

for a series of peripheral companies:

This is an overview of the peripheral companies of Panel, which as of today have

basically signed “nominee holdings documents” with their shareholders and legal

representatives. We will follow-up regularly with the new peripheral companies

established in the future and any substantive changes at the old companies.

[264] Attached to Zeng’s email was a list of the peripheral companies. The list included some of

Sino-Forest’s standing timber suppliers, with Huang Ran listed as the administrator of those

companies, various individuals listed as the legal representatives, and other individuals listed as

the shareholders. Ten of those suppliers are listed on the Nominee Company Managers List with

Huang Ran listed as the manager and the same individuals listed as the legal representatives and

shareholders.

[265] Xunxiang was also listed on the attachment to Zeng’s email, with Li Hai Bo listed as the

administrator, legal representative, and one of the two shareholders. The other listed shareholder

is Zhang Jun Feng. Similarly, Xunxiang is the next company on the Nominee Company Managers

List, with Li Hai Bo listed as the manager, legal representative, and one of the two shareholders,

with the other shareholder being Zhang Jun Feng.

[266] The explanations provided by Mr. Chan and Zeng for this email do not hold up to scrutiny.

Mr. Chan testified that this email was “part of this on-shoring studies” and that “we want also to

know who we are dealing with, who are the real boss of these companies.”

[267] Mr. Chan admitted, however, that none of this was disclosed to Zeng, who was actually

doing the work. Mr. Chan’s explanation that Zeng was doing exploratory research on nominee

arrangements for on-shoring is uncorroborated by any independent Sino-Forest source, such as

independent Board members or professional advisors. On-shoring was the most significant

strategic problem facing Sino-Forest – how to extract the increasing value of BVI standing timber

assets out of the PRC and deal with the regulatory, tax and other potential problems associated

with extracting that value.

[268] Given the importance of this issue, and the glacial pace at which it was being addressed, it

would reasonably be expected that the consideration of a potential solution would have been

known to the Board and the independent professionals charged with finding a solution. There is

not a hint of this in the evidence. Instead, Mr. Chan was off on his own, using a lawyer who acted

for Mr. Chan personally.

[269] Zeng testified that the purpose was to “understand the identity of the real shareholders

behind these companies. Sino-Forest could use such investigation to identify potential

competitors who could be using such nominee shareholding format to conceal their real identity

so that they could get close to Sino-Forest.”

Page: 52

[270] During cross-examination, Zeng admitted that the whole point of a nominee arrangement

is to hide the beneficial ownership. It makes no sense that counterparties and potential

competitors who were trying to hide their identities from Sino-Forest would share their nominee

arrangements with Sino-Forest.

[271] Most importantly, both Mr. Chan and Zeng’s explanations fly in the face of the plain

language of the email itself. When considered in conjunction with Zeng’s February 25 and April

2, 2010 emails regarding getting the nominee documents signed for Mr. Chan’s companies, the

simplest and most plausible explanation, and the explanation most in accord with the probabilities

of the case, is that Zeng was reporting to Mr. Chan that he got more nominees to sign the nominee

documents. This time, it was the nominees for companies they called the “peripheral companies”

that included companies Sino-Forest did business with on a supposedly arm’s length basis.

The Nominee Company Managers List

[272] What the plaintiff has styled the “nominee companies caretaker list” was, according to

Zeng, created by Kelly Xie, who worked for Zeng, under his direction. The metadata of the

document shows – and Yosanda confirmed – that it was originally created by Kelly Xie, accessed

and printed by Yosanda on January 20, 2011, and found in Yosanda’s electronic recycling bin.

[273] The title of the document, which the plaintiff had professionally translated, explains what

the document is: “Status of Companies for which the Managers are Nominee Shareholders / which

are Managed by the Managers.”

[274] The Nominee Company Managers List has eleven columns:

(1)

“No” – “No” is short-form for number. This column assigns a number to each

manager. There are ten managers in total.

(2)

“Manager/No. of Companies” – This column sets out the names of the managers

and the number of companies they manage. The managers are Pauline, Li Hua, Ho,

Chen, Huang Ran, Li Hai Bo, Lok, Liu Feng, Zeng, and Marco Lam.

(3)

(4)

(5)

(6)

“Project” – This column sets out the names of the projects that are managed by the

managers (e.g. Project Russia).

“Company name” – This column sets out the names of the companies under each

project.

“Place of Incorporation” – This column sets out the jurisdiction in which each

company was incorporated.

“Registered Shareholder” – This column lists the shareholders of each company.

Page: 53

(7)

(8)

(9)

“Director/Legal Representative” – This column lists the directors and legal

representatives of each company.

“Date of Incorporation” – This column sets out the date on which each company

was incorporated.

“Documentation Signed by Nominee Shareholder(s)” – this column contains a

checkmark, an “x”, a question mark, or another note indicating whether the

nominees of each company have signed the nominee documents.

(10) “Financial Data” – This column is blank for every company.

(11) “Note” – This column contains miscellaneous notes regarding a few of the

companies.

[275] Many of the companies on the Nominee Company Managers List did business with Sino-

Forest, including PhytoGaa, the peripheral companies, Trevista, Spring Field, the companies

under Project Erenhot, and more. Others were companies in which Mr. Chan personally invested,

including Shenzhen Hongji Investment Development Limited (“Shenzhen Hongji”) and Beihai

Faye Real Estate Development Company Limited (“Beihai”), the details of which are set out

below.

[276] Zeng’s evidence is that in 2010, he and some friends, including Mr. Chan, had an idea of

forming a conglomerate of companies focusing on the “green” concept.

[277] He asked Kelly Xie, one of the lawyers at his law firm, Kai Tong, to compile a list of

companies for consideration. He says he gave no concrete instructions on which companies or

what data to include. But, for PRC companies he wanted to know the “true owners” and therefore

to know if the registered shareholders were mere nominees or the true owners. From this data, he

said, he hoped to identify five or six large companies that would create high volume for a public

listing by way of initial public offering (IPO).

[278] Zeng said he told Kelly Xie to put the draft IPO list on a USB key so he could take it to

Hong Kong for a meeting with Mr. Chan. When he arrived in Hong Kong, he asked Yosanda to

print it out for him, which is how it ended up on Yosanda’s computer.

[279] When he saw the document, however, he said he found it was full of errors and that he

could not make sense of some parts of it. Zeng says, for example, that Ho was not the manager of

any of these companies listed under Project Russia (although this contradicts his email of April 2,

2010 specifically commenting on Ho’s performance in this role, not to mention Ho’s evidence at

trial, where Ho admitted he was the manager of Project Russia).

Page: 54

[280] Zeng says the title of the document is wrong. The managers are not the nominee

shareholders. Although Zeng testified through a translator, he felt comfortable taking issue with

some of the translation.²

[281] Zeng says this list has nothing to do with Mr. Chan and that none of the shareholders listed

are Mr. Chan’s nominees.

[282] Mr. Chan disclaims all knowledge of this document and any connection to any of these

companies. He brushes it off as another one of Zeng’s hare-brained schemes.

[283] Kelly Xie did not testify.

[284] In my view, there is virtually no respect in which Zeng’s explanation of this document

makes any sense. The very idea of randomly throwing some large companies together into a

conglomerate to issue an IPO is inherently ridiculous.

[285] Zeng did not produce a single document to corroborate his IPO story. Zeng’s story does

not conform in any way to the document itself. The document is not called “List of Potential IPO

Targets” nor does the term “IPO” appear in the document. There is no reference to forming a

“green” conglomerate to issue an IPO in any contemporaneous document.

[286] Zeng’s explanation for why there is reference to nominee shareholders is also illogical and

contradictory. He says he wanted to know who the “true owners” were of these potential

“conglomerate” partners. He could not explain why independent, arm’s length companies that had

gone to the trouble of establishing nominee shareholder structures would share that information

with Kelly Xie, since the whole point of establishing a structure like that would be to conceal who

the real shareholders were.

[287] There is no corroborative evidence for the suggestion that any of these companies were

large, successful enterprises. The evidence tends to the opposite conclusion, as a number of the

companies listed were in contractual relationships with Sino-Forest, defaulted on their obligations

and disappeared after the Muddy Waters Report.

[288] There is simply no coherent explanation for why there would need to be a designation of

“managers” at all, or why a list of IPO candidates would be organized into “Projects” which,

ultimately, were shown to reflect a number of business areas or activities in which Mr. Chan was,

or shortly became, active.

2

As noted earlier, if translation was in issue, the proper way to address it was by filing a

competing translation by a qualified expert. This was not done. I do not accept Zeng’s attempted

retranslation of the document.

Page: 55

[289] Zeng’s story is inconsistent with a significant volume of evidence tying the listed

nominees and companies back to Mr. Chan or members of Inside Management and showing Mr.

Chan’s involvement in incorporating and managing those companies.

[290] For example, although Zeng says Ho was not a manager of any of these companies, as will

be discussed below dealing with Project Russia in the context of wood log trading, Ho and Zeng

were both central to the creation and establishment of several companies under Project Russia

which are listed on the Nominee Company Managers List. Ho was explicitly and admittedly the

manager of Project Russia, in which Sino-Forest ended up doing tens of millions of dollars of

wood log trading.

Yosanda’s Role in Implementing the Nominee System

[291] Yosanda was Mr. Chan’s secretary at Sino-Forest. Maradin referred to Yosanda as “the

gate keeper in terms of getting access” to Mr. Chan. By his own admission, Mr. Chan engaged in

very little electronic communication. Emails for example, intended for Mr. Chan were typically

sent to Yosanda. Mr. Chan’s responses were often from Yosanda. Many emails addressed to

Yosanda are clearly intended for Mr. Chan.

[292] Yosanda agreed she was responsible for monitoring Mr. Chan’s email account. She said

she printed out emails and delivered copies to him.

[293] Yosanda continues to have an ongoing financial and working relationship with Mr. Chan.

She received a HKD$2.7million loan from Mr. Chan in 2011. She continued to work for him to

the date of trial. Yosanda said she “paid off” her loan to Mr. Chan by continuing to work for him

without compensation.

[294] Yosanda was paid a large salary for an assistant. This is an indication of her importance to

Mr. Chan and the operations and management at Sino-Forest.

[295] Some reference has already been made to Yosanda’s involvement in the preparation and

circulation of nominee documents. This will come up again in a number of other contexts as

individual transactions are considered.

[296] Yosanda also assisted with the incorporation and administration of many of the companies

on the Nominee Company Managers List, including Global Sugar, Grand Eastern Development,

Elderbridge, and Findhelm. Yosanda also assisted with the incorporation and administration of

Fortune and Montsford, which were Mr. Chan’s nominee companies for Greenheart.

The Nominees and Managers

[297] The relationship of many of the alleged nominees and managers to Mr. Chan is material to

the overall picture. These are names which come up repeatedly in the analysis of particular

transactions. I will therefore set out at this point who the nominees and managers are, outline

Page: 56

what their relationship was to Sino-Forest and to Mr. Chan and foreshadow the evidence of their

role in the conduct of business with Mr. Chan and Sino-Forest.

(a)

Lei Guangyu

[298] Lei was involved in managing Mr. Chan’s personal investments and held interests in

companies as Mr. Chan’s nominee such as Fortune, which invested in Greenheart. He is also

listed as the nominee shareholder of several companies on the Nominee Company Managers List

and received draft nominee documents from Yosanda in respect of Global Sugar.

[299] Mr. Chan denies that Lei ever acted as his nominee. Lei, similarly, initially testified that

he never held an interest for Mr. Chan as a nominee and that Mr. Chan and Lei never invested in

the same project or company at the same time.

[300] In cross-examination, Lei resiled from his prior evidence and admitted that he had in fact

previously held money and shares on behalf of Mr. Chan. Some of Lei’s activities in relation to

investments with Mr. Chan are outlined below.

(i)

Shenzhen Hongji

[301] Shenzhen Hongji appears on the Nominee Company Managers List with Lei listed as the

director/legal representative. Lei says this was his company. Shenzhen Hongji’s predecessor

company was Hongji Industrial, which was later restructured into Shenzhen Hongji in 2002. Lei

testified that he kept money belonging to Mr. Chan in Hongji’s account when the money was idle.

There were no accounts or documents setting out the amount or disposition of these funds.

[302] On October 25, 2006, Lei wrote to Mr. Chan regarding a proposed investment in Shenzhen

Hongji by another individual named Mr. Shi. Although the investment would increase the capital

of Shenzhen Hongji, Lei warned that “[t]he percentage of the original shareholders will be

diluted.” Lei told Mr. Chan that the capital increase was “pending your approval.”

(ii)

Recent Fortune

[303] Lei also controlled a company called Recent Fortune Group Ltd. (“Recent Fortune”).

Recent Fortune was supposed to be an arm’s length remittance agent that remitted money to Sino-

Forest on behalf of its wood log customers.

[304] On March 3, 2010, Lei sent Hung bank account details for Recent Fortune. Lei also used

Recent Fortune to invest money as Mr. Chan’s nominee.

(iii) Beihai Real Estate Project³

³It should be noted that the Beihai, Wuxi and Changshou projects were not directly implicated in

any fraudulent activity or transactions. The plaintiff focusses on these transactions in support of

Page: 57

[305] Beihai appears on the Nominee Company Managers List, with Li Hua and Pang Zhi Zhong

listed as the registered shareholders. There are multiple letters from Lei to Mr. Chan describing

Mr. Chan’s investment in Beihai, reporting on the Beihai project to Mr. Chan, and seeking Mr.

Chan’s instructions with respect to the project.

[306] In a letter from Lei to Mr. Chan dated June 24, 2009, Lei proposed that Sino-Forest

invest in Beihai. The total amount to be invested in Beihai was RMB12 million. RMB7.8 million

was to be paid by “Sino-Forest,” which would amount to 65% of the investment. The remaining

35% (being RMB 4.2 million) was to be paid by Hongji. Following the June 24, 2009 letter, Lei

sent numerous letters to Mr. Chan reporting on the status of the project and seeking Mr. Chan’s

instructions with respect to various issues.

[307] In a letter from Lei to Mr. Chan dated August 27, 2009, Lei described the current capital

contribution of Beihai as: “Pang Zhizhong paid RMB11.29 million and Sino-Forest (you) actually

paid RMB41.81 million” indicating that Mr. Chan or Sino-Forest had invested at that point in

time. There is no evidence that Beihai real estate was ever a Sino-Forest asset.

[308] In a letter dated December 9, 2010 from Lei to Pang Zhi Zhong copied to Mr. Chan, Lei

stated “[d]uring the waiting period, if an appropriate buyer is interested in this project, (we) can

consider to sell 65% shares of Sino-Forest and Hongji.” In a letter dated December 10, 2010 from

Lei to Mr. Chan, Lei wrote: “There is currently a technical problem facing the acquisition of the

Beihai project. Shi and others acquire 100% shares under their names but they can only raise

approximately RMB$40 million of funds (only sufficient to acquire Pang’s 35%). Does our 65%

need to be paid as a matter of form?”

[309] Mr. Chan’s evidence is that Lei was confused. Mr. Chan testified that these were never

more than proposals and that neither he nor Sino-Forest invested in this project. There is nothing

about the communications, however, to suggest these were proposals. These emails are

discussing existing interests. The interaction also shows the degree of financial integration Mr.

Chan had with Lei.

(iv)

Wuxi Furniture Factory

[310] On January 1, 2011, Lei sent Mr. Chan a letter advising that “the owner of our leased

factory wishes to transfer it in its entirety due to financial difficulty.” The factory was called the

Wuxi Ziyunxuan Rosewood Furniture Co. Ltd. After setting out the details of a proposed

transaction, Lei set out the current shareholders of the factory and their respective ownership

interests. As set out by Lei, Mr. Chan was the majority owner and Lei held Mr. Chan’s shares as

Mr. Chan’s nominee. Lei wrote:

the proposition that Mr. Chan held beneficial interests in companies through nominees, such as

Lei, who took instructions from Chan on business matters affecting those companies in

recognition of Mr. Chan’s beneficial interest.

Page: 58

a. You hold 51%, investing RMB2.55 million. (held by Lei on your behalf)

b. Marco Lam holds 20%, investing RMB1 million

c. Lei Guangyu holds 19%, investing RMB950,000.

[311] Mr. Chan’s evidence at trial contradicted the plain language of this message. Mr. Chan

testified that Lei’s letter was merely a proposal and that he did not invest.

[312] However, on July 9, 2010, Guo Zhibiao, who worked for Lei, sent Hung a document titled

“SINOFOREST’s Statement of Fund Flow Balance.” The document listed “funds received” and

“funds expended.” Under “funds expended,” one item was “Purchase of equity capital of Wuxi

Ziyunxuan Furniture Company” for RMB2,550,000. The figure corresponds exactly to the

amount that Lei stated that Mr. Chan invested in the aforementioned letter. Lei testified that “this

is just a coincidence.”

(v)

Changshou Road

[313] Another project listed under "Funds Expended" on the “SINOFOREST’s Statement of

Fund Flow Balance” is the Changshou Road project, which was located in Shanghai.

[314] On October 15, 2009, Lei sent a letter to Mr. Chan recommending that Mr. Chan invest in

the Changshou Road real estate project. On April 12, 2010, Lei sent Hung an email advising that

“Allen directed that the two of us were to be responsible for carrying out the specific tasks”

regarding the “property projects.”

[315] From April 27, 2010 onwards, Lei and Hung corresponded regularly regarding the

Changshou Road project. On May 17, 2010, Lei told Hung to “transfer the USD funds required

by the Shanghai project into the following account” and then set out the account details for Recent

Fortune. The “Funds Received” section of the “SINOFOREST’s Statement of Fund Flow

Balance” shows that $3,000,000 was received three days later. As depicted by the “Funds

Expended” section and stated by Lei in his letters to Hung, Lei then used that money to invest in

the Changshou Road project on behalf of Mr. Chan.

(b)

Pauline Chan

[316] Pauline is listed as the manager of three companies of the Nominee Company Managers

List. Zeng testified that Pauline’s company, Eminens, managed those companies. In Zeng’s April

2, 2010 reporting email to Mr. Chan, he reported that Eminens was getting involved in “more and

more operations.”

[317] In 2009 or 2010, Mr. Chan claims to have loaned Pauline about HKD$3.1 million but did

not formally document the loan. Since the Litigation Trust obtained a Mareva injunction over Mr.

Chan’s worldwide assets in August 2014, Mr. Chan’s evidence is that Pauline has been paying for

his personal expenses.

Page: 59

(c)

Li Hua

[318] Li Hua is listed as the manager of 22 companies on the Nominee Company Managers List

and as the nominee shareholder of several companies.

[319] One of the projects listed as managed by Li Hua is the Beihai project. In Lei’s August 27,

2009 letter regarding Beihai, discussed above, Lei stated that the shareholders of Beihai were Mr.

Chan and Pang Zhi Zhong. He also explained that Li Hua was assisting Lei with negotiations

regarding the project. On the Nominee Company Managers List, the “registered shareholders” of

Beihai are listed as Li Hua and Pang Zhi Zhong.

(d)

George Ho

[320] Ho was the Chief Financial Officer and Vice President Finance of Sino-Forest from

October 2009 to April 2012. Ho is listed as the manager of 16 companies on the Nominee

Company Managers List. Along with Jack Chen, Ho was responsible for managing Project

Russia. In connection with Project Russia, Ho assisted Mr. Chan in hiring Jack Chen and setting

him up as Mr. Chan’s nominee.

[321] Ho also received an interest free HKD$2 million “loan” from Mr. Chan in August 2009

that Ho has not paid back. The terms of the loan were not documented in any way.

(e)

Jack Chen

[322] Chen is listed as the manager of 15 companies on the Nominee Company Managers List,

all under Project Russia. He is listed as the nominee shareholder and director/legal representative

of several of those companies, including Grand Eastern Development and Trevista International

Limited (“Trevista”).

[323] Chen was originally hired by Mr. Chan and Ho to work for Eminens. Chen was ultimately

placed in charge of the GED group, which included Sino-Forest’s wood log supplier, Trevista, and

wood log customer, Spring Field, in connection with Russian wood log trading.

(f)

Huang Ran

[324] Huang Ran was a former employee of Sino-Forest. He joined Sino-Forest in about 1997

and left in about 2007.

[325] Huang Ran is listed as the manager of ten companies on the Nominee Company Managers

List, some of which were BVI and WFOE standing timber suppliers. He is also the nominee

shareholder of some of these companies. Although not listed, Huang Ran was also a

nominee/manager of Yuda Wood, which was Sino-Forest’s largest BVI standing timber supplier.

[326] One of the Suppliers listed as being managed by Huang Ran is Guangxi Hezhou Kun’an

Forestry Company Limited (“Kun’an”). There is email correspondence from Inside Management

Page: 60

making it clear that Ran was responsible for making Kun’an look like a real company, not an

“empty shell.”

(g)

Li Hai Bo

[327] Li Hai Bo is listed as the manager, nominee shareholder, and director/legal representative

of Xunxiang. Xunxiang received a deposit of over $85 million from Sino-Forest for wood logs

that were never delivered. The plaintiff alleges that this was one of the wood log deposit frauds

involving an undisclosed related party transaction. Sino-Forest, following the Muddy Waters

Report, eventually obtained a substantial arbitration award against Xunxiang, only a small

percentage of which was ever recovered.

(h)

Jim Lok

[328] Lok is listed as the manager of 54 companies on the Nominee Company Managers List

and as the nominee shareholder and director/legal representative of some of those companies.

Yosanda sent Lok nominee documents for at least five companies listed as being managed by

Lok.

[329] In his affirmation, Mr. Chan testified that Lok had been the Consul to Suriname for more

than 15 years and was a career diplomat for the PRC government. Mr. Chan’s evidence was that

“it was a ridiculous suggestion by the Plaintiff that I could control Jim Lok.” During cross-

examination, Mr. Chan also denied that Lok ever worked for him.

[330] However, a number of text messages from Lok to Yosanda (for Mr. Chan’s attention) tell a

different story. In these messages, Lok referred to Mr. Chan as “King”; and confirmed that he had

worked for Mr. Chan for many years. For example, in one series of text messages that Lok send

to Mr. Chan, Lok stated:

King, regarding the Hunan matter this morning I’ve been thinking about it and

decided to send you a SMS directly. I heard that Marco [Lam] questions whether

the project can be listed and is suspicious of me so I thought I’d better explain to

you.

Firstly, I have always been involved in this project and to date have obtained the

approval for listing. Secondly, this fundraising has been popular with Hunan, I

saw an opportunity to obtain high return as well controlling this company in the

future, hence why I suggested the investment.

This time the fundraising raised 59 million. 10 million from Hunan was available a

month ago.

Thirdly, if the issue is not as I described, then it’s my personal integrity that is the

problem. All these years working for you I’m most concerned about you

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misunderstanding me. Whatever issue can be resolved, I resolved them myself as I

didn’t want to bother you.

Although up to now I have not made much profit for you, you know that I am

competent. I won’t disappoint you and also hope that you will trust and support

me like before. I will definitely be successful, of that I am confident of.

Fourthly, King, I am really tired now. Although I appear to be successful but in

reality I don’t have anything. It’s year-end again and many things have not been

resolved. Also there were many instances where I couldn’t go ahead even where

there was an opportunity.

I can’t say this in person. Although the SMS is not well written and you may not

see it clearly, but this represents my current honest thoughts. Thanks.

(i)

Liu Feng

[331] Liu Feng is listed as the manager of 10 companies under Project Cambodia. There is little

other information.

(j)

John Zeng

[332] Zeng is listed as the manager of five companies on the Nominee Company Managers List

and the nominee shareholder and director/legal representative of four of those companies. There

are checkmarks under the “Documentation Signed by Nominee Shareholder(s)” column for all

five companies managed by Zeng.

[333] As will be reviewed in the section of these Reasons dealing with Greenheart, Zeng also

held Montsford’s interest in Greenheart on Mr. Chan’s behalf.

(k)

Marco Lam

[334] Marco Lam is listed on the Nominee Company Managers List as the manager of China

Square Industrial Limited (“China Square”) which was a wood log supplier for Sino-Forest.

[335] Lam was a friend of Mr. Chan’s and worked at Sino-Forest from 2001 to 2007.

[336] Lam made payments at the direction of Mr. Chan and Inside Management, including a

HKD$5 million payment to Jack Chen, a salary bonus to James Lau who was a Sino-Forest

employee, and a $1 million payment to Sino-Forest so that Sino-Forest’s auditors would not write

off a wood log deposit paid to Elderbridge, one of Lam’s companies held as nominee for Mr.

Chan.

[337] Lam and his companion, Peggy Lo, were also involved in the purchase of Mr. Chan’s

personal residences in Hong Kong. In particular, Lam paid for the residences at Mr. Chan’s

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direction. The registered owner of the properties is a company named Shiny Tech Hong Kong

Limited (Shiny Tech). From September 21, 2007 until 2011, under declarations of trust, Peggy

Lo held the shares of Shiny Tech in trust for Mr. Chan’s daughters Joyce and Grace Chan. Mr.

Chan agreed during cross-examination that he only trusted Peggy to hold the shares of Shiny Tech

due to his trust and faith in Lam.

[338] Lam also ran Prompt Sky. Prompt Sky received a $25 million wood log deposit under a

contract dated February 14, 2011 that was signed by Mr. Chan on behalf of Sino-Forest and Peggy

Lo on behalf of Prompt Sky.

[339] On February 19, 2011 – four days after Sino-Forest entered into the Prompt Sky

transaction – Mr. Chan’s lawyer, May Tsui, sent Yosanda an email advising that she prepared

documents in respect of the resignation of Peggy Lo and the appointment of Grace and Joyce as

directors of Shiny Tech. Peggy Lo then transferred the shares of Shiny Tech to Grace and Joyce

pursuant to instruments of transfer dated March 1, 2011.

[340] Mr. Chan’s evidence is that it was just a coincidence that Peggy Lo resigned from her

trusteeship for Shiny Tech shortly after signing the Prompt Sky contract. I find the more probable

explanation is that Mr. Chan was concerned with the appearance of Sino-Forest entering into a

transaction to pay a $25 million unsecured deposit to a counterparty that was controlled by Peggy

Lo, who also held the shares of the company that owned his residence in trust.

[341] Further details about many of these people and their relationships and financial dealings

with Mr. Chan and Sino-Forest, will be reviewed in the context of specific allegations, analyzed in

the next several sections of these Reasons.

Conclusion on the Use of Nominees

[342] The evidence, taken as a whole, overwhelming supports the conclusion that Mr. Chan

established a complex network of relationships with third parties, including Lei, Ran, Lam, Chen,

Zeng and others, in which they acted as his nominees, holding positions as directors and officers

and shareholders in corporations beneficially owned or controlled by Mr. Chan. These

relationships were never disclosed to Sino-Forest. Indeed, following the release of the Muddy

Waters Report, they were denied.

[343] Many of these companies such as Yuda Wood, Kun’an and China Square, did hundreds of

millions of dollars of standing timber and wood log trading with Sino-Forest.

[344] A critical component of the BVI model and Sino-Forest’s wood log trading was that the

transactions were at market value and represented the acquisition of valuable assets (in the form of

standing timber and wood logs). This depended absolutely on the counterparties being bona fide

arms’ length entities. The conclusion that many of Sino-Forest counterparties were not bona fide

arms’ length entities, but were secretly controlled by Mr. Chan or other members of Inside

Management working under Mr. Chan’s direction, guts the whole BVI model, as well as the wood

log trading model, of any semblance of validity.

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The BVI Model Fraud

Overview

[345] The BVI model involving the purchase and sale of standing timber in the PRC was the

main contributor to Sino-Forest’s incredible growth. By 2011, the BVI model accounted for 50%

of Sino-Forest’s reported assets, 61% of its reported revenues, and 95% of its reported profits.

The 2011 second quarter financial statements showed the BVI standing timber assets valued at

$2.99 billion.

[346] The plaintiff argues that the entire BVI standing timber model was a fraud. He describes

the fraud as follows.

[347] A Sino-Forest BVI and a Supplier entered into an agreement for the purchase of standing

timber. The Supplier entered into the agreement on behalf of the original owner, typically a rural

collective or village.

[348] The Sino-Forest BVI would hold the standing timber for two to three years before selling

it. Sino-Forest did not sell to end users. It sold to AIs under an entrusted sales agreement. The

AIs were responsible for sales to end users. The AIs were also responsible for payment of all

taxes arising out of the transaction.

[349] The BVI model was cashless. Sino-Forest did not pay cash to the Supplier and did not

receive cash from the AI. Instead, Sino-Forest instructed its AIs to settle Sino-Forest’s receivable

by paying funds directly to a Supplier to whom Sino-Forest owed a payable. The directed

payments by AIs for their purchase of standing timber was typically never to a Supplier in respect

of the same standing timber plantation. The directed payments were further complicated by the

fact that the Suppliers often designated third or fourth parties as their payees to receive payment,

and the AIs often designated third or fourth parties as their payors to make the required payments.

[350] There is no objective evidence to support the existence of cash flows between the AIs and

the Suppliers. Before the Muddy Waters Report the AIs “paid” Sino-Forest’s accounts receivable

100% of the time and, in fact, paid on average 141 days in advance of their contractual

obligations. After the Muddy Waters Report, collections went from 100% to 0%, leaving $877

million of unpaid outstanding accounts receivable.

[351] Nor is there any objective evidence that any of the tax liabilities, the responsibility of the

AIs, were ever paid.

[352] Under the purchase agreement, Sino-Forest lacked key documents to establish ownership

or identify the location of the standing timber plantations. This included plantation rights

certificates issued by the local forestry bureaus and villagers’ authorizations for the purchase from

the local village or collectives. This lack of documentation means that, even now, six years after

the Muddy Waters Report, no compartment of standing timber has ever been proven to be the

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property of Sino-Forest and virtually none (barely 1%) of the compartments of BVI standing

timbers have even been located.

[353] Sino-Forest likewise provided no title documents or maps or other means of identifying

the location of the standing timber sold to the AIs. These documents were necessary to obtain

permits to harvest the timber. Although Sino-Forest was contractually bound to assist the AIs to

obtain the necessary permits to harvest, no AI or customer ever sought that assistance. There is

also no evidence that any AI or customer ever applied to harvest standing timber sold by Sino-

Forest to the AI.

[354] In lieu of key ownership documents, Sino-Forest prepared virtually identical forestry

bureau confirmations for execution by 66 different local forestry bureaus in nine different

provinces. These confirmations all provided that the local forestry bureau was, at the time, unable

to issue a plantation rights certificate but that the bureau “will do so immediately” once its

plantation rights certificate regime was up and running.

[355] The defendant’s forestry law expert testified that, by 2009, 51% of the forested areas in

China had issued plantation rights certificates; by 2010 it was over 82%; in 2011 over 86%; and

by 2013, it was almost 98%. In not one case, however, in over 500 contracts from 2004 to this

day, has any local forestry bureau ever issued a plantation rights certificate to any Sino-Forest

BVI in respect of any BVI standing timber plantation acquired by Sino-Forest.

[356] All the key contractual documents, including the purchase agreements, the entrusted sales

agreements, the set off documents and the forestry bureau confirmations were prepared by a Sino-

Forest employees working for Hung after the end of each quarter with respect to all transactions in

that quarter.

[357] Mr. Chan and Inside Management had undisclosed connections to many of the BVI

standing timber Suppliers and AIs. The plaintiff argues that:

i)

many of the Suppliers had shareholders, officers or contact persons who were former

Sino-Forest employees who appear on the Nominee Company Managers List;

ii)

iii)

iv)

a number of the Suppliers themselves appear on the Nominee Company Managers

List;

Sino-Forest employees including Inside Management were involved in establishing

and administering the affairs (including financial affairs) of many of the Suppliers;

following the release of the Muddy Waters Report, site checks by Sino-Forest’s former

auditors, the IC’s advisors and the Monitor revealed that many Suppliers and AIs had

deregistered as corporations or could not be located at the business addresses provided.

Most simply evaporated; and

Page: 65

v)

similarly, efforts by the IC’s advisors and the Monitor to verify that funds actually

flowed from AIs to Suppliers were 100% unsuccessful. The Suppliers and AIs either

could not be found or refused to disclose any relevant information.

[358] Thus, the plaintiff argues that the BVI standing timber model was a fraud. The Suppliers

and AIs who sold and bought the BVI standing timber were not bona fide arm’s length

counterparties. These counterparties were controlled by Mr. Chan or other members of Inside

Management operating under his direction. The entire BVI standing timber trading business was

a fiction. There were no standing timber compartments bought and sold, there was no money paid

by AIs to Suppliers. It was all a scam to inflate Sino-Forest’s asset values, boost its share price

and enable Sino-Forest to raise money on the debt and equity markets. The proceeds of those

capital raises were used by Mr. Chan to create and operate this fraudulent business and, with the

help of Inside Management, were diverted to Mr. Chan for his own benefit.

[359] The defendant agrees there was a fraud: he says, however, that the fraud was perpetrated

by Muddy Waters. The defendant alleges Muddy Waters shorted Sino-Forest stock and then

published a false, extremely negative report about Sino-Forest in order to make hundreds of

millions from its investment when the share price declined. The defendant points to the fact that

Sino-Forest actually commenced an action against Muddy Waters on precisely this theory. The

defendant faults Sino-Forest for not pursuing that action for what he says was the real fraud on

Sino-Forest.

[360] Fundamentally, the defendant maintains that the BVI standing timer model was bona fide

and that Sino-Forest owned 520,000 ha of standing timber with a value of some $2.9 billion. He

denies that he exercised any control over Sino-Forest counterparties and denies all allegations of

fraud. The defendant says the bondholders acted precipitously, failed to exercise due diligence in

establishing Sino-Forest’s ownership of its assets and improperly pulled the plug on Sino-Forest,

causing its business model to collapse

[361] The evidence leads me to the conclusion that, on a balance of probabilities, the plaintiff is

right. The BVI standing timber model was a fraud. My reasons for coming to this conclusion are

set out below.

Shortcomings in the BVI Model Purchase Contracts and Underlying Documents

[362] Sino-Forest’s BVI model purchase contracts stated that they attached plantation rights

certificates, villager’s authorizations, and survey reports. However, none of these contracts had

attached a plantation rights certificate or a villager’s authorization, nor did Sino-Forest have these

documents in any other form. The “survey reports” that were attached were proven to be too

vague to be of any use. The forestry bureau confirmations that Sino-Forest possessed were not

sufficient to establish ownership or to locate the standing timber plantations. As a result, Sino-

Forest lacked the requisite documentation to find the standing timber assets, much less prove that

it had any ownership interest in them.

Page: 66

The Contracts Were Vague and did not Comply with Industry Standards

[363] The defendant argues that Mr. Borrelli has advanced his theory of fraud in the BVI

standing timber model on the basis of one “sample” transaction, and that fraud cannot be proved

through “samples.” This is not an accurate description of what Mr. Borrelli has done. All of the

purchase and sale contract documentation is in evidence and available to both parties. Mr.

Borrelli testified that the transaction structure and documentation is essentially the same in all 525

contracts. Trial and judicial economy dictated that, unless absolutely necessary, time should not

be devoted to the proof of every piece of documentation for every BVI standing timber transaction

(there are 525 transactions in issue). If the defendant wanted to quarrel with Mr. Borrelli’s

assertion and show the transactions and documentation were not all essentially the same, he had

all of the raw material necessary to do that. With a few extremely minor exceptions, no effort was

made to contradict Mr. Borrelli’s assertion that the standing timber deal structure and

documentation was essentially all the same for every transaction. Mr. Borrelli’s approach was

appropriate in the absence of evidence that more detail was required. There was no such

evidence.

[364] The BVI model purchase contracts state that the Sino-Forest BVI was purchasing a certain

area of forest within a certain province in the PRC. The sample purchase agreement (which is

representative of all of the BVI standing timber purchase contracts) states that the BVI subsidiary

was purchasing 52,426 mu of broad-leaved trees in Gengma County.⁴No other information is

provided identifying the specific location of the trees. Sino-Forest did not have any maps in its

records for its BVI assets. Although the verification reports were intended to identify the location

of the trees, they were deficient in numerous respects and were insufficient to locate the vast

majority of the BVI standing timber assets.

[365] Song Li, the Litigation Trust’s PRC forestry expert, concluded that there were serious

problems with the documentation, such as uncertainty of the purchased subject matter and lack of

detail concerning the tree species and the type of transferred plantation rights. He described a

map as “indispensable in forest transactions” and concluded that “the absence of a map in a

transaction involving such a large-scale forestry area failed to comply with standard industry

practice.” Song Li further explained that the description “broad-leaved tree” is too vague and

refers to multiple species.

No Plantation Rights Certificates

[366] Sino-Forest’s BVI standing timber purchase contracts state that plantation rights

certificates are attached. However, none of the purchase contracts attached a plantation rights

certificate and, as of June 2, 2011, Sino-Forest did not have any plantation rights certificates

available for any of its BVI standing timber holdings. Xu Ni, Sino-Forest’s legal officer, reported

that Sino-Forest’s Suppliers did not have copies of plantation rights certificates either.

⁴A “mu” is a unit of land measurement in China. Fifteen mu is approximately equal to one

hectare.

Page: 67

[367] Mr. Chan’s own forestry expert, Gavin Hao, testified that the plantation rights certificate is

the key document that allows a purchaser to prove that it owns the trees. The plaintiff’s PRC legal

expert, Qin Tianbao, agreed that “[t]he plantation rights certificate is proof of the ownership

relationship of plantation rights.”

[368] Of all the experts, only the defendant’s Chinese resource law expert, Wang Jin, thought

that plantation rights certificates were not required.

[369] The plaintiff’s PRC legal and forestry experts stated that a purchaser would face enormous

risk by concluding a plantation rights purchase without a plantation rights certificate. Mr. Chan’s

PRC forestry expert, Hao, similarly testified that he would always advise clients to inspect the

plantation rights certificate before purchasing trees because otherwise they would not know if they

owned the trees that they were supposedly buying. The plaintiff’s PRC forestry expert, Song Li,

testified that he has never encountered a situation where a company purchased forestry assets

without obtaining a plantation rights certificate.

[370] New-form plantation rights certificates, as introduced in 2000, have four boxes

representing the four different types of plantation rights: land ownership; land use; timber

ownership; and timber use. Mr. Chan testified that the Sino-Forest BVIs did not have plantation

rights certificates because the BVIs were not allowed to have land use rights and, according to Mr.

Chan, plantation rights certificates were only issued for land use rights and not standing timber

rights alone. However, Sino-Forest’s records contained a plantation rights certificate for timber

ownership and timber rights (but not land ownership or land use rights). Hao also testified that in

his personal experience purchasing standing timber without the underlying land use rights, he was

always able to get plantation rights certificate for the standing timber alone.

[371] The defendant’s forestry law expert, Prof. Wang, questioned whether the plantation rights

certificate regime instituted by the State Forestry Administration (“SFA”) in 2000 and re-affirmed

in 2004 was lawfully authorized by the central government. He admitted, however, in cross-

examination that no PRC court or other authoritative body had ever issued such a declaration or

any other finding or conclusion to this effect.

[372] There is a conflict between the evidence of Prof. Qin (who was called by the plaintiff) and

Prof. Wang about whether the applicable laws in 2000 and following authorized plantation rights

certificates only for rights over forest “land” or whether they also included rights to standing

timber without land use rights. Prof. Wang says there were conflicting laws and that the laws

prescribing certificates for forest land were the superior, governing laws. Prof. Qin says the laws

were not in conflict – they are just focused on different aspects of land use – and that, in any

event, the specific excludes the general, so that the laws specific to forestry, providing for separate

certificates for both forestry land and standing timber, prevail over more general land laws

containing rights over forest lands only.

[373] To the extent there is a conflict in their evidence, I prefer the evidence of Prof. Qin. My

principal reasons for this conclusion are as follows. First, Prof. Qin’s opinion on the law was

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supported by and consistent with both the plaintiff’s and the defendant’s experts on forestry

practice.

[374] Second, I accept Prof. Qin’s assertion that, as a practical matter at least, the specific

forestry laws promulgated by the SFA in 2000 (creating a national plantation rights certificate

regime including certificates for both land and standing timber) prevailed over the provisions of

more generic land use laws. And, as Prof. Qin said, even if one thought the SFA forestry law was

ultra vires, a prudent purchaser would still comply with it until its status had been resolved.

[375] Third, while opining that the governing law defined certificates only in terms of forest

land, Prof. Wang did not dispute, as a practical matter, that local forestry bureaus, applying the

forestry law promulgated by the SFA, issued plantation rights certificates for standing timber.

Indeed, Prof. Wang agreed that the implementation of the SFA’s 2000 national plantation rights

certificate regime was quite successful: by 2009, 51% of forest land was covered by plantation

rights certificates, by 2010 over 82%, by 2011 over 86%, and by 2013 almost 98%. Rather, Prof.

Wang’s point was that implementation in the early years was chaotic and uneven, and took time.

Funds were not necessarily made available at the local level to bring about full implementation of

the plantation rights certificate regime. A lot was left to local forestry bureaus. The forestry

bureau confirmations obtained by Sino-Forest in this case, he said, were a valid and common

alternative.

[376] Fourth, Prof. Qin points out that Prof. Wang’s statistics only reflect the new-form

plantation rights certificate regime enacted in 2000. But there were prior forms of certificates of

ownership available. Sino-Forest’s external legal advisors at the time adverted to these as valid

proof of ownership. Prof. Qin testified that if the pre-reform certificates are included in the

statistics, as early as 1998 certificates had been issued for 78.9% of collective forest land

nationwide; by the end of 2000 for 86%; and, by the end of 2003 for 90%. Prof. Qin testified that

even if new-form plantation rights certificates were not available initially, a “considerable

portion” of Sino-Forest’s transactions should have been conducted with one of the pre-reform

certificates. Sino-Forest had no pre-reform certificates of ownership either.

[377] Fifth, I found Prof. Wang’s evidence both esoteric and internally inconsistent on the issue

of plantation rights certificates. Prof. Wang doggedly adhered to his theory of the hierarchy of

laws which, according to him, rendered the SFA forestry law invalid while at the same time

acknowledging that no court or authoritative body ever made a declaration or other ruling to this

effect and that the new form plantation rights certificate regime was robustly implemented

throughout the PRC. It was internally inconsistent for essentially the same reason – although

maintaining that the new-form plantation rights certificate was not lawfully authorized, Prof.

Wang admitted it was implemented with increasing penetration across all forested areas in the

PRC. In fact, nowhere does Prof. Wang ever say, as was maintained by Mr. Chan, that local

forestry bureaus would not issue a plantation rights certificate in respect of standing timber unless

the transferee of the standing timber rights was taking an assignment of the forest land use rights

as well.

Page: 69

[378] The suggestion that Sino-Forest BVIs could not get plantation rights certificates from local

forestry bureaus because the Sino-Forest BVIs were not acquiring any land use rights appears to

have originated with the defendant and Inside Management following the Muddy Waters Report.

Although, at the time, the IC seems to have accepted this proposition, the evidentiary basis upon

which it did so is not clear. The need for acquisition of land use rights as a precondition to the

issuance of a plantation rights certificate for standing timber was certainly not proved on the

evidence in this trial. On the available evidence, I must reject the suggestion that plantation rights

certificates were only available from local forestry bureaus in circumstances where Sino-Forest

was acquiring land use rights. No expert said this was the case. And, the evidence is that the

same forestry bureau that issued Sino-Forest’s confirmation in the sample transaction (saying the

bureau was not in a position to issue a certificate yet but would do so as soon as it had the

certificate regime up and running) had, over a year earlier, issued a new-form plantation rights

certificate for standing timber alone.

[379] Most importantly, the suggestion that Sino-Forest could not get a plantation rights

certificate because it was not acquiring an interest in land is completely at odds with the language

of the forestry bureau confirmations themselves. The confirmations say that the only reason the

certificate is not being issued is because the local bureau had “not yet implemented the

registration of the change in relevant timber ownership.” They do not say that the bureau could

not issue a certificate because Sino-Forest was not acquiring any interest in land.

[380] I accept the evidence of Mr. Chan’s forestry expert and the plaintiff’s experts on Chinese

forestry practice and forestry law. I largely reject the evidence of Prof. Wang. He had no

explanation, given his evidence that plantation rights certificates were increasingly pervasive

throughout the PRC, for why, although every forestry bureau from which Sino-Forest obtained a

confirmation promised to deliver a plantation rights certificate once the certificate regime was in

place, not one of them ever did so. He similarly did not explain why Sino-Forest had no pre-

reform certificates.

[381] The defendant also argues that the absence of plantation rights certificates cannot be

evidence of a fraud because the absence of certificates was known to Sino-Forest’s auditors and to

Sino-Forest’s Board. He points to a 2007 auditor’s letter to management considered at a May

2008 Audit Committee meeting of the Board. The auditor’s letter alludes to the situation that

Sino-Forest was “still in the process of applying for plantation ownership certificates on some of

the new plantations but the certificate approval process takes a considerable amount of time.” The

defendant also points to his counsel’s cross-examination of Ardell and Hyde to support this

proposition.

[382] The evidence does not support Mr. Chan’s contention.

[383] Ardell’s evidence does not touch on the issue of how much of Sino-Forest’s BVI standing

timber was supported by a plantation rights certificate. And Hyde’s evidence was given only in

the context of: a) when he joined the board in 2004; and b) the Audit Committee’s review the

auditor’s letter to management in 2007.

Page: 70

[384] The auditor’s 2007 letter to management is hardly an acknowledgement that Sino-Forest

had no plantation rights certificates for any of its BVI standing timber. All it says is that the

application process is still pending for “some” of the new plantations. I am prepared to accept

that the implementation of the 2000 certificate reforms was still uneven, perhaps even chaotic, in

2007. But in 2007, Sino-Forest’s BVI standing timber assets were a good deal smaller than they

were in June 2011. And, by 2011, the evidence is clear that 86% of all forested land in the PRC

was covered by issued plantation rights certificates.

[385] There is no evidence that, in 2010 or 2011, the Board or any of its committees, or Sino-

Forest’s auditors, were aware that, although plantation rights certificates had been issued in

respect of 82% to 86% of all China’s forested land, not one hectare of Sino-Forest’s 520,000 ha of

BVI standing timber was supported by a plantation rights certificate while essentially all of Sino-

Forest’s WFOE planted plantations were covered by plantation rights certificates.

No Villagers’ Authorizations

[386] Sino-Forest’s purchase contracts also all stated that they attached villagers’ authorizations.

However, no villagers’ authorization was attached to any of the contracts. The report attached to

Xu Ni’s affirmation filed as part of the defence evidence claimed that Sino-Forest only reviewed

the Suppliers’ villagers’ authorization “on a random basis.”

[387] The plaintiff’s PRC legal expert explained that “[a]ll forest resources growing on

collectively owned forest land, including standing timber, are owned by the collective and rights

of ownership are exercised by the collective … A Villagers’ Authorization is documentary proof

that a change in ownership has received the collective organization’s consent.”

[388] The plaintiff’s PRC forestry expert similarly explained that a “Villagers’ Authorization is

a legal requirement with respect to transactions involving collectively owned forest assets and is

also standard industry practice” and that not obtaining a villagers’ authorization “will pose

enormous risks.”

[389] Hao, the defendant’s forestry expert, agreed that without a planation rights certificate or a

villagers’ authorization, there would be no way of proving ownership of the standing timber assets

and that there could be real problems when a company wishing to assert harvesting rights without

a villagers’ authorization went to harvest the trees.

[390] Again, Prof. Wang was the outlier on this issue. Prof. Wang claimed there was no legal

requirement for a two thirds majority approval from a village or local collective. That may be, but

it misses the point. Every BVI standing timber purchase contract entered into by Sino-Forest

contemplated a villagers’ authorization. It was, therefore, in practical terms at least, a protection

available to Sino-Forest and stated to be included in every contract. Yet, no contract attached a

villagers’ authorization.

Page: 71

The Verification Reports Were Too Vague to Identify the Location of the Trees

[391] Sino-Forest’s BVI standing timber purchase contracts stated that they attached survey

reports. However, the documents that were attached were not survey reports but “verification

reports,” which have different specifications. Mr. Borrelli attached every verification report from

August 24, 2003 until the end of December 2011 to his affidavit and attached one translated

example verification report (associated with the sample purchase agreement) as representative of

the others.

[392] The plaintiff’s PRC legal expert concluded that the sample verification report “did not

follow proper procedures for initiating a verification, the technical specifications on which it was

based do not conform to relevant requirements; the report failed to disclose relevant information

about the standing timber in a complete and detailed manner; and the report lacked a ‘Forest

Resource Asset Appraisal Report.”

[393] The plaintiff’s PRC forestry expert, Song Li, concluded that the sample verification report

did “not comply with relevant regulations and standard industry practice.” Song Li testified that,

based on the information in the sample verification report, “it would not be possible to find the

trees” because the asset list should identify the village, compartments, and sub-compartments.

However, the asset list in the sample verification report only contained the town, not the village.

Mr. Chan’s PRC forestry expert, Hao, agreed that the sample verification report was “too general”

because it only had the town but not the village and the reader of the report needs to know the

village in order to find the trees.

[394] During Song Li’s cross-examination, Mr. Chan’s counsel asked him about one other

verification report that appeared to contain the village, town, compartment, and sub-compartment.

Song Li testified that he would be able to locate that particular plantation with that verification

report if he also had a map. There was no map.

[395] Mr. Chan’s counsel did not provide a translated version of that or any other verification

report. The verification report was taken from Annexure 8 to the Borrelli Affidavit, which

references the 525 BVI standing timber purchase contracts and attached verification reports that

Sino-Forest entered into between August 2003 and June 2011. I was advised in argument that, of

those 525 verification reports, only 30 (5.7%) contain the village, town, compartment, and sub-

compartment and there were no maps associated with any of them.

[396] There are also related party concerns regarding the company that prepared most of the

verification reports. Most of the verification reports were prepared by a company called

Zhanjiang Southern. The IC and its advisors reported that Zhanjiang Southern was 10% owned

by Lu Qiding and 80% owned by Qi Shuxiong. Lu Qiding was a former Vice President of a Sino-

Forest subsidiary and worked for Sino-Forest from 1999 to 2010. The IC reported that Qi

Shuxiong acted as a consultant to Sino-Forest subsidiary from 1993 to 2001 and received a fee of

RMB 3,000 per month during that period. The IC advisors discovered that Qi Shuxiong was a

Page: 72

director of two Sino-Forest subsidiaries until 2003 and a supervisor of a Sino-Forest subsidiary

from 1993 to 2006.

[397] The IC reports were admitted into evidence without objection. Both parties rely on various

findings or conclusions embedded in these reports. The evidence establishes that the IC

discovered this information and had these concerns. It does not necessarily prove the information

to be true, although the defendant adduced no evidence to contradict this information. It is, at the

very least, an insight into the quality of the information that was being obtained at the time by the

IC and its advisors.

The Forestry Bureau Confirmations Were Insufficient to Establish Title

[398] Rather than obtaining plantation rights certificates and villagers’ authorizations, Sino-

Forest obtained forestry bureau confirmations for the majority of its BVI standing timber

purchases. These confirmations were all in substantially the same form.

[399] Qin Tianbao, the plaintiff’s PRC legal expert, testified that “[o]ther documents, including

the confirmation from the Forestry Bureau, do not constitute a legal basis for the transferee to

obtain ownership rights to the collectively owned standing timber.” The plaintiff’s PRC forestry

expert similarly testified that confirmations “do not replace the plantations rights certificate.”

They both agreed that there would be enormous legal risk by concluding a standing timber

plantation transaction in the absence of a plantation rights certificate. Hao agreed that all the

confirmation did was contain the forestry bureau’s promise that the bureau would issue a

plantation rights certificate when the system was up and running. As no plantation rights

certificates were ever issued, the confirmations were useless.

[400] The Hong Kong Stock Exchange refused to list Sino-Forest in 2003 because, as Xu Ni

testified, the Hong Kong Stock Exchange “did not believe that the confirmations were the same as

Plantation Rights Certificate and therefore it was not sufficient … the Hong Kong Exchange

would only give considerations to the Plantation Rights Certificate and no other proof.”

[401] During the IC investigation, the IC sought to contact forestry bureaus to verify the

confirmations directly. The IC and its advisors asked Mr. Chan and management for contact

details for the forestry bureau officials to be visited. However, Mr. Chan and senior management

were very reluctant to allow the IC advisors to interview forestry bureau representatives and

refused to provide the contact details; instead, management arranged the meetings themselves.

[402] Serious concerns arose from the forestry bureau meetings, which took place between July

and November 2011. For example, with respect to the Dongkou Country Forestry Bureau, the IC

reported that:

The visit was conducted at the forestry bureau and attended by one person who

Management introduced as a vice chief of the forestry bureau. Subsequent to the

meeting, it was found that the individual had been removed from this position and

his name was not listed on the official forestry bureau website. Further, the IC

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Advisors also obtained verbal confirmation over a direct telephone inquiry to the

forestry bureau that the person they had met no longer held the position of vice

chief.

[403] It was also discovered that “the former vice chief was previously a consultant with SF who

received monthly payment from SF” and that “[h]e mentioned that the decision of issuing

confirmations was made by the previous chief, who had been arrested due to corruption charges,

and the forestry bureau had not issued confirmations to other companies.” The IC further reported

that “[t]here are indications in emails and in interviews with Suppliers that gifts or cash payments

are made to forestry bureaus and forestry bureau officials.”

[404] This evidence from the IC report was, again, not independently proved during the trial. In

the circumstances, I make no finding on whether the specific content of the reported information

was true. The report does provide insight into the quality of the information being received, and

the concerns being raised, by the IC and its advisors at the time.

[405] Of more direct significance is that Mr. Chan and Inside Management at the time expressed

“strong concerns” about approaching the forestry bureaus to confirm or reconfirm existing

forestry bureau confirmations. Management claimed, among other things, that the confirmations

were “confidential” and “could embarrass the forestry bureau officials.”

[406] While this alone raises significant questions regarding the legitimacy of the original

confirmations, it also forced the IC advisors to seek to have the forestry bureaus issue new

confirmations to help validate Sino-Forest’s purported ownership rights to its claimed standing

timber holdings. The IC advisors reported that new confirmations were only obtained in four

instances and that:

In all four instances where new confirmations were obtained, the forestry bureau or

other parties who issued the confirmation did not sign the new form of

confirmation as sought by the IC Advisors but instead prepared their own versions

whereby ownership is not confirmed and only a contractual arrangement between

SF and its Supplier is recognized.

[407] The only expert who placed a great deal of importance on the forestry bureau

confirmations was the defendant’s PRC legal expert, Prof. Wang, who went so far as to testify that

“it’s impossible to have legal risk” if forestry bureau confirmations were obtained. However,

during cross-examination, Prof. Wang admitted:

Q. Okay. And just so we’re clear on this, if a forestry bureau issued a confirmation,

you would expect the forestry bureau to stand behind the confirmation and validate

it; isn’t that right?

A. Correct.

…

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Q. I’m just asking you, if Sino-Forest went to the forestry bureau and said, “Help

us resolve this dispute,” you wouldn’t expect that request to jeopardize Sino-

Forest’s relationship with the forestry bureaus, would you?

A. I don’t think so.

Q. No. And similarly, you wouldn’t expect the forestry bureaus to say that they

would be embarrassed if a request was made for them to confirm the confirmations

that they issued.

A. Right.

Q. And you also wouldn’t expect the forestry bureaus to be saying that they may

have exceeded their authority in issuing the confirmations, would you?

A. Right.

Q. Nor would you expect the bureau to say that the confirmations were confidential

and if they were presented, the bureau would deny issuing them, would you?

A. The confirmations have already been issued to the parties involved, so it seems

that your question is problematic. How can the confirmations be confidential?

Q. Exactly, and if properly issued by the forestry bureaus, there would be no reason

why the bureaus would deny having issued them, is there?

A. Correct.

Q. And similarly, you would not expect the forestry bureaus to say that the

confirmations contradict the position of the Chinese Central Government, would

you?

A. Correct.

Q. And, in fact, if these were legitimately issued certificates, you wouldn’t expect

any of that to happen; isn’t that right?

A. Correct.

[408] All of these representations, however, were made by Mr. Chan and other member of senior

management to the IC advisors in 2011. Senior management expressed strong concerns to the IC

advisors about approaching the forestry bureaus to reconfirm existing confirmations. Prof. Wang

agreed that each of these representations made by Sino-Forest management was inconsistent with

the forestry bureau confirmations being legitimate documents.

If the forestry bureau

confirmations were legitimate documents proving ownership, why would senior management not

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want anyone else approaching the local forestry bureaus? And why would the forestry bureaus

not, immediately upon request, confirm that they were legitimate documents and reissue them to

Sino-Forest as the IC advisors requested?

[409] Thus, if Prof. Wang’s opinion was correct, Mr. Chan and senior management would not

have sought to discourage the IC and its advisors from approaching the forestry bureaus and the

forestry bureaus ought readily to have reissued or confirmed their prior confirmations. Senior

management’s response to the IC’s request and the forestry bureaus’ responses significantly

undermine Prof. Wang’s opinion and constitute strong evidence that the forestry bureau

confirmations were not bona fide and did not in actual fact constitute any evidence of ownership.

[410] In addition, the IC discovered during its investigation that Sino-Forest personnel “prepared

the actual forestry bureau confirmations on notional forestry bureau letterhead on which a forestry

bureau chop was then obtained.” No individual at any forestry bureau is ever named or identified.

The Litigation Trust confirmed that forestry bureau confirmations (along with purchase and sale

contracts and other documents, as set out below) were created by Sino-Forest personnel following

the end of each quarter under Hung’s direction.

[411] During Hung’s evidence, he explained that Kenny Wong (who also prepared all the

contracts and other documents at the end of each quarter) prepared the forestry bureau

confirmations at the same time, and backdated them to the date of the underlying contract.

[412] Mr. Borelli’s affidavit attaches a translation of a representative forestry bureau

confirmation, which was issued by the Gengma Dai and Va Autonomous County Forestry Bureau

in connection with the sample purchase agreement. It states, among other things, that the bureau is

temporarily unable to process the change of registration of ownership because it has not yet

implemented the system for issuing new plantation rights certificates, but that it will do so later

when the system is up and running.

[413] This confirmation, indicating that the Gengma County forestry bureau will issue a

plantation rights certificate once the new ownership system is in place, is dated September 23,

2008. However, Sino-Forest had in its records a plantation rights certificate for standing timber

rights alone issued by the same forestry bureau more than one year earlier, on May 25, 2007.

Accordingly, the statement in the September 23, 2008 confirmation, that the Gengma County

forestry bureau was unable to process a plantation rights certificate because it had not put in place

the new registration system, was incorrect. Hao, the defendant’s forestry expert, therefore found

the forestry bureau confirmation to be “surprising.” In fact, no forestry bureau has ever issued a

plantation rights certificate to a Sino-Forest BVI subsidiary, despite promising to do so in 525

confirmations. Hao also found this “surprising.”

[414] Sino-Forest obtained identical confirmations which made identical representations from 66

different forestry bureaus in nine provinces for 525 standing timber purchase contracts over a six

year period. I agree with the plaintiff; it is completely implausible that so many government

bodies with different levels of progress in forestry reform and different local rules and regulations

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would issue confirmations over that period of time without any change to the language and

without ever issuing a promised plantation rights certificate at a later date.

[415] This is especially so because, even though Prof. Wang doubted the legality of the

plantation rights certificate regime and said its implementation was underfunded and uneven

throughout China, his own research demonstrated a high level of successful implementation of the

new-form plantation rights certificate in the period relevant to this case - 2009 to 2011 (and

beyond). As noted earlier, at p. 44, para. 49 of his report, Professor Wang set out that:

 by 2009, just over 50% of the relevant forest areas had new form plantation

rights certificates issued

 by 2010, the number had increased over 82%

 by 2011, over 86% of forest land had issued new form plantation rights

certificates, and

 by 2013, almost 98% of forest land was subject to the new form plantation

rights certificates.

[416] Hao, the defendant’s forestry expert, cited almost identical figures in his evidence in chief.

It is implausible, given these levels of implementation, that no forestry bureau ever issued a

promised plantation rights certificate from 2009 to 2011 (or still to this day).

[417] Subsequent events also make it clear that the forestry bureau confirmations do not have the

value Mr. Chan has ascribed to them in this proceeding. I say this because, if Mr. Chan was right,

Sino-Forest would have been able to demonstrate that it owned its BVI standing timber holdings

long ago and the market would have been willing to pay for Sino-Forest’s BVI standing timber

assets either during the two sales processes supervised by the court, or, following the Emerald sale

to New Plantations in 2016.

Shortcomings in the BVI Model Sales Contracts and Underlying Documents

The Contracts Were Too Vague to Find the Standing Timber Assets

[418] Similar to the BVI standing timber purchase contracts, Sino-Forest’s sales contracts with

the AIs were also too vague to locate the standing timber that Sino-Forest was selling. The

translated sample Sales Agreement is substantially similar to all other BVI standing timber sales

agreements. It says that the Sino-Forest BVI was selling “broad-leaved tree standing timber

occupying an area of 5,939.00 mu in Yunnan Province.” It does not refer to a village or town.

During cross-examination, Hao agreed that Yunnan is much bigger than Germany; the contract

told the purchaser, therefore, that Sino-Forest was selling the AI a 400 hectare plantation of trees

located somewhere in an area the size of Germany.

Page: 77

[419] This problem was complicated by the fact that, although Sino-Forest bought large

plantations from its Suppliers, it sold them off two or three years later in numerous, smaller plots

to multiple purchasers. In the sample purchase transaction, the Sino-Forest BVI bought from

Yuda Wood 52,426 mu of standing timber in Gengma County, Yunnan Province in September

2008. In February and March 2011, over a period of seven weeks the Sino-Forest BVI partitioned

that plantation off in nine separate sales contracts with four different AI counterparties. The

sample sales contract is with Shanghai Liangze Trading Company for 5,939 mu, but there are

eight other sales contracts, some with other purchasers, accounting for the rest of the 52,426 mu.

How did each purchaser know which plot of trees it was purchasing?

[420] Mr. Chan, who signed all of these contracts, gave evolving evidence about this problem.

He first said on his examination for discovery that he did not know what information was given to

the AIs to identify the trees. Later, at trial, he testified to his understanding that Sino-Forest gave

the AIs the purchase contract and verification report. He said he learned that later, during the

New Plantation deal with Emerald. Then, in cross-examination, Mr. Chan said if the customer

could not find which trees they had bought, they would get help from the forestry bureau. When

pressed on how the forestry bureau could assist with this problem, he then said the AI purchaser

could also get help from the surveyor if they needed it.

[421] In the end, Mr. Chan was driven to say that the four buyers of the nine plots of trees in

Yunnan Province could get together and agree, amongst themselves, which portions of the

original 52,426 mu plantation was theirs.

[422] This situation exposes a critical flaw in the logic of Mr. Chan’s claim that these were bona

fide arm’s-length deals with real customers selling real trees. How could any of these purchasers

know what part of Sino-Forest’s 52,426 mu plantation it had purchased? How could a purchaser

ever harvest any trees if it could not identify which plot of trees were the trees it owned and was

entitled to harvest? Mr. Chan had no explanation for this other than to throw up his hands and say

the purchasers could figure it out.

[423] Given the enormous scope for future problems for the purchasers due to uncertainty on

such an important issue, it is simply incredible that any buyer would conclude a deal under these

circumstances. But not only were hundreds of these transactions concluded, the buyers paid

(earlier than necessary on average) 100% of the time. It is also incredible that there is no record

of any AI or ultimate purchaser ever having a problem reselling or harvesting the trees, or

complaining to Sino-Forest or having to sort out, with other purchasers of the other subsections of

original Sino-Forest acquisitions, who owned what.

[424] This is, I conclude on the preponderance of probabilities arising from the evidence, strong

evidence that the transactions were not real. There were no problems because there were no

purchasers of trees that anyone ever planned to cut down. It is further evidence that the

transactions were a sham.

Page: 78

No Underlying Documents

[425] Unlike the BVI standing timber purchase contracts, the sales contracts did not have any

attachments. However, under the terms of the sales contracts, the Sino-Forest BVI agreed to

provide the purchaser “with copies of the documents relating to the standing timber under this

Agreement as reference materials for the entrusted sale.” There is no evidence that any AI ever

asked for these “reference materials.”

[426] As noted above, during cross-examination Mr. Chan stated that “we provide them a copy

of the purchase contract.” However on his examination-for-discovery, Mr. Chan testified that he

had no knowledge of what documents the Sino-Forest BVIs agreed to provide and that he did not

believe that he ever asked anybody.

No Harvesting Permits

[427] Under the sales contracts the Sino-Forest BVI also undertook to apply for licences and

permits such as felling licenses and transport permits for the AI, and would provide the AI with

other “necessary assistance.”

[428] The plaintiff’s forestry law expert, Prof. Qin, gave evidence that the lack of a plantation

rights certificate affects the ability to obtain a felling licence. Mr. Chan’s own PRC forestry

expert, Hao, previously authored a report stating that, without the plantation rights certificate, “a

forest owner normally cannot obtain a harvest permit.” Hao agreed during cross-examination that

a forestry company needs a plantation rights certificate to be able to obtain a felling permit in the

PRC. Even Mr. Chan agreed that “you can’t get a harvesting or felling license without a

plantation rights certificate.”

[429] Since Sino-Forest did not have plantation rights certificates for its BVI standing timber

plantations, it could not have obtained the felling licenses it promised the AIs it would obtain.

[430] During cross-examination, Mr. Chan said it was his understanding that, as required by the

contract, the Sino-Forest BVIs assisted the AIs in applying for the permits. Mr. Chan was again

impeached by previous evidence given on discovery when he testified that “the buyer will take

care of it themselves ... The buyers, they will do it.” When confronted with the conflicting

testimony, Mr. Chan told a third story - Sino-Forest would go to the Suppliers for help as the

Suppliers had the plantation rights certificates. However, that could not be the case because,

according to Xu Ni’s evidence, Sino-Forest’s Suppliers did not have plantation rights certificates

either.

[431] Mr. Chan’s inconsistent evidence on this important point highlights again how little

commercial sense the BVI standing timber model made for any of the parties, given that the end

purchaser (the AI or another purchaser who bought from the AI) could never cut down the trees;

critical documentation was simply not available. True arm’s-length third parties would not buy

timber plantations if they had no right to harvest the trees.

Page: 79

[432] Despite the fact that neither Sino-Forest nor its customers could have obtained the felling

permits, neither Mr. Chan nor Hung were aware of any AIs or end-customers ever complaining

that they could not harvest the trees that they had purportedly purchased or seeking assistance

from Sino-Forest or its subsidiaries in obtaining felling licences.

Perfect Accounts Receivable and Early Payment Versus No Collection

[433] Even though the AIs and customers lacked the necessary documentation to prove they had

the right to harvest the trees they had purchased, Sino-Forest’s records show that it had perfect

accounts receivable collections from its sales of BVI standing timber prior to the release of the

Muddy Waters Report. The books of the company report that every AI paid every dollar owed to

Sino-Forest. Not only did they pay in full, but the AIs paid, on average, over four months before

the payments were actually due under the sales contracts. This is not normal commercial practice.

[434] In spite of this history and despite its best efforts, the Monitor was unable to collect any of

the $887 million in outstanding BVI standing timber receivables that were on Sino-Forest’s books

at the time of its CCAA filing. The 100% collection rate became a 0% collection rate once there

was a Court officer in place to test the validity of the transactions.

[435] As noted earlier, the Monitor could not track down any of the AIs to collect payment.

Engen testified that, “[u]nfortunately, we had nobody to talk to about how it [the outstanding

receivable] could be paid.”

Contracts and Other Documents Were Created After the End of Each Quarter

[436] As noted earlier, the IC discovered that following the end of each quarter, Hung instructed

a subordinate, Kenny Wong, to prepare BVI model purchase contracts, forestry bureau

confirmations, plantation purchase requisition forms, and sales agreements for all the transactions

that had taken place during the preceding quarter. Kenny Wong prepared the documents using a

“mail merge” function on his computer that allowed him to produce a set of documents for each

transaction with the push of a button.

[437] Hung testified that Kenny Wong was able to do this by merging the standard form contract

documents with an Excel spreadsheet which Hung continually updated throughout the quarter.

Hung said that Ip would call him each time there was a new standing timber deal. Hung scribbled

the details onto post-it notes, he said, and then later, when he had time, entered the contract

particulars onto the spreadsheet.

[438] The purchase contracts stated that the parties “have signed this contract on” a date earlier

in the quarter. This was untrue - the contracts were created and signed following quarter-end.

The forestry bureau confirmations were also backdated to the date of the underlying contract. The

sales contracts similarly stated that the parties “have signed this Agreement on” a date within the

quarter, which was also untrue because they too were produced following the end of each quarter.

Page: 80

[439] In connection with each BVI standing timber sale, Sino-Forest employees would also

create documents containing instructions and confirmations pertaining to the set-off payments.

The set-off documents included: (a) a letter from Sino-Forest to the Supplier that a payment would

be made to the Supplier by the AI; (b) a letter from Sino-Forest to the AI instructing it to make the

set-off payment; (c) a letter from the AI advising Sino-Forest that it made the payment; and (d) a

letter from the Supplier to Sino-Forest confirming that the Supplier received the payment. Even

though the letters from the AIs and Suppliers were on their letterhead and appear as though they

were created by the AIs and Suppliers, they were actually created by Kenny Wong following the

end of each quarter.

[440] There is no evidence that these documents were ever actually sent from Sino-Forest to the

Suppliers or AIs. There is also no evidence, in the form of cheques, accounts or bank withdrawals

or deposits, that any payments between AIs and Suppliers were ever actually made.

[441] It is also important to know that the setoffs did not relate to the purchase and sale of the

same standing timber plantation and were by no means as simple as just described. In many

cases, Sino-Forest counterparties did not themselves make or receive the payment. Suppliers

frequently directed payment not to themselves but to other parties once removed, or twice or three

times removed, from these transactions. Likewise, AIs often did not make the purported

payments themselves but caused them to be made by parties not in any contractual relationship

with Sino-Forest at all who were twice, three times, or even further removed from Sino-Forest and

the AI. This made any tracing or confirmation of actual payments virtually impossible.

BVI Model Counterparties Provided No Supporting Documentation During the IC

Investigation

[442] Mr. Chan claimed to have relationships with the Suppliers and AIs. During its

investigation, the IC and its advisors asked Mr. Chan to facilitate meetings with the Suppliers and

AIs at which meaningful information would be made available. This process was significantly

delayed by lack of cooperation from Mr. Chan and Inside Management. However, even when the

IC advisors did finally manage to set up meetings with a few AIs and Suppliers in September and

October 2011, Mr. Chan and Inside Management declined to attend those meetings in spite of the

IC advisors’ express requests that they do so.

[443] Under the BVI standing timber model, the Suppliers and AIs conducted extraordinary

volumes of business with Sino-Forest. Given the volume of lucrative business they were

conducting with Sino-Forest, it is reasonable to expect they would have done everything possible

to assist in demonstrating that their transactions with Sino-Forest were real; doing so would have

preserved a significant source of business for them. In fact, the exact opposite proved to be true.

[444] In every case, the Suppliers and AIs declined to show any financial records that would

demonstrate the validity of the BVI standing timber transactions. The excuses provided included

a desire to avoid scrutiny regarding tax, media exposure, and that Sino-Forest should have copies

of the same documents. The limited documents that were provided by some interviewees were

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not the documents requested and did not relate to any of the transactions that the IC sought to

confirm.

[445] The excuses provided by the Suppliers and AIs do not stand up to scrutiny. With respect

to tax, Suppliers and AIs readily acknowledged the transactions had occurred, so providing

evidence of these same transactions could not reasonably have created any tax problems. The

same is true regarding media exposure - there could be no more exposure from providing

documents to confirm transactions they readily admitted had taken place. In any event,

confidentiality measures were put in place. The IC reports even redacted the names of the AIs

and Suppliers. And, if Sino-Forest had copies of the same documents already, there is no reason

for the AIs and Suppliers to be reticent to provide them.

[446] Not one Supplier nor one AI provided a single plantation rights certificate, villagers’

authorization, or financial record validating or verifying the purported BVI standing timber

transactions.

No Evidence of the Existence of Counterparties from Site Visits

[447] With one exception, none of the IC advisor meetings with AIs and Suppliers arranged

through senior management took place at the business addresses of the AIs and Suppliers shown

in Sino-Forest’s records or at the registered addresses noted in their corporate filings.

[448] When the IC advisors made unannounced visits at offices or locations of record for AIs

and Suppliers, they found no evidence of operations at any of those locations, except for one AI

that had changed its name.

[449] The Monitor had a similar experience making unannounced site visits to Suppliers and

AIs. The Monitor found little to no evidence of the existence of Sino-Forest’s purported

counterparties. Some of the locations were not specific enough to be found at all, others turned

out to be forestry bureau offices, others were incorrect (supposedly on the 18^thfloor of what

turned out to be a three storey building) or were simply not occupied by the AIs or Suppliers.

These entities had vanished.

Mr. Chan and Inside Management’s Control of Contracting Parties

Yuda Wood

[450] During the period 2005 to June 2011, Yuda Wood was Sino-Forest’s largest BVI standing

timber Supplier, receiving 14% of the total consideration “paid” to all BVI standing timber

Suppliers during that period.

[451] In August 2011, the IC advisors located a number of documents suggesting questionable

relationships between Sino-Forest’s senior management team and Yuda Wood. This information

was not volunteered by Mr. Chan or senior management. The information was only discovered

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through the investigations of the IC advisors, including their review of massive volumes of

company records.

[452] Like many of Sino-Forest’s purportedly arm’s-length counterparties, Yuda Wood was

owned and managed by former Sino-Forest employees. For example, Huang Ran worked at Sino-

Forest from 1997 to 2007 and made a monthly salary of RMB 6,200 (approximately CAD$1,200)

at the time he left. Huang Ran was the legal representative and executive director of Yuda Wood.

Huang Ran is also listed as the manager of other BVI and WFOE standing timber Suppliers on the

Nominee Company Managers List.

[453] Other former Sino-Forest employees were also involved in managing Yuda Wood and

were the named shareholders of Yuda Wood’s parent company, Sonic Jita.

[454] The IC uncovered documentary evidence that Ho managed Yuda Wood’s bank account.

Hyde emphasized during his examination-in-chief that:

The item that stuck most significantly with me was that Sino-Forest, and

specifically George Ho, was managing the bank account for Yuda Wood. Which

was a rather surprising revelation, that this was supposed to be an arm’s length

Supplier, and I hadn’t run into anything like that in my experience in the financial

industry.

[455] May Liu, who worked for Ho, monitored Yuda Wood’s bank accounts and asked for Ho’s

authorization regarding Yuda Wood payments (using non-Sino-Forest email accounts, including

Eminens accounts). For example, in an email dated February 8, 2010 from May Liu to Ho, she

said:

Yuda has received the remittance of ¥4,516,000 from Yang Jun. This amount is

for the payment of Gengma’s 58,000 mu timber amount. Do you agree to the

payment? Please provide your instruction!

[456] In an email from Ip to Ho, copied to Mr. Chan (again, using non-Sino-Forest email

accounts), Ip said they had to help Yuda Wood pay its taxes because Huang Ran’s account had no

money.

[457] May Liu also sought Ho’s approval when Ran requested more control over Yuda Wood’s

affairs. This indicates that Ho, Sino-Forest’s CFO and VP Finance, had the authority to determine

whether to give Ran more control over what was supposed to be Ran’s company. In the same

email, May Liu also noted that Yuda Wood did not have reasonable operating expenses compared

to its revenues. This strongly suggests that Yuda Wood was a shell company with no real

operations.

[458] During the IC investigation, Mr. Chan swore a statutory declaration in which he deposed

that:

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(a) he did not hold a direct, indirect or beneficial shareholding interest in Yuda Wood, Beijing

Sonic Jita or Hong Kong Sonic Jita or their affiliates, and was not involved in their

operations and did not have other personal arrangements with or entitlements from these

entities; and

(b) to his knowledge, no officer, director or employee of Sino-Forest held a direct, indirect or

beneficial shareholding interest in Yuda Wood, Beijing Sonic Jita or Hong Kong Sonic

Jita or their affiliates or was involved in their operations, and that to his knowledge, no

other officer, director or employee of Sino-Forest had any other personal arrangements

with or entitlements from these entities.

[459] During Mr. Chan’s interview with the IC advisors on August 24, 2011, he was shown an

email, on a non-Sino-Forest server, from Simon Yeung, a member of Inside Management, to Mr.

Chan’s friend, Marco Lam, recommending that Lam borrow money in the name of Yuda Wood

because Yuda Wood was “a wholly foreign owned enterprise, and its operation is 100% controlled

by us.” Mr. Chan was also shown another document in which Ip and Yeung discussed the

capitalization of Yuda Wood. During the interview, Mr. Chan retreated from the blanket denials

contained in his statutory declaration saying, “if I had seen these documents, I would have to

investigate before signing. … I would have to ask for answers.” At trial, Mr. Chan admitted that

he has never asked for answers from Sino-Forest’s senior management regarding these

documents.

[460] Rather, Mr. Chan engaged in speculation, split hairs on possible translation issues and

repeatedly refused to acknowledge that what Yeung was plainly saying could possibly imply that

Yeung and senior management at Sino-Forest “100% controlled” Yuda Wood. I found Mr.

Chan’s responses to these documents, as with so many others, incredible. I do not accept Mr.

Chan’s evidence. I accept the evidence of the contemporaneous document, authored by one of

Mr. Chan’s chief lieutenants, viewed in the context of all of the other evidence, as meaning what

it says: “us” means Mr. Chan and Inside Management; Yuda Wood was “100%” controlled by

them.

Kun’an

[461] Kun’an was another major BVI standing timber Supplier.

[462] Kun’an appears on the Nominee Company Managers List with Huang Ran listed as the

manager, Yu De Gang listed as a 60% shareholder and the director/legal representative, and Tian

Jian Guo listed as the other shareholder. Similar to Yuda Wood, these individuals are all former

Sino-Forest employees. For example, Yu De Gang left Sino-Forest on October 31, 2008. He was

making a monthly salary of RMB 5,250 (approximately CAD$1,000) at the time.

[463] On January 7, 2009, within months of Yu De Gang leaving Sino-Forest, someone named

Joe Chan sent an email to Yosanda addressed to “Allen” that set out a list of “lucky names” for a

“Guangxi company.” Mr. Chan testified that Joe Chan is a friend of his who is a “master in Feng

Page: 84

Shui.” One of the names proposed by Joe Chan was “Kun’an.” Kun’an was incorporated thirteen

days later on January 20, 2009.

[464] During cross-examination, Mr. Chan initially testified that Huang Ran did not ask him to

choose the company name. However, when confronted with his previous sworn evidence given

during his examination for discovery - that Huang Ran did ask him to choose the name - Mr. Chan

changed his evidence and testified that Huang Ran did ask him to choose the company name on

behalf of Huang Ran’s friend, Yu De Gang.

[465] On January 9, 2009 a Sino-Forest BVI named Amplemax Worldwide Ltd. entered into a

contract with Kun’an for the purchase of 2,860 hectares of standing timber for RMB 60,515,400.

This was 11 days before Kun’an was incorporated and two days after Mr. Chan received the

Kun’an name from Joe Chan.

[466] Thus, a junior Sino-Forest employee making RMB 5,250 per month left Sino-Forest and,

within a couple months, had a company, the name of which was chosen by Mr. Chan, which

acquired 2,860 hectares of standing timber for RMB 60,515,400, and entered into a contract to sell

those trees to Sino-Forest before the company was even incorporated. Mr. Chan thought this was

unremarkable. He testified that “in China even a chauffeur can be a big boss … what I’m saying

is that in China driver, junior guys, that can make a fortune, yes.”

[467] In an email dated September 29, 2009, Yeung emailed Huang Ran, copying Ip and another

individual named Wu Qianhui who worked for Ip, calling Huang Ran “the head of the pirates.”

Yeung told Ran that the Kun’an company “has to step up to the plate to make the cooperation

with us perfect to reach the goal set by” Ip. Yeung told Ran to “urge Jun Yang” to take steps to

make Kun’an “look like a company with a certain scale, not an empty shell company” such as

“getting a business hotel room on a long term basis, there must be an office.” Jun Yang was also

a former Sino-Forest employee who left in October 2008 – the same time that Yu De Gang left.

[468] Yeung also directed that Jun Yang should “collect all of the contracts signed between

Kun’an and Sino-Forest” and “prepare accounts receivables and payables; if there are accounts

receivables, send collection letters in the name of Kun’an company.”

[469] Yeung further stated in the September 29, 2009 email that “For big money account, it

takes two stamps to withdraw money, one is Jun Yang’s stamp, one is Hua Li’s stamp from

accounting.” Hua Li was one of Mr. Chan’s nominees on the Nominee Company Managers List.

Yeung then stated that “For small money account, it also takes two stamps to withdraw money,

one is Jun Yang’s stamp, one is the stamp of cashier payable or president Wu.” Wu was a Sino-

Forest employee who worked under Ip. A Sino-Forest employee, therefore, was required to sign

off on payments to be made by Kun’an.

[470] Yeung concluded this email by saying:

In summary, Kun’an needs to be built like it were a new company, Jun Yang is the

head of this task, and you are the head of Jun Yang. Move, you cannot wait

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anymore, otherwise, when the books are getting bigger and bigger, it will be a

mess.

[471] By the time of the September 29, 2009 email, Kun’an had entered into at least 12 BVI

standing timber purchase agreements with Sino-Forest subsidiaries for a total of 45,127 hectares

with a total consideration of over RMB 1.2 billion.

[472] By way of contrast to this large and rapid growth, Hao, Mr. Chan’s PRC forestry expert,

testified that when he worked at a mature PRC forestry company called StoraEnso, it took 500

employees dealing with multiple suppliers seven years to acquire 90,000 hectares of trees. Yu De

Gang and Jun Yang, minor clerks with Sino-Forest, were able to acquire and re-sell 45,127

hectares valued at over $1 billion RMB in less than one year through Kun’an, an “empty shell

company,” that Mr. Chan himself described as a “one-person, briefcase company.”

[473] Apart from Kun’an, three of Sino-Forest’s other BVI standing timber Suppliers also

appear on the Nominee Company Managers List; they are Zhanjiang Bohu, Jiangxi Senchangtai

and Yongzhou Maoxiang.

[474] The IC and the Monitor reported that they learned from Mr. Chan that some of the AIs had

“backers.” Mr. Chan recommended contacting these backers to collect outstanding receivables.

The Monitor reported that Sino-Forest was unable to contact those backers. Mr. Chan testified

during cross-examination at trial that he spoke to the backers and that the backers told him that no

one tried to reach out to them during that period. When asked who the backers were, Mr. Chan

answered that two of them were Lei Guangyu and Liu Feng. Both appear on the Nominee

Company Managers List as two of Mr. Chan’s nominees.

[475] Lei testified at the trial. He was asked during cross-examination if he was a backer of an

AI. Lei responded by saying that, in respect of one AI, “I have only lent money two times or three

times to them, and the amount is small.” Lei said he had no control over that AI. When asked if

he would be the right person to speak to about collecting a debt owed by that AI to Sino-Forest, he

responded that “[t]here is no relationship with me at all.”

[476] The concept of a “backer” was Mr. Chan’s attempt to explain why it should not be

surprising that former junior Sino-Forest employees like Huang Ran and Yu De Gang emerged

overnight as timber barons. However, there is no independent evidence of these backers and the

only alleged backer to testify, Lei, denied ever playing such a role.

[477] Sino-Forest earned significant profits buying and selling standing timber plantations.

Because of the system of setoffs and directed payments, the Suppliers and AIs not only knew who

each other were, they knew how much was paid by and to Sino-Forest for the standing timber

plantations.

[478] Mr. Chan could not explain why the Suppliers and the AIs, knowing of each other, would

not start doing deals directly, eliminating Sino-Forest as the middle man, and sharing some or all

of the profit reaped by Sino-Forest between themselves.

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[479] The defendant also says Muddy Waters made all this up. While it is possible that Muddy

Waters could have published a false report to profit from its short position, I find that theory is not

in accordance with the probabilities arising out of the evidence in this case.

[480] I say this because, if the Muddy Waters allegations were false, Sino-Forest ought to have

been able to readily disprove the Muddy Waters allegations. As the plaintiff argued, real

companies with real assets can prove that they own those assets. That is why it was relatively easy

for Sino-Forest to prove it had the cash it was supposed to have, certain of the WFOE assets it was

supposed to have, the shareholding in Greenheart it supposedly had, and certain of the

manufacturing assets it was supposed to have.

[481] By contrast, Sino-Forest was manifestly unable to disprove the Muddy Waters allegations

regarding the BVI standing timber assets. Mr. Chan still, after six years, provided no credible

explanation of why the BVI standing timber assets have remained so elusive.

[482] Sino-Forest was unable to prove it owned $2.9 billion worth of BVI standing timber

assets. The defendant’s own forestry practice and resource law experts support this conclusion.

Sino-Forest had hundreds of forestry bureau confirmations, from 66 different forestry bureaus in

nine provinces, promising the delivery of a plantation rights certificate as soon the local bureaus

had the new form certificate system in place. Prof. Wang and Gavin Hao both testified that by

2011, 86% of all forested areas in China had issued plantation rights certificates. By 2013, this

figure had risen to almost 98%. Yet, not one of the 66 forestry bureaus has ever issued a

plantation right certificate in respect of any BVI standing timber subject to those hundreds of

forestry bureau confirmations.

[483] Sino-Forest was unable to prove that the Suppliers and AIs involved in the standing timber

trading transactions were legitimate, arm’s-length businesses who were paid, or paid, valuable

consideration for the BVI standing timber. Following the publication of the Muddy Waters

Report, these Suppliers and AIs essentially evaporated. The AI’s had historically “paid” ahead of

schedule 100% of the time. Collection on Sino-Forest’s accounts receivable owing from AI’s fell

to zero upon publication of the Muddy Waters Report, leaving unpaid obligations owing to Sino-

Forest of $887 million.

[484] The defendant argues that Sino-Forest’s relationships were based on trust and that the

Suppliers and AIs did not want to deal with the new people who took over Sino-Forest’s daily

operations – the IC and its advisors and, later, the court-appointed Monitor. A similar argument is

also made to explain the unusually close connections between Sino-Forest and counterparties such

as Yuda Wood and Kun’an.

[485] I am unable to accept this explanation. The Suppliers and AIs had been engaged in

hundreds of millions of dollars’ worth of trading with Sino-Forest. If these were legitimate

businesses, there is absolutely no reason why they would not have wanted to continue their

trading relationships with Sino-Forest. I do not accept that trust, or lack of trust, lay at the heart of

this reluctance. Not only were the Suppliers and AIs not banging down Sino-Forest’s door, they

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completely disappeared. The defendant attempted to justify the unusually close connections with

supposedly arms’ length counterparties on the basis that oversight was necessary to make sure

Sino-Forest’s money was deployed by its counterparties appropriately. This seems to me to be the

opposite of a relationship of mutual trust, not evidence of its existence. It is against this backdrop

that the specific allegations against Mr. Chan and his senior management team must be assessed.

[486] In my view, the evidence supports the conclusion that Mr. Chan and Inside Management

secretly controlled counterparties in many, if not all, of the BVI standing timber transactions.

High Profits with No Value Added

[487] The BVI model was cashless, meaning that Sino-Forest was not providing the capital

outlay needed to acquire the standing timber assets. This is to be contrasted with wood log

trading in which Sino-Forest paid large unsecured deposits to secure the supply of logs.

[488] Given that Sino-Forest did not have plantation rights certificates or villagers’

authorizations, the transactions were risky for Sino-Forest’s AIs. Sino-Forest also never obtained

(nor was asked to obtain) the necessary harvesting or transportation licenses for its customers

despite contracting to do so. Sino-Forest did not even pay taxes in the BVI model transactions, as

the AIs were contractually obliged to do that.

[489] Because of the system of directed payments, the AIs were well aware of who Sino-Forest’s

Suppliers were, and the Suppliers were well aware of who Sino-Forest’s AIs, or customers, were.

Given that Sino-Forest did not finance these transactions, it is unclear exactly what Sino-Forest

brought to the table. There has been no plausible reason advanced for why the AIs would, in the

face of substantial margins being earned by Sino-Forest for simply buying and holding standing

timber plantations for two to three years, not have contacted the Suppliers directly and avoided the

middleman. Likewise, there has been no plausible explanation for why the Suppliers would not,

at least over time, have dealt directly with the AIs, and increased their own margins.

[490] All Sino-Forest did under the BVI model was hold standing timber plantations for two to

three years and then sell them at relatively high margins. In the sample transaction set out in the

Borrelli Affidavit and Song Li’s expert evidence, Sino-Forest purchased standing timber for RMB

3,224/mu and then sold it less than two and a half years later for RMB 10,829.52/mu - a threefold

increase. Song Li described such a price differential as “extremely uncommon.” BVI standing

timber accounted for 50% of Sino-Forest’s assets but over 95% of its profits. This must be

contrasted with Sino-Forest’s efforts, post-2004, under the WFOE model.

The BVI Model Versus the WFOE Model

[491] According to Mr. Chan, the BVI model was designed to circumvent restrictions on foreign

companies carrying on business in the PRC. When the law changed in 2004 to permit WFOEs to

purchase and sell standing timber, the BVI model was no longer necessary. Despite its undisputed

limitations and obsolescence, however, the BVI model did not begin to fade away; instead, it

reported ever-increasing growth between the years 2004 and 2011.

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[492] If the BVI model was legitimate, there is no reason why Sino-Forest should not have been

able to replicate this success in the WFOE model. However, the cash-based WFOE model, in

contrast to the profits earned under the BVI model, actually incurred a net loss in 2011.

The Poyry Reports

[493] The defence has placed considerable reliance on the fact that Poyry conducted annual

valuations of Sino-Forest standing timber plantations to support its contention that the BVI

standing timber assets were legitimate.

[494] The Poyry reports were made available in both the CCAA and Emerald Plantations sales

processes. Despite this, no buyer (including the ones that Mr. Chan himself advised) ever came

forward with an offer to pay for the BVI standing timber assets. If the Poyry reports were good

evidence of the legitimacy of the BVI standing timber assets, one might reasonably have expected

someone in the industry to have acted on these reports during the two sales processes. No one

did. There is no evidence that the Poyry BVI standing timber valuations formed any part of what

New Plantations was willing to pay for the remaining Sino-Forest assets in 2016.

[495] Nor is there any evidence that New Plantations has been able to leverage these reports into

any material value since April 2016.

[496] The Poyry reports were admitted into evidence on the consent of both parties. However,

no witness from Poyry testified about these reports. They are contentious. The plaintiff is suing

Poyry for professional negligence in connection with these reports. The defendant wishes to rely

upon these reports as proof that Sino-Forest’s BVI standing timber assets existed and that they

were worth $2.9 billion.

[497] The reports themselves discuss the basis upon which they were prepared. The evidentiary

value of these reports is, not surprisingly, significantly qualified by the terms of the reports

themselves. For example, Poyry says under “Assumptions and Limiting Conditions” in its report

of February 24, 2004 that:

(a)

details concerning the location and physical characteristics of the forest assets were

“taken from data provided by” Sino-Forest;

(b)

Poyry has taken legal descriptions from sources thought to be authoritative but

“neither assumes nor suggests responsibility for either”;

(c)

(d)

Poyry has undertaken a “limited visual inspection”; and

legal matters are beyond the scope of the report.

This report goes on to note that stands of timber were measured using GPS or by manually

interpreting detailed contour maps. Several stands were evaluated this way but the number of

these evaluations was “limited by the time consuming nature of this operation.”

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[498] Later reports contain similar qualifications. In 2007, the Poyry valuation report added that

it “had not reviewed any of the contracts relating to the forest land use rights or cutting rights or

forest purchases.”

[499] In 2008, the Poyry annual valuation report states that it relied on data supplied by Sino-

Forest and that Poyry did not review any purchase contracts. In Appendix 4, the report says Sino-

Forest provided hand-drawn maps and that from the information provided by Sino-Forest, Poyry

drew a representative sample of 1,639 ha or .5% of Sino-Forest’s forest estate. The report goes on

to say, however, that of the 1,639 ha sample selected, only 301 ha represented purchased

plantations whereas 1,338 ha involved planted plantations (which are not in issue in this action).

[500] The 2008 report also noted, for the first time, that its valuation methodology was “more

challenging” in the case of Sino-Forest because it not only managed and harvested forests but

actively traded standing timber assets. As a result, “the composition of Sino-Forest’s estate can

change quite significantly from one year to the next.” Poyry’s valuation methodology was based

on a cash flow model which assumed Sino-Forest would hold the standing timber assets to

maturity and harvest them. This, of course, was not the BVI standing timber model.

[501] In 2009, Poyry only sampled .3% of Sino-Forest estate. That sample was not broken down

by planted versus purchased plantations, so the results are even more attenuated in relation to any

assessment of BVI purchased plantation forestry assets held by Sino-Forest. In neither 2008 nor

2009 did the report differentiate between BVI and WFOE assets.

[502] There was also documentary evidence at trial that several people, including people from

Poyry, expressed doubts about the utility of the reports at the time. Poyry personnel expressed

concerns that their valuation approach was incorrect as it was based on a fundamental

misunderstanding of Sino-Forest’s business model, i.e., management and harvesting at maturity as

opposed to active trading in standing timber plantations. Apparently, Poyry refused to permit

Sino-Forest to include its 2009 valuation as supporting document for a Sino-Forest bond issue.

One former Poyry employee was recorded in a memo as saying that “It is my concern that the

December 2009 Sino-Forest valuation report is unsafe, and may substantially over-value the

resource.”

[503] Although hearsay, most of this information was admitted into evidence on the basis that

the nature and quality of the evidence would go to weight rather than admissibility. Given that the

evidence is so controversial, the inability to cross-examine about the preparation of the Poyry

reports and the quality of the due diligence performed places a significant limitation on the weight

to be placed on them. In addition, it is clear that the Poyry reports were based on forestry data

that was provided by Sino-Forest management. The Poyry valuations were based on a small

sample to begin with and the sample of BVI purchased forestry assets (the assets that are at the

heart of this action) was essentially insignificant. In any event, the Poyry reports simply do not

address the question of whether Sino-Forest actually held valid title to its forestry estate, including

the BVI standing timber assets.

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[504] The Poyry reports constitute some evidence that an independent forestry expert placed

significant value on Sino-Forest’s forestry assets. In the context of the issues in this trial,

however, and given the limitations outlined above, I conclude that the Poyry reports do not

provide any reliable evidence that Sino-Forest held valid title to its BVI standing timber

plantations or that the BVI standing timber assets Sino-Forest owned were worth $2.99 billion.

The Jingtian & Gongcheng Legal Opinions

[505] Similarly, the defendant also relies on the fact that legal opinions concerning ownership of

forestry assets were obtained from the Jingtian & Gongcheng law firm between 2004 and 2010.

The defendant argues he was entitled to rely on these opinions as support for his assertion that

Sino-Forest subsidiaries held valid title to BVI standing timber assets. Xu Ni attached twelve

legal opinions from the Jingtian & Gongcheng firm which address Sino-Forest’s title to various

standing timber assets (WFOE and BVI).

[506] For similar reasons to those relating to the Poyry reports, only limited weight can be given

to these opinions. No witness attended to testify in support of these opinions. The full scope of

the due diligence and the assumptions and information upon which these opinions were based is

not set out. The opinions are, again not surprisingly, significantly qualified. For example, the

opinions typically state that they assume all documents are authentic and that all seals, signatures

and “chops” are authentic. A “chop” is a very important personal identification and authorizing

stamp in Chinese culture and business.

[507] The March 10, 2007 opinion (Exhibit 8 to the Xu Ni affidavit), states that it is based,

among other things, on “the relevant facts confirmed by Your Company” and on certain

documents “given your assurance that the documents made available are complete and genuine.”

The opinion goes on to state that a foreign company that has the “new version” of a “Forest Rights

Certificate” issued by the government at the place where the forest is located can prove its lawful

rights over the forest. It goes on to note that where the new version of a Forest Rights Certificate

is not yet available, the “old version” of a forest rights certificate can still be regarded as valid

evidence for proof of forest rights. If even the old Forest Rights Certificate cannot be processed, a

letter of confirmation from the local forestry administration “can be regarded as a valid document

of proof that the foreign company is in possession of the ownership of the forest they have

acquired.”

[508] Because the very foundation of the legal conclusions is based on the validity and veracity

of information and documents provided by management at Sino-Forest to the law firm, the nature

and scope of disclosure, and what, exactly, that disclosure was, is essential to placing any reliance

on the legal opinions in the context of the issues presented in this case. In these Reasons, I have

found that the documents supporting the BVI standing timber purchases were not bona fide and

the information provided to Sino-Forest’s professional advisors (and to the public) was not honest

or complete. For these reasons, I do not find the Jingtian & Gongcheng opinions (or the Poyry

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reports) to be of significant probative value on the question of the validity of Sino-Forest’s title to

the BVI standing timber assets.⁵

[509] As well, as is the case with the Poyry valuation reports, these opinions were available to

all potential and actual purchasers of Sino-Forest’s assets before, during and after the CCAA sales

process. The evidence is that no one, in spite of these opinions, was prepared to ascribe any

material value to the BVI standing timber assets.

The Area Verification Exercise

a) Background

[510] It is a recurring theme in the defendant’s argument that the bondholders gave up on Sino-

Forest too early, concluded that a restructuring was the only way to go and, in doing so, failed to

exercise due diligence in the verification and realization of Sino-Forest’s BVI standing timber

assets.

[511] One particular manifestation of this argument is that the bondholders decided to shut down

an area verification exercise being conducted by Indufor, an independent forestry consultant, even

though, the defendant alleges, Indufor was meeting with considerable success. The bondholders

did this, Mr. Chan argues, because they just wanted to get on with the restructuring.

[512] I cannot accept this argument for two reasons. First, it fails to recognize that the

bondholders were highly motivated to maximize their returns. Second, it is not supported by the

evidence.

[513] The bondholders held Sino-Forest debt of about $1.8 billion. The evidence in this case is

that they realized somewhere in the vicinity of about $438.5 million from the sale of all of Sino-

Forest’s assets, resulting in a shortfall to the bondholders of well over $1 billion. If the BVI

standing timber had value, the economic motivation of the bondholders was to find and unleash

that value, not to walk away from it. The defendant has not explained in any satisfactory manner

why the bondholders would shut down what the defendant says was a successful, albeit a time-

consuming, process if it held out the promise of a much larger recovery.

[514] I have no doubt the bondholders lost faith in senior management and the company, which

contributed to their decision to pursue restructuring. But that loss of faith was, in significant

measure, the result, not the cause, of the lack of success of the area verification exercise. All of

the evidence supports this conclusion.

⁵Section 123 (4) of the CBCA provides a defence to a director or officer who relied in good faith

on audited financial statements or other professional reports. In my view, Mr. Chan cannot rely on

these defences because his “reliance” was not in good faith. There was a failure of honest and

complete disclosure. Mr. Chan and Inside Management provided false information to and

concealed information from Sino-Forest’s auditors and other professional advisors.

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[515] One of the functions of the IC was to verify the existence and ownership of Sino-Forest’s

timber assets, including the BVI standing timber. The IC advisors were able to tie all relevant

purchase and sale contracts of standing timber back to Sino-Forest’s reported revenue. What was

less apparent from the company’s records was how to locate Sino-Forest’s BVI standing timber.

[516] The proof of concept exercise was developed to determine if specified forest areas, in

particular the forest covered by the BVI standing timber purchase contracts, could be located and

quantified by independent forestry experts. Sino-Forest retained two experts, Indufor and Stewart

Murray.

[517] There is significant disagreement between the parties about the results of this proof of

concept exercise. There is disagreement about whether the asset verification process was, or was

not, pursued with sufficient diligence and whether it was or was not successful in locating BVI

standing timber assets.

[518] The plaintiff says the asset verification process was a dismal failure with respect to BVI

standing timber.

[519] Maps were essential to the area verification process. This was because the contracts and

supporting documents themselves did not provide enough information to locate the standing

timber plantations. The only maps actually produced were provided by former senior

management. After 10 months of effort, Indufor was able to locate:

(a) 93% of WFOE planted plantations;

(b) 44% of WFOE standing timber plantations; and

(c) 1% of BVI standing timber plantations.

According to Indufor, the BVI standing timber represented about 64% of the total volume of

timber assets and 85% of the book value.

[520] Maps covering the BVI standing timber were not forthcoming. Because 10 months of

intensive work resulted in the verification of only 1% of the BVI standing timber assets, Sino-

Forest concluded the exercise was futile and instructed Indufor to discontinue further area

verification work. The Monitor and the bondholders supported that decision.

[521] The defendant argues that the proof of concept exercise was successful and that Indufor

was “steadily” verifying Sino-Forest’s timber assets throughout 2012. This area verification

process only stopped at the insistent of the bondholders who, by October 2012, were focused on

the CCAA process rather than preserving Sino-Forest as a viable, ongoing entity.

[522] In his evidence, Hung testified that, pre-Muddy Waters, the Sino-Forest Resource

Department was able to get maps and locate Sino-Forest plantations when needed. Hung testified

that he often required access to maps and location information to allow Poyry, auditors, and

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insurers to visit standing timber plantations. During Poyry’s annual valuations, the Resource

Department would provide a map to Poyry, either from maps in its possession or by borrowing

maps from the forestry bureau. Poyry, Hung testified, never raised an issue with the maps

received and, in fact allegedly remarked on the precision and reliability of those maps. As noted

earlier, no one from Poyry testified at the trial.

[523] The final IC report summarized Indufor’s work on the proof of concept:

(a)

maps of two timber compartments were provided by Sino-Forest to Indufor. These

maps were borrowed from the contracted survey company which, in turn, had

borrowed them from the forestry bureaus;

(b)

(c)

the two maps clearly showed the extent of each compartment’s boundary that

corresponded to those in surveys related to the contracts;

each compartment’s boundary was able to be spatially located for use with a

geographic information system;

(d)

(e)

the forestry experts located and physically visited the two forest compartments;

the use of recent high-resolution satellite images allowed the removal of gaps and

areas of un-stock forest from the calculation of each compartment’s net stocked

area; and

(f)

the net stocked area calculated by the verification process for the two

compartments slightly exceeded that stated in the forestry survey reports attached

to the Sino-Forest purchase contracts for the compartments.

Over subsequent months, Indufor was only able to obtain five additional maps.

[524] The defendant says there is a credible explanation for this paucity of maps. Evidence from

forestry experts working for the IC as well as Sino-Forest management and witnesses who

testified at the trial was to the effect that maps are sensitive in China for security reasons and

could be subject to state regulation. There were restrictions on forestry maps being provided to

foreigners and on the digitization or copying of these maps.

[525] As part of its investigation, the IC also referred to its understanding from management that

maps were not readily available for continuing possession by persons trading in standing timber

without a lease, as was the case with the transactions under Sino-Forest’s BVI model.

Management indicated to the IC that maps can usually be borrowed from forestry bureaus (but not

retained) and were used by survey companies as part of Sino-Forest’s due diligence.

[526] In addition, the computers that Indufor used were isolated from the Internet for security

reasons. Sino-Forest staff was often required for certain data transfer functions and the

digitization process could only be conducted in Sino-Forest’s Guangzhou office.

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[527] Following publication of the Muddy Waters Report, Sino-Forest also became highly

vulnerable to staff departures and lacked direction from knowledgeable senior management.

Concerning the BVI standing timber, the organization had been decimated with staff departures.

In particular, knowledge of the location, village and forestry bureau relationships no longer

existed in a number of cases. This had an adverse impact on Sino-Forest’s business, financial

condition and operations.

[528] All of this evidence, according to the defendant, helps explain why it took so long to

produce certain maps and why the verification process went so slowly for BVI standing timber

assets.

[529] The defendant argues the initial proof of concept was a success. Indufor expanded the

scope of its review between January and July 2012 to cover an increasing amount of Sino-Forest’s

forest estate. By the time the project was stopped, Indufor had located seven BVI standing timber

plantations: the two located during the proof of concept exercise; and five more which were

located subsequently.

[530] The defendant argues that the asset verification project did not come to an end because

maps were unavailable. Rather, he argues that it was terminated because the process was slow

and expensive and the bondholders wanted to reduce ongoing cash outlays and focus on

restructuring which was by then a “foregone conclusion.”

[531] Mr. Chan points to Indufor’s final report to the effect that, as of October 15, 2012, it had

obtained access to hundreds of compartment maps for BVI purchase contracts and WFOE

plantation rights certificates that cover 158,735 ha representing close to 20% of the 806,685 ha of

Sino-Forest’s reported timber assets. The defendant argues that it is not true that Sino-Forest was

unable to obtain maps for its standing timber assets.

[532] The defendant also relies on certain email correspondence introduced by Mr. Chan in his

evidence to support the argument that Sino-Forest staff continued to obtain maps and provide

them to Indufor through October 2012.

[533] Although he concedes the asset verification process was time consuming, the defendant

says there is no evidence to suggest that the process could not be completed and the total timber

assets, including the BVI standing timer of Sino-Forest, verified. The defendant argues that a

negative inference should be drawn against the plaintiff for his failure to call Indufor, who were

responsible for the area verification exercise.

b) Analysis

[534] It must be remembered that the area verification process was only designed to do one thing

– find the standing timber plantations. It offered no comfort or assistance on the even more

important questions of whether Sino-Forest owned or could prove that it owned the BVI standing

timber assets on its books or what they were actually worth.

Page: 95

[535] I find that the area verification project was terminated because it was a long, labour

intensive and costly process which produced little or no reliable information. After 10 months of

work, only seven BVI standing timber plantations, 1% of the total BVI standing timber, could be

located. The maps which allowed Indufor to locate those seven plots were all provided by Sino-

Forest management. As a result, the provenance of these maps is unknown and their validity must

be suspect. The bona fides of those maps was never proved.

[536] The only real success in the exercise was in relation to forest plantations that are not in

dispute – the WFOE planted plantations.

[537] The Court-appointed Monitor, Engen, was clear in his evidence in chief and during his

cross-examination that, from his perspective, the area verification process was not making

headway due to the lack of maps. Ten months after the Indufor asset verification process had

been initiated, the Monitor reported to the Court, in his tenth report of October 18, 2012 (at pp. 11

- 12) that:

(a)

(b)

(c)

Sino-Forest had been able to provide Indufor maps for the majority of the

compartments which are on leased lands (i.e. WFOE plantations);

Sino-Forest had been able to produce less than 1% of the maps for compartments

which did not include land leases; and

the maps were provided by certain of the former senior management group of Sino-

Forest.

[538] The Monitor also concluded that it was not clear “how the Company would be able to

identify the relevant areas of timber purchased by the BVI’s at the time of sale or harvesting.”

The Monitor advised that, in light of recent results from attempts at obtaining maps, Indufor had

been instructed by Sino-Forest to discontinue further area verification work.

[539] During cross examination, Engen said:

Q. It was requested by the affected creditors to shut it [the area verification

process] down?

A. Yes. I think that, consistent with what we've said in our reports and in other

places, the fact that they weren't doing anything in September, because they didn't

have any maps, was an overriding thing. So I think if they had, if there had been,

you know, the 26 maps had been produced and they were making good progress,

certainly the Monitor would have been saying, no, we don't think you should wind

down this process. But because there was no maps and no progress was being

made, we all agreed that it was futile to continue to pay them for not making any

progress.

[540] It was also suggested to Engen that new maps were being produced after September 2012:

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Q. And you don't know, Mr. Engen, you're not there, whether or not Indufor

received further maps after September 2012, do you? You just don't know, do

you?

A. To the best of my knowledge, they did not. It would have been a very big deal

for many, many people if Indufor had received a map in September. Because we

would have been saying, "Hold on. If maps are now being delivered, let's continue

this process".

[541] In June 2012, Indufor was told to focus on BVI standing timber exclusively and was given

a deadline of September 2012. The process was continuing in August 2012, when the Monitor

reported that “work being performed by third party consultants to verify [Sino-Forest’s] forestry

estate is on-going and estimated to take years to complete and/or to verify a substantial portion of

the estate.”

[542] Chronologically, the last document referring to additional maps was received by Xu Ni on

September 14, 2012. Xu Ni received an email from another Sino-Forest employee who said maps

for BVI contracts “were received yesterday… Do we need to provide to Indufor?” No maps were

attached to the email.

[543] There is no evidence Xu Ni responded to this email or took any further action.

Specifically, there is no evidence this email, or any further maps, were forwarded to or brought to

the attention of Mr. Judd Martin (who had taken over from Mr. Chan as CEO) or Indufor.

[544] Although Xu Ni did not tell Mr. Martin that additional maps had been obtained, she

testified it was “possible” that this information was sent directly to Martin by someone else.

Although Martin was scheduled to testify as part of the defendant’s case, the day following Xu

Ni’s cross examination counsel for Mr. Chan advised that Martin would not be testifying. As a

result, there is no evidence Martin was ever advised of the September 14, 2012 email to Xu Ni.

Nor is there any evidence that additional maps were ever produced or provided to Martin or

Indufor.

[545] To the contrary, a comparison of Indufor’s September 30 and October 30, 2012 reports

suggests that no new maps came to light in October 2012. Indufor’s September report refers to

maps permitting confirmation of 5,542 ha of BVI standing timber. Indufor’s final report of

October 30, 2012 also refers to the same final number, confirmed BVI standing timber of 5,542

ha. In its final report, Indufor did report that as of October 15, 2012, three of the randomly

selected 26 BVI sale and purchase agreements had been mapped and that maps had been

requested for other compartments. However, nothing that happened in October 2012 resulted in

any increase in the volume of BVI standing timber that Indufor was able to locate. The only

reasonable inference is that no new maps helpful in locating BVI standing timber were provided.

[546] I am also unable to accept the argument that Chinese government security concerns

prevented Sino-Forest from obtaining maps. I say this because Sino-Forest was able to procure

Page: 97

maps for almost all (93%) of its WFOE planted plantations and a significant portion of its WFOE

standing timber. While it is true that a BVI company is not a Chinese company and that a WFOE

is, both are by definition wholly foreign owned. I cannot accept that a security policy of the

People’s Republic of China would be so credulous and porous that it would fail to account for this

obvious problem.

[547] Mr. Hao, the defendant’s forestry expert, could not accept this either. He agreed that a

policy for security purposes that restricted a foreign company’s access to maps but placed no

restriction on a PRC company that was wholly foreign owned made no sense. “For those like

government authorities,” he said, they are “still a foreign company.” The evidence of Song Li and

Qin Tianbao, the plaintiff’s Chinese forestry and law experts, was to similar effect.

[548] When Indufor was engaged to attempt to find BVI standing timber plantations, Indufor

explained that it required maps. Unlike the WFOE planted plantations for which Sino-Forest had

maps, management was ultimately only able to produce maps for 1% of Sino-Forest’s claimed

BVI standing timber holdings. The process was terminated because, according to independent

management and the Monitor, it was costly and producing no positive outcomes.

[549] Chandler Fraser Keating, the bondholders’ and then Emerald Plantations’ forestry experts,

were equally unsuccessful, reporting that any efforts to find the BVI plantations beyond what

Indufor had done would be “impractical as there was virtually no one who knew the exact location

of the forest.” This report is consistent with the expert evidence this Court heard from both Mr.

Chan’s and the plaintiff’s forestry experts, which is set out above.

[550] The lack of maps cannot be blamed on the departure of Sino-Forest staff. It was in Mr.

Chan’s interests, and the interests of Inside Management, that maps be found. They, perhaps

more than anyone, were incentivized to prove Sino-Forest owned the BVI standing timber. Yet,

nothing was or has been forthcoming from Mr. Chan or Inside Management. Despite the fact that

EPHL received all of Sino-Forest’s assets (including its operations and subsidiaries), not one

Sino-Forest employee was able to point EPHL to the BVI assets. Based on the absence of

evidence that the BVI assets existed, Brough, and later Dubow, concluded that the assets were not

real and ascribed them a “nil” value in EPHL’s financial statements.

[551] The former assets of Sino-Forest have now been in the hands of New Plantations for more

than a year. Even with Mr. Chan’s assistance, New Plantations has not produced any evidence

that it has been able to find, prove title to or monetize any purported interest in the BVI standing

timber assets. It has not paid anything to EPHL under the RAPA arising out of the sale of any

BVI assets. The best Mr. Chan can offer in this regard is revealed in the evidence of Alvin Lim,

who testified that New Plantations is “still in the process of investigation.”

[552] Six years have passed since the Muddy Waters Report was released and nobody , despite

enormous financial incentives to do so, (incentives motivating Sino-Forest, the bondholders, the

purchaser Emerald, the purchaser New Plantations and Mr. Chan himself), has been able to locate,

confirm ownership of, or monetize the BVI assets. When considered in the context of all the

Page: 98

evidence, the inescapable conclusion is that Sino-Forest did not own the BVI assets that it claimed

to own.

[553] All of the evidence considered as a whole, leads to the inescapable conclusion that the BVI

standing timber model was a fraud. The logical and reasonable inferences to be drawn from the

totality of the evidence, based on a preponderance of probabilities, are that:

i)

the defendant and others inside and outside Sino-Forest management operated an

elaborate system of nominee companies ultimately controlled by Mr. Chan or persons

acting under his direction;

ii)

many of these nominees companies were major Suppliers of BVI standing timber;

iii)

the Suppliers and AIs were not bona fide arm’s length sellers and purchasers of BVI

standing timber;

iv)

the BVI standing timber transactions were paper transactions. Sino-Forest employees

under the direction of Mr. Chan and his cadre of Inside Management created the

contracts, the supporting documents and the so-called evidence of directed payments

made between the AIs and Suppliers. No consideration in fact passed between these

entities;

v)

Sino-Forest subsidiaries did not hold title to BVI standing timber plantations;

vi)

the value of Sino-Forest’s BVI standing timber, represented at $2.99 billion in 2011,

did not exist. Because Sino-Forest did not own these assets, this value was nil; and

vii)

the defendant and members of Inside Management exploited weaknesses and

ambiguities in the PRC forestry regulatory regime to perpetrate this fraud and to

conceal it from scrutiny by Sino-Forest, external auditors, other professional advisors,

independent members of the Board and the public.

The WFOE Standing Timber Fraud

[554] The WFOE model involved both purchased plantations and planted plantations. The

plaintiff has made no claims concerning the WFOE planted plantation model in this proceeding.

[555] However, the plaintiff does allege that a significant proportion of the purchased plantation

side of the WFOE business was a fraud that was implemented through fictitious transactions with

counterparties that were secretly controlled by Mr. Chan and Inside Management.

[556] According to Sino-Forest’s records, Kun’an was Sino-Forest’s largest supplier of WFOE

purchased plantations from August 2007 until July 2011. Yuda Wood was also a large supplier.

Both these Suppliers were controlled by Mr. Chan and Inside Management.

Page: 99

[557] Nine of Sino-Forest’s WFOE purchased plantation Suppliers are listed on the Nominee

Company Manager List. Many of those companies were “peripheral companies” for which Zeng

obtained signed nominee documents. There are also other connections alleged between Mr. Chan,

Inside Management, and the WFOE purchased plantation counterparties, all of which are detailed

in Annexure 6 to the Borrelli Affidavit.

[558] Sino-Forest lacked plantation rights certificates for the majority of its WFOE purchased

plantations. The IC and the Litigation Trust collectively were only able to locate plantation rights

certificates accounting for 17.5% of Sino-Forest’s WFOE purchased plantations, almost all of

which were actually issued in the names of Sino-Forest’s Suppliers rather than the Sino-Forest

subsidiary that supposedly owned the plantations. Sino-Forest did not have plantations rights

certificates for over 82% of its claimed WFOE purchased plantations.

[559] Sino-Forest also did not have maps for the majority of its WFOE purchased plantations.

When Indufor was retained to attempt to locate Sino-Forest’s claimed timber holdings, Sino-

Forest was unable to produce maps for 86.6% of its purchased plantations under the WFOE

model. In particular, Sino-Forest produced maps for 13,780 of the 31,371 hectares (or 44%) of its

purchased plantations where Sino-Forest leased the underlying land but was unable to produce a

single map for any of the 71,577 hectares where Sino-Forest did not lease the underlying land. By

contrast, Sino-Forest was able to produce maps for 93% of its WFOE planted plantations.

[560] The essential hallmarks that make the BVI standing timber model a fraud are present in the

WFOE purchased plantation model as well. The counter parties were not arm’s length. In spite of

the fact that by 2011, 86% of China’s forested area was covered by new form plantation rights

certificates, only 17.5% of the WFOE purchased plantations had certificates.

[561] No explanation was offered by the defence for this anomaly. There is no evidence of any

material realization of value from these purported assets.

[562] In the circumstances, I can only conclude that, like the BVI standing timber, the majority

of the WFOE purchased plantations were never actually owned by Sino-Forest and had no value.

The Wood Log Trading Cash Gap Fraud

Overview

[563] Part of Sino-Forest’s business model included wood log trading. The purchase,

importation and sale of logs was a significant contributor to the overall revenue of Sino-Forest.

From 2005 to 2010, revenue from wood log trading ranged from 15% to 25% of Sino-Forest’s

total revenues. Wood log trading did not, however, have a comparable contribution to Sino-Forest

profits. Profit from wood log trading over the same period ranged from 1 to 3% of Sino-Forest’s

total profits.

Page: 100

[564] The plaintiff claims that from 2006 to 2011, under the wood log trading model, Sino-

Forest made cash payments to its wood log suppliers for the purchase of wood logs. Purchases

were generally funded by, and settled through, trust receipt credit facilities guaranteed by Sino-

Forest. Thus, a bank would pay the wood log supplier for the purchase of the logs and Sino-

Forest and its subsidiaries would incur a liability, secured by a letter of credit, to repay the bank.

[565] Sino-Forest would then immediately sell those logs to a purchaser, receiving payment

mostly through remittance agents. However, on average, only about 70% of wood log sales

accounts receivable were paid in cash by Sino-Forest’s customers. The remaining 30%, on

average, was “paid” by directing set-off payments from Sino-Forest’s wood log trading customers

to its BVI standing timber Suppliers. These directed payments were used to satisfy Sino-Forest’s

accounts payable to BVI standing timber Suppliers. This had the effect of diverting “new” money

into the BVI standing timber model and increasing the stock of BVI standing timber assets held in

Sino-Forest’s portfolio.

[566] The plaintiff takes the position that, since the BVI model was a fraud, the recorded set-off

payments from wood log trading customers never actually occurred (or, if they did, resulted in no

value to Sino-Forest). The result was a “skimming fraud” in which Sino-Forest paid out $239.8

million more in cash to its wood log suppliers than it received from its wood log customers. The

difference is the “cash gap.”

[567] Further, after the Muddy Waters Report, essentially no outstanding obligations owed to

Sino-Forest for wood log trading were paid. The non-payment of the wood log trading

receivables after June 2, 2011 led to a “further cash gap” of $93.4 million, for a total loss of

$333.2 million.

[568] The defendant argues that this claim is barred by the doctrine of affirmation and the

Limitations Act. Further the defendant argues that the direction of payment for log sales into BVI

standing timber assets was bona fide; it enabled Sino-Forest to meet its obligations to BVI

standing timber Suppliers and resulted in the acquisition of valuable BVI standing timber assets.

[569] I have concluded that the preliminary issues raised by the defendant, affirmation and the

limitation period, do not bar this claim. I have further concluded that the diversion of funds into

BVI standing timber was a fraud. The diversion of these funds did not result in the acquisition of

any asset or produce any value for Sino-Forest.

[570] My reasons for reaching this conclusion are set out in detail below.

Were the Contracts Affirmed?

[571] The defendant raises two preliminary issues regarding the cash gap fraud claim, as well as

a substantive defence.

[572] First, the defendant argues that the basis of the cash gap fraud is that Sino-Forest loaned

money to its subsidiaries to finance the wood log trading model and was never repaid. Once these

Page: 101

loan agreements were affirmed when Sino-Forest conveyed them under the CCAA Plan, the

plaintiff was precluded from making a claim for damages on the basis that these loans were

advanced as a result of fraudulent misrepresentations.

[573] I have dealt with this argument earlier in these Reasons. In my view, the doctrine of

affirmation has no application in the circumstances of this case. I therefore reject the defendant’s

first preliminary argument.

The Limitations Defence

[574] The defendant’s second preliminary argument is that the facts underlying this particular

allegation of fraud were known to independent management as early as 2008 and, in any event, by

the end of 2011 and, therefore, upon the plaintiff’s appointment in 2013. The defendant therefore

argues that the claim based on the wood log trading cash gap fraud was known or discoverable

more than two years before the claim was advanced by way of motion to amend the statement of

claim in August 2016. The defendant argues, therefore, that the claim is barred by the Limitations

Act.

[575] Section 4 of the Limitations Act, 2002, S.O. 2002 c.24 provides that a proceeding shall not

be commenced in respect of a claim after the second anniversary of the day on which the claim

was discovered. Section 5(b) defines “discovery” as “the day on which a reasonable person with

the abilities and in the circumstances of the person with the claim first ought to have known” of

the injury, loss or damage alleged to have been caused by the defendant’s act or omission.

[576] The defendant argues that the cash gap fraud is a new claim. The plaintiff is required to

plead fraud with a high level of particularity. The plaintiff’s statement of claim before the motion

to amend contained specific allegations identifying 16 distinct “frauds” advanced by the plaintiff.

These did not include the cash gap fraud allegations. The motion to amend, by adding the cash

gap fraud, resulted in the pleading of a seventeenth allegation of fraud. It is, therefore, a new

“claim” which must meet the test of discoverability in order to stand.

[577] There are essentially two grounds for the defendant’s argument on discoverability. First,

the defendant points to a governance document prepared under the supervision of Thomas

Maradin in 2008. The December 2008 TRE NI 52-109 Material Weakness Disclosure Form for

“Netting Accounts Receivable with Accounts Payable on Timber Operations” describes that log

trading customers of Sino-Forest sometimes satisfied accounts receivable for wood log purchases

by paying the money to Sino-Forest’s standing timber Suppliers. The internal control report goes

on to identify the potential for fictitious or unauthorized setoffs on accounts receivable and

payable being made.

[578] In cross examination, the plaintiff conceded that the fictitious or unauthorized setoff of

accounts receivable and payable described in the internal control document prepared by Maradin

for the years 2009 through 2011 is what the plaintiff alleges occurred in the wood log skimming

fraud.

Page: 102

[579] In addition, Maradin, the author of the TRE NI 52-109 internal control report, worked for

the plaintiff as a consultant following the plaintiff’s appointment from August 2013 through to

February 2016. Maradin’s responsibilities were to provide guidance and direction in the

investigation of Sino-Forest’s historical transactions and the use and destination of the funds

raised by Sino-Forest.

[580] During Maradin’s cross examination, he explained that he personally investigated the

transaction process set out in the TRE NI 52-109 for netting out accounts receivable from wood

log trading customers by directing the customer to pay Suppliers in the BVI standing timber

model. He also confirmed that there were corporate documents confirming the transactions and

receipt of funds by the BVI Suppliers.

[581] Second, during the IC Investigation, counsel to the IC, Jean Fraser of Osler Hoskin &

Harcourt LLP, identified the circumstances of the very transaction the plaintiff relies on as the

archetypal example of the wood log trading cash gap fraud transactions. In her email, Ms. Fraser

expressed her concern that more money was going into the BVI structure from Sino-Forest’s

offshore funds by wood log trading customers settling accounts receivable by paying accounts

payable to BVI Suppliers. Fraser wrote:

If this is the case, BVI funds outside of China or accounts receivable offshore in

foreign exchange are being transferred by way of set off into China. There is a

concern that such set-off arrangements may be problematic for a Chinese foreign

exchange control perspective and may also add to the problematic BVI

assets/trapped funds within China.

[582] Fraser’s email uses a sample transaction to illustrate how funds due from a wood log

trading customer were being set off against Sino-Forest’s accounts payable to a Supplier in the

BVI standing timber model. The sample transaction is the transaction relied on by the plaintiff,

whereby Suifenhe Longtai (a wood log customer) partially paid its account receivable owed to

Sino-Forest by paying the accounts payable of Sino-Forest’s BVI subsidiary, Rich Choice, to a

standing timber Supplier, Zhanjiang Bohu.

[583] The plaintiff conceded in cross-examination that even if he did not review the email

himself, the email was available to his counsel, Mr. Staley, who was an addressee on the email. In

any event, Fraser’s email is appended to the Second IC Report. There is no doubt the plaintiff had

access to the second IC Report and its conclusions. Indeed, the IC investigation is specifically

referenced in the Amended Statement of Claim at paras. 53-60.

[584] Thus, the defendant argues, since at least 2011 Sino-Forest, through its counsel (and, since

his appointment in 2013, the plaintiff), has had the documents and underlying facts the plaintiff

now relies on to support the wood log trading cash gap fraud claim that was not made until

August 2016.

Page: 103

Analysis of Limitations Act Issue

[585] There are two issues to be addressed:

(1)

(2)

is the cash gap fraud a new cause of action or, to use the language of the

Limitations Act, a new “claim” asserted by way of a “proceeding” for the first time

in August 2016; and, if it was,

was that claim “discoverable” before August 2014, that is, at least two years prior

to the motion for leave to advance that claim.

[586] A cause of action means a factual situation, the existence of which entitles a person to

obtain from the court a remedy against someone else. It is well settled that a new legal conclusion

drawn from facts already pleaded will not constitute a new cause of action. It is also the case that

proposed amendments which serve to particularize a cause of action that has already been pleaded

also do not constitute a new cause of action: Ivany v. Financiere Telco Inc. 2011 ONSC 2785, 207

A.C.W.S. (3d) 664, at para. 30. Adding clarity, precision and definition to an existing claim

should not be discouraged, as these are attributes of a good pleading: Toronto Standard

Condominium Corp. No. 2051 v. Georgian Clairlea Inc. 2016 ONSC 2948, 266 A.C.W.S. (3d)

60, at para. 62.

[587] In this case, the claim is some 72 pages long, consisting of 236 paragraphs. Paragraph 1

contains the prayer for relief which includes a claim for damages of $3 billion for losses suffered

as a result of fraud, breach of fiduciary duty and negligence. Paragraph 9 pleads that Mr. Chan

caused Sino-Forest to materially overstate the value of Sino-Forest’s revenue and assets and

concealed personal profits made by Mr. Chan as a result. Paragraph 9 goes on to plead particulars

which include the allegation that Mr. Chan had operational and de facto control over allegedly

arm’s-length purchasers of Sino-Forest’s timber and the Suppliers of that timber, that Mr. Chan

caused Sino-Forest to significantly overpay for assets sold by companies which Mr. Chan secretly

controlled and that Mr. Chan caused monies to be paid out by Sino-Forest and its subsidiaries for

no proper purpose.

[588] At paragraph 85, the claim pleads that by controlling the Suppliers, AIs and other nominee

companies, Mr. Chan and Inside Management carried out transactions which either overstated the

economic substance of the transactions or which were entirely fictitious. Paragraph 88 pleads that

Mr. Chan personally profited from these insider relationships with related parties, the full

particulars of which were known only to Mr. Chan. Further particulars, the pleading goes on to

say, of the secret profits made by Mr. Chan in connection with related party entities will be

provided prior to trial.

[589] Paragraphs 108 to 110 plead that Mr. Chan and Inside Management caused Sino-Forest to

enter into a number of transactions that were fraudulent or devoid of any legitimate business

purpose. They allege that Mr. Chan and Inside Management perpetrated this massive fraud by

papering hundreds of fictitious transactions, “the full particulars of which are known only to

Page: 104

Chan.” The claim goes on to state that further particulars will be provided prior to trial but that

the following transactions are “illustrative” of the fraudulent conduct perpetrated by Mr. Chan and

Inside Management. What follows is a list of 16 transactions or types of transactions, which the

plaintiff says fall into the categories of fraud or breach of duty pleaded earlier. These particulars

include the illegitimacy of the transactions with AIs and Suppliers in both the BVI and WFOE

models, improper prepaid deposits in the wood log trading business, improper prepaid deposits in

other businesses and a number of other specific allegations involving particular transactions or

types of transactions. The cash gap fraud allegations in the amended claim are added as the

seventeenth particular of the general allegation of fraud set out above.

[590] The defendant’s premise for its limitations argument, that allegations of fraud must be

pleaded with “full particulars,” while undoubtedly true, confuses the rules of pleading with

particularity (Rule 25.06(8)) with the initiation of a proceeding for a remedy under the Limitations

Act.

[591] The statement of claim, before the August 2016 amendment, constituted a proceeding

which pleaded, generally, causes of action in fraud and various breaches of duty. The pre-

amended claim also pleaded facts which, again generally, encompass the type of conduct

ultimately relied on as the specific foundation of the cash gap fraud. That claim was sufficient to

fulfil the Limitations Act requirement. The plaintiff was unquestionably required to provide

particulars of the cash gap fraud in order to pursue that issue at trial. That obligation, however,

arose as a matter of trial fairness – the defendant was entitled to know the case he had to meet –

not as matter of whether a proceeding had been commenced to assert a claim within the two year

limitation period.

[592] For this reason, I reject the defendant’s argument that the cash gap fraud allegations are

barred by the Limitations Act.

[593] In the event that I am wrong in this conclusion, I will also deal with the defendant’s

argument on discoverability.

[594] Discoverability, as I said on the motion for leave to amend in August 2016, would involve

the question of when a reasonable litigation trustee, with the abilities and in the circumstances of

the plaintiff, first ought to have known about the facts on which he now seeks to rely in order to

assert the wood log cash gap fraud allegation.

[595] Mr. Borrelli gave a good deal of evidence about the magnitude of the task he took on in

January 2013. The Sino-Forest structure was labyrinthine. There were many business lines,

hundreds of corporations and thousands of transactions all involving a business that had been

operated over many years. No one previously had actually tried to trace the flow of funds. Mr.

Borrelli decided to do that because he felt it would lead him to the people he would need to sue as

Litigation Trustee. His evidence was that analysis took 2 ½ years.

Page: 105

[596] Following Mr. Chan’s discovery, Mr. Borrelli decided to focus more on the timber

suppliers, China Square and Flying Profit. That led to the preparation of set off schedules which

showed a pattern, not just isolated instances, of receivables from wood log trading being set off

against purchases of BVI standing timber. The key to this particular allegation, however, was not

that there were set offs or that there were questionable relationships among Sino-Forest and its

suppliers and customers but that, only after carefully analyzing all of the transactions did he

realize that, on average, 30% of the payments to Sino-Forest for the sale of logs was made by way

of set off against purchases of additional BVI standing timber. It was that analysis that led to the

realization that $239.8 million more was paid out to log suppliers than Sino-Forest received back

from log purchasers when the logs were sold. That realization, Mr. Borrelli testified, came about

for the first time in May 2016. The motion to amend was brought in August 2016, well within the

two-year period from when the particular fraud was discovered.

[597] I am not persuaded the Maradin internal control document was sufficient to put

independent management, the IC, the Monitor or the Litigation Trustee on notice that the log

trading model involved a material fraud. The cash gap fraud is different from the on-shoring

problem, different from the related-party problem and different from, although related to, the

problem of whether Sino-Forest actually owned any BVI standing timber assets. There is nothing

about the TRE NI 52-109 Material Weakness Disclosure Form to indicate the wood log

receivables were in US dollars or that the BVI standing timber assets were fictitious. I also

conclude that the identification of a process weakness, that is, a risk that something might go

wrong, is very different from a discovery that something has gone wrong or that would put a

reasonable person on inquiry about whether something has gone wrong.

[598] Similarly, the concerns raised by the IC’s counsel were about the on-shoring problem -

that is, increasing the stock of BVI standing timber - and the potential of related-party dealing.

Nothing about these concerns points to a pervasive, across-the-board average cash gap between

what was paid out in what was received of 30%. That realization only came about as a result of

painstaking forensic examination of all the transactions, which did not occur until 2016.

[599] These two documents do not constitute evidence that Mr. Borrelli failed to use reasonable

diligence in chasing down the cash gap problem in all of the circumstances.

[600] I should also comment on the fact that it was in the nature of these transactions that their

true purpose and effect was concealed by Mr. Chan and his senior management. The evidence is

that Inside Management, including Mr. Chan, was not helpful or forthcoming in the aftermath of

the Muddy Waters Report. The evidence is that relationships between Suppliers and AIs and

Sino-Forest and between Sino-Forest personnel and Sino-Forest’s suppliers and customers were

not disclosed. Mr. Chan maintains still in this litigation that the BVI standing timber model was

entirely appropriate and that nothing was wrong. Mr. Chan is critical of the IC, the Monitor, the

bondholders, EPHL and the Litigation Trustee for jumping to conclusions and not taking

sufficient time to prove that Sino-Forest held title to $2.99 billion of BVI standing timber assets.

It is incongruous, in the circumstances, for Mr. Chan, with the benefit of hindsight now that the

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problem has been exposed, to claim that Mr. Borrelli slept on his rights and failed to act

reasonably to uncover the concealed fraud involving the wood log trading cash gap.

[601] Golden Oaks Enterprises Inc. (Trustee of) v. Lalonde, 2016 ONSC 5313, 133 O.R. (3d)

513, set aside 2017 ONCA 515, 137 O.R. (3d) 762, concerns the unique circumstances and

challenges faced by a trustee investigating a fraud on behalf of defrauded creditors.⁶The Court

noted that discoverability in relation to a Trustee in Bankruptcy is different than in relation to an

ordinary person and/or corporation, particularly as it relates to a fraudulent scheme. The Court in

Lalonde held that claims only become discoverable during the course of the trustee’s

investigation:

In a case like this where a bankrupt has perpetrated fraud on creditors of a bankrupt

estate prior to bankruptcy, the Trustee acting on behalf of the unsecured creditors

must seek to recover those assets which were fraudulently used or transferred by

the bankrupt. In doing so, the Trustee will have to conduct various investigations

to see if there were fraudulent activities and how the assets were used and who

received the benefit from their use. Once this is determined, the Trustee can then

decide who has received the benefit of the fraud and by how much they benefitted.

Then, the Trustee must determine the appropriate course of action to deal with

those situations. It is only during the course of the investigation that the claims

will become discoverable.

[602] This conclusion in part reflects the principle that the presence of fraud vitiates the

corporate identification doctrine. A corporation cannot be “aware” of a fraud that was perpetrated

by its directing minds prior to the discovery of the wrongdoing by the trustee. It would be

illogical if the actions of the directing minds who perpetrated the fraud were to be subsumed in the

very company they were trying to defraud.

[603] I conclude that there is no evidentiary basis to contradict the Litigation Trustee’s assertion

that he has been diligently investigating the complex, concealed fraud now alleged against Mr.

Chan. The Statement of Claim was amended within two years of the Litigation Trustee’s

discovery of the cash gap and, accordingly, the cash gap allegations are not barred by the

Limitations Act.

The Cash Gap Fraud Allegation

[604] Finally, the defendant argues that the plaintiff has not established that Sino-Forest suffered

a loss in any event. The underlying asset purchased through the set off or netting process was

BVI standing timber. Mr. Chan says the plaintiff has not established that the BVI standing timber

does not exist and that the evidence demonstrates that the assets do exist. Nor has the plaintiff

⁶Although this decision was set aside on other grounds, the description of the position of a

Trustee was not contradicted and remains, in my view, accurate.

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established that the assets purchased in each of the set off or netting transactions were not equal to

the value of the accounts receivable that Sino-Forest would have otherwise collected from the

wood log trading customer.

[605] As Mr. Chan tried to explain during his cross-examination:

(i)

“if you have BVI assets with account payable pending, you have to pay it. One

way or another you have to pay it;

(ii)

“the BVI trees have values,” and

(iii) “so that is, firstly, we have payables obligations we have to pay. Two there are

good values.”

[606] In other words, according to Mr. Chan, he deliberately chose to direct new cash, not

locked into the BVI standing timber model, into the purchase of BVI standing timber assets,

thereby subjecting an even larger portion of Sino-Forest’s assets to the on-shoring problem.

[607] The defendant nevertheless concedes, at a conceptual level, that, if the BVI standing

timber model was a fraud, diverting an additional $239.8 million into non-existent BVI standing

timber assets must also be a fraud. My disposition of the BVI standing timber fraud claim is, for

this reason alone, dispositive of this issue.

[608] There are, however, three unique features of the cash gap fraud which warrant special

attention:

(1)

the diversion of USD cash receivables owed by wood log customers toward the

acquisition of BVI standing timber assets is completely inconsistent with Mr.

Chan’s argument about the problems of “on-shoring” and his admission that the

WFOE model, available since 2004, was the better business model from Sino-

Forest’s point of view;

(2)

(3)

almost none of the purchasers who owed money to Sino-Forest as of June 2, 2011

(for a total of over $93.4 million) ever paid. They all disappeared almost instantly,

by becoming deregistered as corporations or otherwise shutting down operations

and simply “going dark”; and

the evidence of wood log suppliers and customers not being arm’s-length and that

senior management of Sino-Forest itself was not arm’s-length from some of its

major counterparties in this business.

[609] I will address each of these issues in turn.

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Diversion of USD Cash into BVI Standing Timber Assets

[610] As set out earlier, the BVI model was “cashless” in the sense that no cash was transferred

through Sino-Forest’s bank accounts under the BVI model. Unlike the BVI model, the wood log

trading model was a cash-based model under which Sino-Forest actually paid and received cash

for the wood log transactions.

[611] By directing wood log customers to make set off payments to BVI standing timber

suppliers 30% of the time, cash that Sino-Forest otherwise would have received in USD outside of

the PRC was supposedly converted into BVI standing timber assets. As the wood log trading

transactions resulting in the cash gap took place between 2006 and 2011 – years after Sino-Forest

was permitted to operate the WFOE model – cash was purportedly being diverted into the BVI

model at a time when Sino-Forest was trying to convert its BVI assets into WFOE assets so that

the assets could be monetized outside the PRC. It makes no sense that new US cash was

effectively being directed into the BVI model (where the value would be trapped) at a time when

Mr. Chan claims Sino-Forest was attempting to turn the BVI assets into cash through what was, to

that point, a complicated and unsuccessful on-shoring process.

[612] Mr. Chan’s explanation for this was that, in some cases, the purchasers of wood logs did

not have sufficient USD to pay USD cash in accordance with their obligations under the wood log

trading purchase contract. In those instances, Sino-Forest agreed to let the customer pay in RMB

and directed them to pay the requisite amounts to a BVI standing timber Supplier to which Sino-

Forest owed accounts payable for BVI standing timber acquisitions. Sometimes, Mr. Chan said,

this was the only way Sino-Forest could meet its obligations to BVI standing timber Suppliers.

[613] There are a number of problems with this explanation.

[614] Mr. Chan accepts the reality of the on-shoring problem for BVI standing timber assets.

Under Chinese law there were restrictions on foreign currency and foreign corporations doing

business in China. This meant that profits on the trading of BVI standing timber had to be “re-

invested” in more BVI standing timber assets. The exponential growth of the BVI standing

timber assets from 2004 to 2011 created a significant problem. The value in those assets was

“trapped” in the PRC and could not be monetized without incurring significant tax, foreign-

exchange, regulatory and other risks. Mr. Chan argues this very point in defence of his position

on the BVI standing timber.

[615] He says the Board, the IC and the Monitor were aware the BVI standing timber model was

a legacy problem. Ernst & Young, Sino-Forest’s auditors, were also well aware of the problem.

The BVI standing timber profits were locked in the PRC. Because of this, Sino-Forest wanted to

move the BVI standing timber assets to the WFOE model, thereby unlocking the value of these

assets. No solution for how to do this had yet been found but senior management and professional

advisors were working on it. It was clearly understood, however, that this issue arose precisely

because the BVI standing timber model was a cashless model. The profits were trapped, so to

deploy them profitably, they were ploughed back into more purchases of BVI standing timber.

Page: 109

There was never any suggestion, however, that new cash available to Sino-Forest for use in non-

BVI standing timber enterprises would ever be folded into the BVI standing timber model.

[616] The diversion of log trading receivables into BVI standing timber purchases is completely

inconsistent with Mr. Chan’s attempted justification of the onshoring initiative. Mr. Chan’s sworn

testimony is that Sino-Forest was trying to migrate from the BVI model to the WFOE model

which “was a better model than the BVI model.” At a time when he was publicly espousing the

need for a solution to the BVI standing timber problem, Mr. Chan now acknowledges that he was

authorizing the payment hundreds of million dollars of new money owed to Sino-Forest for log

sales to be used for the purchase of more BVI standing timber assets. This is the exact opposite of

his position to the Board at the time. The evidence is that the Board was completely unaware of

this.

[617] Ardell, who became lead director of Sino-Forest in January 2010, understood management

was working on trying to “repatriate” the profits in the BVI model. It was, he understood,

desirable to accumulate assets in the WFOE model in preference to the BVI model. Ardell was

totally unaware and, to his knowledge, the Board was unaware, that management was using cash

raised in the North American debt and equity markets to purchase new BVI standing timber

assets. He testified that he was surprised to discover, just prior to testifying at trial, that this was

happening.

[618] A second problem with Mr. Chan’s explanation is that he never seems to have entertained

the possibility that Sino-Forest could simply insist upon the customer’s strict compliance with its

contractual obligations to pay for the logs in USD. Mr. Chan took the position that there was an

urgent need to meet BVI standing timber payables. To meet this need, he chose to direct

customers with USD cash obligations for wood log purchases to pay BVI standing timber

payables in RMB.

[619] This runs afoul of the evidence that Sino-Forest’s BVI standing timber customers, the AIs,

always paid, 100% of the time, on average 140 days early. Mr. Chan could not explain why any

rational person, given the on-shoring problem, would ever buy more BVI standing timber assets

than were supported by payments from AI’s on sales of BVI standing timber assets. I agree with

counsel for the plaintiff that, in the circumstances, no one would never put themselves in a

situation where they were buying more BVI standing timber assets and incurring more liabilities

in the trapped model than they knew was coming due as receivables from BVI standing timber

sales. If Mr. Chan was legitimately concerned about on-shoring and finding a solution to the

locked-in problem, the last thing he would do is incur new liabilities to BVI standing timber

Suppliers that required Sino-Forest to pay with new, un-trapped cash.

[620] A third and related problem with Mr. Chan’s explanation is why, even if Sino-Forest’s

wood log customers did not have sufficient funds in USD on hand to fulfil their contractual

obligations, he insisted on diverting payment into the BVI standing timber model instead of, for

example, the purchase of WFOE model assets. In other words, if an indulgence was being granted

to the customer, why not divert the customer’s RMB payments to setting off a debt owed to a

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WFOE standing timber supplier, so as to at least minimize the growth of the on-shoring problem

associated with the BVI standing timber assets being locked up in the PRC.

[621] Mr. Chan’s response was, as noted above, that there was an urgent need to pay BVI

standing timber suppliers and that the BVI standing timber assets were good value. As discussed

above, neither of these propositions has been established on the evidence. I simply cannot accept

Mr. Chan’s explanations as reliable or credible.

[622] Finally, there is Mr. Chan’s evidence that Sino-Forest only directed wood log payables

into the BVI standing timber model when wood log customers had no USD, only RMB. The

evidence is that most of the PRC customers purchasing wood logs from Sino-Forest used

remittance agents or currency converters. The whole point of using remittance agents was to

avoid problems with currency controls. It was never explained why the remittance agents, in their

capacity as currency converters, could not have facilitated payment in USD, whether or not the

customer itself had USD immediately available.

The Disappearance of Wood Log Customers Owing $93.4 Million after June 2, 2011

[623] The last cash payment received from a wood log customer was July 28, 2011, about two

months after the Muddy Waters report. Sino-Forest’s wood log trading customers walked away

from outstanding net accounts receivable owing to Sino-Forest of $93.4 million. The Monitor’s

Tenth Report (and the testimony of Engen at trial) says that six of the eleven customers who owed

money to Sino-Forest were, on investigation, deregistered as companies and no longer existed.

Two of them, in fact, had been deregistered for a long time, yet continued to trade with Sino-

Forest even after they were no longer registered. The Monitor was unable to make any meaningful

contact with any of the debtor customers. They all appeared to have simply vanished.

[624] This is not unlike Sino-Forest’s experience with the AIs under the BVI standing timber

model. Several of the wood log trading customers had been doing transactions with Sino-Forest

entities in the hundreds of millions of dollars. That they would vanish so quickly at the first sign

of trouble is highly suggestive of the inference that, in spite of having allegedly engaged in tens of

millions of dollars of wood log trading, they were not legitimate operations or companies of any

substance.

Unusual Relationships with Wood Log Trading Counterparties

[625] Marco Lam was a friend of Mr. Chan’s who worked Sino-Forest from 2001 to 2007.

Within a short period of leaving Sino-Forest, Lam’s company, China Square, was conducting

transactions worth hundreds of millions of USD with Sino-Forest subsidiaries. China Square was

the single largest supplier of wood logs to Sino-Forest forest.

[626] China Square is listed on the Nominee Company Managers List with Marco (Lam) as the

manager. Lam/China Square had a number of unusual financial dealings with Mr. Chan and Sino-

Forest senior management.

Page: 111

[627] In May 2009, Ip authorized a bonus to James Lau, a Sino-Forest employee. Ip sent an

email to Lam, telling him to deposit RMB 110,000 to Lau’s account. Lam replied: “Will do.”

Lau confirmed that the payment was made.

[628] In March 2010, Ho advised Mr. Chan and Yosanda that “we” needed $5 million for Jack

Chen’s Hong Kong company, Great Eastern Developments. A few days later, Lam deposited

Hong Kong $5 million in Chen’s bank account.

[629] Lam and his companion, Peggy Lo, were also involved in the purchase of Mr. Chan’s

personal residences in Hong Kong in early 2010. Lam paid for the residences at Mr. Chan’s

direction. The registered owner of the properties is a company called Shiny Tech Hong Kong

Limited. From September 21, 2007 until 2011, Peggy Lo held the shares of Shiny Tech in trust

for Mr. Chan’s daughters, Joyce and Grace Chan. Mr. Chan agreed in cross-examination that he

only trusted Peggy Lo to hold the shares of Shiny Tech due to his trust and faith in Lam.

[630] In May, 2010, at Yosanda’s request, Lam forwarded to Mr. Chan an accounting of certain

receipts and payments in and out of his companies, Day Best and Shiny Tech. The accounting

reflects a HK$2.4 million payment for Mr. Chan’s residences and a HK$5 million payment to

Jack Chen.

[631] In May 2011, Ernst & Young was threatening to write off a four year old deposit refund

owing from Elderbridge, a wood log supplier. David Horsley sent an email to Mr. Chan about

this, indicating that a million dollar payment had to be made immediately. Mr. Chan forwarded

the email to Hung. Hung then sent an email to Lam at China Square, telling Lam to send Sino-

Forest $1 million. He says, “Please send US $1 million from Winter Ally Investments Limited in

May.” This money was paid to Sino-Forest and the auditors did not require Sino-Forest to write

off the remainder of the debt. No logs were ever delivered and the balance was never repaid.

[632] These examples of financial interactions between Mr. Chan and the owner of Sino-Forest’s

largest wood log supplier represent a small fraction of the evidence of relationships, not only with

Lam, but with other wood log suppliers and customers, as well as evidence of relationships

between the suppliers and customers themselves. All of this evidence further supports the

inference that the counterparties to Sino-Forest wood log trading giving rise to the cash gap were

not at arm’s-length.

[633] I am satisfied that the preponderance of probabilities, having regard to all of the evidence,

is that the wood log cash gap was a fraud orchestrated by Mr. Chan with the assistance of Inside

Management at Mr. Chan’s direction.

The Wood Log Deposit Fraud

Overview

[634] The plaintiff alleges that Mr. Chan and Inside Management caused a number of Sino-

Forest’s subsidiaries, using Sino-Forest’s funds, to enter into wood log trading agreements and to

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pay substantial unsecured “deposits” and “advance payments” to entities with undisclosed

connections to Mr. Chan. The amount of the unsecured deposits and advance payments exceeded

the value of any logs delivered. Following the Muddy Waters Report, essentially all log deliveries

ceased and, with one limited exception, no repayment of outstanding deposits or advance

payments was ever made. Through four transactions of this nature, (Prompt Sky, Trevista,

Xunxiang and Elderbridge), Sino-Forest is alleged to have lost $167.4 million.⁷

[635] The defendant says the wood log trading model had a bona fide business purpose.

Through log trading, Sino-Forest secured long term trading agreements at favourable prices.

Although capital-intensive, it was a low risk endeavour because the balance of the contract price

(after deposits and advance payments) was paid through trust receipts and letters of credit, which

could only be drawn upon by the suppliers after logs had been delivered.

[636] Log trading was supportive of a PRC policy to promote timber imports to help alleviate

the fiber supply deficit in China. And, log trading in Russia provided Sino-Forest with the chance

to learn about the Russian market before making equity investments in timber concessions there.

[637] The defendant argues that losses in this business model were only incurred after the

Muddy Waters Report. The wood log trading model only broke down when Sino-Forest could no

longer obtain the necessary credit to cover its wood log trading transactions. This led to defaults

when Sino-Forest was unable to make scheduled payments for log deliveries.

[638] The defendant denies that the counterparties to the wood log transactions were not at

arm’s-length or that he, or others in senior management, controlled the counterparties in any way.

Finally, the defendant argues that the loss, if any, was suffered by Sino-Forest’s subsidiaries, for

which Sino-Forest itself has no claim.

[639] I have concluded that the scheme of causing Sino-Forest to fund these deposits and

advance payments was a fraud, the effect of which was to divert Sino-Forest’s cash to entities

secretly controlled by Mr. Chan or others acting under his direction.

[640] My reasons for this conclusion are set out below, in the context of reviewing each of the

four transactions which the plaintiff alleges were fraudulent and caused a loss to Sino-Forest of

$167.4 million.

Prompt Sky

[641] Mr. Chan admits that he caused Sino-Panel Trading, a Sino-Forest subsidiary, to pay

Prompt Sky, a BVI company, $25.8 million as an unsecured deposit towards the purchase of wood

logs under a supply agreement dated February 15, 2011. Mr. Chan signed the Prompt Sky

Agreement on behalf of Sino-Panel Trading and Peggy Lo signed on behalf of Prompt Sky.

⁷This amount is before taking into account the $10 million RAPA recovery in respect of the

Xunxiang transaction, discussed below.

Page: 113

[642] Similarly, there is no dispute that Mr. Chan caused Sino-Forest to fund the $25.8 million

Prompt Sky deposit by authorizing Sino-Forest to lend Sino-Panel Trading the money to be paid

to Prompt Sky. Mr. Chan signed the loan agreements on Sino-Forest’s behalf; Ip signed them on

behalf of Sino-Panel Trading.

[643] Mr. Chan testified that, at the time he signed the purchase and loan agreements on behalf

of Sino-Forest, he:

(a)

(b)

understood that the $25.8 million deposit was unsecured;

did not know whether Prompt Sky had ever previously entered into a contract with

any Sino-Forest entity;

(c)

(d)

(e)

had no recollection of asking what due diligence had actually been performed;

did not know what (if any) assets Prompt Sky had; and

did not know who the principals were behind Prompt Sky.

[644] There is evidence that Ip asked Mr. Chan’s sister, Pauline, which counterparty should be

used for the transaction. Pauline Chan told Ip that Prompt Sky was to be the name of the

counterparty. Ip then forwarded that information to his team and asked them to prepare the

Prompt Sky agreement. This was on the same day that Mr. Chan executed the Prompt Sky

agreement, February 15, 2011.

[645] At trial, Mr. Chan contradicted prior evidence he had given by admitting that he always

knew his friends, Lam and Peggy Lo, were the sole shareholders of Prompt Sky. Mr. Chan’s

evidence at trial was that because Lam was involved, Mr. Chan had added comfort that Prompt

Sky would not default on its obligations.

[646] Peggy Lo was a director and shareholder of Shiny Tech. Shiny Tech held both of Mr.

Chan’s residences in trust for Mr. Chan’s daughters.

[647] Lam is a friend of Mr. Chan’s. He is a former Sino-Forest employee and owner of China

Square, a major wood log supplier for Sino-Forest. Lam made payments toward the purchase of

Mr. Chan’s residences. Yosanda instructed Peggy Lo to sign the provisional agreement of

purchase and sale. She also told Lam to make the payments toward the purchase. Lam later

accounted to Mr. Chan, through Yosanda, for these payments in a spreadsheet and email.

[648] A few days after the Prompt Sky agreement was signed, it was amended by Sino-Forest

staff without any input from Prompt Sky.

[649] No wood was ever delivered under the Prompt Sky agreement and the deposit was never

repaid. Further, during the time Mr. Chan remained at Sino-Forest, no one from Sino-Forest ever

followed up with Prompt Sky about outstanding deliveries of logs or the return of the deposit.

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[650] It was not until after Mr. Chan was required to resign that Sino-Forest wrote to Prompt

Sky about its failure to deliver any logs. No response was ever received from Prompt Sky.

Prompt Sky was struck off the register of companies in the BVI for non-payment of fees on

November 1, 2013. Prompt Sky and Sino-Forest’s $25.8 million simply vanished.

[651] Although admitting that Lam was his friend and that Lam was behind Prompt Sky, Mr.

Chan testified he never spoke to Lam about recovering the $25.8 million or having Prompt Sky

deliver the promised logs. It was only after New Plantations acquired Sino-Forest’s PRC assets in

2016 that Mr. Chan says he had discussions with Lam about re-activating the contract.⁸No

recovery of the deposit (or cash receipts of any kind) under this agreement has taken place under

the RAPA.

[652] The logical and reasonable inference from these facts is that Prompt Sky was not at arm’s-

length from Mr. Chan. This was never disclosed.

[653] The outstanding deposit balance of $25.8 million was written off in Sino-Forest’s books as

unrecoverable in December 2011, resulting in a $25.8 million cash loss to Sino-Forest.

Trevista and Spring Field

Background

[654] In 2010, Sino-Forest was looking at forestry-related opportunities in Russia. Sino-Forest

wanted to develop a full range of wood product development: plantations, harvesting, wood log

trading and manufacturing. According to Ho, who was the senior manager responsible for

overseeing this foray into the Russian forestry business, wood log trading was a good, low risk

way to learn about operating in a foreign country.

[655] On July 1, 2010, Sino-Panel Russia (SPR) and Trevista entered into a long term supply

agreement for the supply of Russian wood logs to SPR over a period of ten years (the Trevista

LTS). Mr. Chan signed the Trevista LTS on behalf of SPR. Jack Chen signed on behalf of

Trevista.

[656] Between July 1, 2010 and July 3, 2011, SPR entered into nine specific purchase

agreements with Trevista under which Trevista was to supply SPR with various quantities of

Russian wood logs. Mr. Chan signed the first agreement on behalf of SPR and Ho signed the

remaining eight.

[657] A feature of the Trevista log purchases was that that every single purchase of logs by SPR

from Trevista was matched, within four days, by a sale from SPR to Spring Field. Thus over the

same period (July 2010 to July 2011) SPR entered into nine log sale agreements with Spring

Field. Ho signed all nine of these sale agreements.

⁸No documentary or other support for this assertion was offered. How this would happen after so

many years and the deregistration of Prompt Sky was not explained.

Page: 115

[658] Sino-Forest and SPR entered into a loan agreement under which Sino-Forest lent SPR $62

million to finance the anticipated unsecured deposit and advance payments to be made to Trevista.

Mr. Chan signed the SPR Loan Agreement on behalf of Sino-Forest; Ip signed on behalf of SPR.

Documents approving the $62 million fund transfer to SPR indicate that the purpose of the loan

was to “inject funds from Sino-Forest to SP-Russia for Long Term Wood Supply Agreement.”

[659] SPR ultimately paid $63 million in unsecured deposits to Trevista, by way of a $25 million

deposit under the Trevista LTS, and $38 million as “Advanced Payments” under four of the nine

specific agreements. SPR also paid an additional $10.3 million for alleged log deliveries that, for

reasons that were not explained, were not drawn from deposits already made, bringing SPR’s total

payments to Trevista up to $73.3 million.

Incorporation of Great Eastern Development and Other Companies for Jack Chen

[660] According to Mr. Chan, Ho introduced Mr. Chan to Jack Chen, a Chinese businessman.

Mr. Chan and Ho interviewed Jack Chen for a job in the summer of 2009. In October of 2009,

they got Chen a job working for Pauline Chan as Executive Director at Eminens. Mr. Chan

testified that, shortly thereafter, Chen “proved himself capable” and “was then ready to set up his

own companies to start doing business in Russia.”

[661] In early 2010, Yosanda and Elsa Kwok (Ho’s secretary), assisted in establishing Great

Eastern Development (GED). They obtained the incorporation of GED, equipped its Hong Kong

office and set up GED’s telephone and internet accounts. GED’s Certificate of Incorporation and

share certificate list Jack Chen as the sole shareholder. Elsa Kwok forwarded the incorporating

documents to Zeng, Ho and Chen using “eminens” and other non-Sino-Forest email addresses.

Zeng said he understood Chen was going to be making investments for Sino-Forest in Russia

because Sino-Forest did not want to use its own name.

[662] On January 6, 2010, Ho sent an email to Yosanda (to Mr. Chan’s attention) advising that

Chen wanted an indemnity against liabilities because he was “only a nominee.” The email says:

Allen:

I talked to Jack again and he is fine with the new arrangement. He would like to

have a quick face to face meeting with you more for comfort purposes.

He also wanted to confirm that even though the Russia project is the only project in

the Newco for now, this does not preclude that there are other potential projects

that can be developed as originally discussed during his employment in light of the

fact that Eminens is currently managing the majority of the projects discussed

originally.

He also indicated that he does not mind being a shareholder of the Newco but

would need some assurance of indemnity of liabilities, etc. as he is only a nominee.

I will get John Zeng to draft some terms for your review.

Page: 116

[663] During his examination for discovery, Mr. Chan stated that he had no recollection of this

email. He said that he had “no idea what [Ho is] talking about”, and that “we haven’t get into

implementing that structure, so there’s no Newco.”

[664] Mr. Chan’s explanation evolved during his examination at trial. He recalled that at some

stage, he and Ho had requested Jack Chen’s assistance in paying $10 million to secure an

investment in a Russian company, PLP. This was a company for which, he said, Sino-Forest used

Trevista (Jack Chen’s company and a counter party to a large wood log trading contract) as an

intermediary to “shield the identity of Sino-Forest, as the purchaser, and protect its interests.” Mr.

Chan speculated that this might be what Ho was referring to. This explanation, however, finds no

support in the plain words of the text. It is also implausible, given that the email was sent in

January 2010 and predates the first payment to Trevista by eight months. It also predates the

incorporation of Trevista by six months.

[665] It is clear, in the context, that “Newco” is a reference to GED. It is also clear that Ho was

not contemplating that Jack Chen would be operating that company as an arms’ length wood log

trading counterparty. Rather, the email contemplates that Chen would be a “nominee,” hence the

need to address Chen’s concern to be indemnified against possible liability. The $10 million so-

called “investment” in PLP on behalf of Sino-Forest was never disclosed to Sino-Forest or its

Board. Ho admitted as much.

[666] During cross-examination it was put to Mr. Chan that Ho clearly thought Jack Chen was

only acting as a nominee. Mr. Chan then testified that Ho was mistaken and that that Jack Chen

was supposed to be “an agent” of Sino-Forest. There would not be “any nominee arrangement

between Sino-Forest and Jack Chen’s company,” according to Mr. Chan.

[667] Even accepting this evidence on its face, it would have been a serious conflict were Jack

Chen’s company to be, simultaneously, Sino-Forest’s “agent” and also SPR’s arm’s-length third

party log supplier and customer. In cross examination, however, Mr. Chan rejected the suggestion

that these functions were mutually exclusive:

As I said earlier that he is there to perform two kinds of function. One is in terms

of trading. So for that part, it is that is a third-party definitely a trading thing.

And then the other is to perform the function help us to spearhead into the

acquisition of Russian Projects. At that point of time we haven’t decided what

exactly should be the format, the eventual structure of the deal.

[668] Mr. Chan expanded further on Jack Chen’s role during the following exchange:

Q.…Now I think I understand where you’re coming from. You’re suggesting when

Jack Chen and his newly incorporated companies are acting as a log supplier, or a

log customer, because they were both, to Sino-Panel Russia, they were acting as

independent third-party counterparties. But when that same Jack Chen was

operating his Newco to go out and look for a potential acquisition target, he was

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following your instructions and not accounting as an independent third party; is

that right?

A. He is independent third party but performing the kind of generic what we are

calling agent.

Q. Sometimes Jack Chen was wearing his independent log supplier hat, sometimes

he was wearing an independent log customer hat, and sometimes he was wearing

his company acquisition agent hat?

A. That is exactly the kind of arrangement you needed into Russia.

[669] Mr. Chan’s explanation regarding the many roles purportedly played by Jack Chen is

unsupported by the contemporaneous documents and is not credible. The simpler and more

plausible explanation is that Jack Chen only had one role: acting as Mr. Chan’s nominee.

[670] Ho also sought to resile from the plain meaning of his email. Ho, however, testified that

when he used the word “nominee” what he really meant was “firewall”:

But I guess if Jack becomes a shareholder of a company that deals with Sino-Panel,

in my mind, he would be acting as a firewall for Sino-Forest because he would be

at the front to shield Sino-Forest with respect to the dealings in the Russia arena,

which, you know, neither -- I guess at least myself, I don’t know whether Jack

knows Russia that much, but I guess in my mind, he is saying that he is acting as a

firewall for Sino-Forest, so he requires indemnity of liabilities. So I -- “as he is

only a nominee” -- in my mind, I used “nominee” because he is just a firewall

between Sino-Forest and our Russian counterparts. Analogy is Yuda being a

firewall between us and the local farmers. So in my mind, at that point in time, I

would have meant -- and what I read this to mean, that he is the firewall between

Sino-Panel group of companies doing business with Russian counterparts.

[671] Ho’s concept of a “firewall” is inconsistent with the indemnity discussed in his email to

Mr. Chan. Sino-Forest would not indemnify an arm’s-length trading partner from liability if the

whole reason for using the trading partner was to protect Sino-Forest from the liability to which

the trading partner might be exposed.

[672] Ho’s email to Mr. Chan, authored in the normal course of business, when he had no reason

to lie, is compelling contemporaneous evidence of a plan to use Jack Chen as Mr. Chan’s nominee

to conduct undisclosed related-party wood log trading at Sino-Forest’s expense.

[673] Mr. Chan’s financial interest in GED is also reflected in a March 19, 2010 text message

sent to Yosanda, just as Project Russia was ramping up. That text, referred to earlier, says:

We need rmb 5 m for jack’s hk ged. pls send him the funds. I have talked to allen

and yosanda is copied with this sms.

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[674] A reconciliation sent by Marco Lam to Yosanda shortly after this text corroborates a

payment to Jack Chen of HKD$5 million made on March 22, 2010 (three days after the text

message), organized by Lam through a company named Day Best. Day Best re-emerges in the

nominee narrative outlined below.

[675] Several more GED-related, Jack Chen companies were incorporated as part of what Ho

called Project Russia. In August 2010, Tiffany Chen forwarded Ho and Jack Chen “registration

information of the BVI companies as at 13 August.” Ho and Tiffany Chen were using the

Eminens email platform. The list of companies includes Trevista, Trellis and Spring Field.

[676] Ho forwarded this list of the companies “involved in the Russia project” to Yosanda at her

Yahoo email address. Ho told her he would update the list “from time to time as the flow

stabilizes.” Ho told Yosanda that Zeng had helped incorporate each one of these companies.

Zeng testified that he did not incorporate these companies but that his firm, Kai Tong, did act for

Jack Chen providing administrative assistance to set them up. Zeng understood they were all

Chen’s companies. According to Zeng, he acted for Chen in helping to set up these companies

and, later, in reviewing their structure.

[677] In early 2011, there was further correspondence about the Project Russia companies

between Zeng, Zeng’s associate, Kelly Xie, Jack Chen and Colin Wong, who Zeng said was a

Sino-Forest employee, all using non-Sino-Forest email platforms.

Attached to this

correspondence is what is described as a complete list of “non SF companies for Project Russia

which KT was responsible for setting up.” The email asks Zeng to provide a brief description of

the current status of these companies so that “we” have a complete list to keep track of. On

Zeng’s behalf, Kelly Xie confirmed the information was current.

Jack Chen Reported to Mr. Chan

[678] On April 17, 2010, Jack Chen sent an email to Yosanda setting out “some quick updates

for Allen.” Jack Chen reported to Mr. Chan on his progress in implementing assignments for

GED and concluded the email by stating:

Please let me know for any comments. Since I am new in the project and I am

outside of Sino, I would appreciate more helps and instructions directly from

Allen, if possible, until I understand better Allen’s thought and way of working

among the team in order to better serve the company.

[679] When confronted with the email during cross-examination, Mr. Chan asserted that Jack

Chen was merely trying to get Mr. Chan’s attention and seek his “thoughts.” Mr. Chan

maintained that Jack Chen was mistaken when he referred to seeking “instructions” from Mr.

Chan.

[680] Another email from Ho, with the subject line “Request for a meeting”, was sent to

Yosanda on March 2, 2011, and forwarded to Mr. Chan on his Blackberry the same day. In the

email, Chen had requested that an agenda item be added called “directions for the business

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management (GED group) for going forward.” Chen also undertook to “send Allen and George

the financial report of Jan later.”

[681] During cross-examination, it was put to Mr. Chan that it did not make sense for Jack Chen

to be seeking directions for the business management of the GED Group, given it included an

arm’s length supplier (Trevista) and an arms’ length customer (Spring Field). Mr. Chan’s answer

was evasive. Ultimately, Mr. Chan’s evidence was that, at that point, Chen was no longer needed

for their Russia transactions and so was feeling “insecure …about his future.” Mr. Chan’s answer

was not responsive, however. He could not explain why Chen would be seeking directions from

Sino-Forest about the business management of an arms’ length wood log supplier or customer and

offering to provide to Sino-Forest the financial results of those arms’ length entities.

[682] Two days after the above email, Jack Chen sent Mr. Chan (via Yosanda) and Ho the GED

Group’s January 2011 management accounts as he had undertaken to do. These management

accounts include accounts in respect of Trevista, Spring Field, and Trellis. On his examination for

discovery, Mr. Chan stated that he did not know why Jack Chen sent Ho the accounts, stating “we

have to ask George Ho.” Asked again on cross-examination, Mr. Chan speculated that Chen sent

these accounts because he was “trying to establish the comfort that he is trustworthy.”

[683] Mr. Chan also denied that it made no sense for Jack Chen to be running both Trevista, the

supplier to SPR, and Spring Field, SPR’s customer, since it meant Jack Chen was selling logs to

Sino-Forest and then buying them back days later at a mark-up. Mr. Chan was unwilling to accept

that this was suspicious. He speculated there might be “tax reasons” for such an arrangement.

Ho’s testimony, when asked about the dual-role of Chen’s companies as both SPR supplier and

SPR customer, was also incomprehensible.

[684] Ho, in response to a question from defence counsel in re-examination about the apparent

contradiction of the GED Group, supposedly at arms’ length from Sino-Forest, selling to Sino-

Forest and then buying back the same logs at higher prices, said that he thought Jack Chen was

trying to hide from Sino-Forest who his real customers were. When Ho was then asked why

Trevista would not simply sell directly to the end customer, and leave Sino-Forest out of it, Ho

replied:

I think probably they did not have the money or cash to pay for the supply – sorry,

the purchase of Russian timber.

[685] This answer sums up, in a nutshell, the convoluted, internally inconsistent, even

nonsensical, nature of the defendant’s attempted explanation for the structure of these wood log

trading transactions. Ho seems to be admitting that Sino-Forest was bankrolling what was

supposed to be GED’s arm’s length trading operations. Implicit in Ho’s answer is that Jack Chen

wanted to sell logs to an unidentified third party and did not want Sino-Forest to know who it was.

To do this, Jack Chen’s company sold logs to Sino-Forest, Sino-Forest sold the same logs to Jack

Chen’s company Spring Field for a small markup, and then Spring Field sold the logs on to the

unknown entity that Jack Chen wanted to sell to. Ho could not explain why Jack Chen would not

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just buy the logs and sell them directly to his intended customer. His assertion that Jack Chen’s

company probably did not have any money, while possibly true, does not explain why Jack Chen

could not have obtained deposits or advanced payments from his customers just as he did from

Sino-Forest. On the evidence, these transactions lacked any commercial purpose.

[686] Ho was equally unable to provide a plausible explanation of why Chen sent him the

January 2011 financial reports for Trevista, Trellis and Spring Field. Ho suggested that the

figures for Trevista and the other companies were included “to demonstrate the flow of the

transaction or flow of logs.” Ho’s answer did not explain why Sino-Forest needed that

information or why a company purportedly at arm’s-length to Sino-Forest would reveal the “flow”

of its transactions to its opposite party in those transactions.

[687] The January 2011 accounts provided by Jack Chen to Mr. Chan and Ho also reflect that

Trevista had an account receivable of $1 million from Day Best. When asked what he knew about

Day Best, Mr. Chan claimed “I have no idea, and it is not my company.” Day Best, however, is

the company:

a) through which payments were made to Mr. Chan’s solicitor, May Tsui, with

respect to the purchase of Mr. Chan’s Hong Kong residential properties held by

Peggy Lo in Trust for Mr. Chan’s daughters. These payments were arranged

by Lam, who provided Yosanda with a payment reconciliation reflecting funds

coming into and out of Day Best; and

b) through which funds were paid to “Jack’s HK GED” following discussion with

Mr. Chan, again arranged by Marco Lam, and also reflected on the Day Best

payment reconciliation sent to Yosanda.

[688] Another representative of GED, Wang Johnson, sent Ho (with a copy to Jack Chen) a

purchase plan for Trevista on April 20, 2011, under cover of an email summarizing various

amounts “we need to pay.” Johnson’s message also asks for more money from Sino-Forest under

the purchase agreement to cover its expenses.

[689] One of the attached spreadsheets to Johnson’s email, with the filename “Reconciliation

with SINO.xls,” includes a chart entitled “Status of BVI Capital Injection” for the period ended on

March 31, 2011. The chart records as a “cash injection” all of the deposits and advance payments

made by SPR under the Trevista LTS (i.e., totalling $63 million), less a deduction for a $14.9

million “Payment to SP Russia.” The spreadsheet records as “cash usage” an assortment of

payments to various payees, many of which appear to have nothing to do with wood log trading in

Russia under the LTS. These include a $299,000 “consultancy fee” to Kai Tong (John Zeng’s law

firm), a $1.3 million “consultancy fee” to One Word (a company associated with Lam) and a $1

million “consultancy fee” paid to Day Best, also Lam’s company.

[690] During cross-examination it was put to Ho that Johnson had treated the payments made by

Sino-Forest under the Trevista supply agreements as a “capital injection.” Ho dismissed this as a

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Chinese language issue, explaining “Johnson is a Chinese accountant…he is just trying to tally the

cash that came from [SPR] for those couple of lines.” Ho was unable to explain why GED, if it

was an arms’ length company, was explaining to Sino-Forest how it was spending the money it

earned on arms’ length trading revenues.

[691] It is clear that the “Status of BVI Capital Injection” accounts effectively treated Trevista,

Spring Field and other companies in the GED Group as one company, with SPR’s deposits and

advanced purchases for logs being treated as a capital injection (net of the payments made by

Spring Field to buy back the same logs). This is not a reconciliation so much as an accounting of

where the cash furnished by Sino-Forest had been spent by the various entities Jack Chen

supposedly controlled. Ho initially conceded that Trevista, Spring Field and Trellis were all Jack

Chen’s companies. He then resiled from that concession, once he was reminded that Sino-Forest

appeared to be buying from and selling the same logs to effectively the same person. Ho’s

evidence changed with every shift in the wind. His explanations were inconsistent, internally

contradictory and lacked any “ring of truth.”

Altered Bills of Lading

[692] The plaintiff, as the post-CCAA Plan custodian of all of Sino-Forest’s records, testified in

his pre-filed evidence in chief that he had been unable to find any reliable evidence that any wood

logs were ever supplied by Trevista to SPR or delivered by SPR to Spring Field.

[693] Ho challenged this assertion in his evidence for the defence, asserting that SPR “should be

in possession of the bills of lading to demonstrate the chain of custody of logs purchased from

Trevista.” Ho appended to his affirmation a series of nine bills of lading “as an example of the

bills of lading” that should be in the possession SPR. Ho explained the sample bills by reference

to a shipper, RFP, and consignee, Suifenhe, stating “it is my understanding that Trevista

purchased logs from the consignee and sold them to Sino-Panel Russia under the LTS.” Mr. Chan

took the position in his opening at the outset of trial that the plaintiff’s inability to find

independent evidence that logs had traded in the Trevista transactions “is bizarre given that Sino-

Forest records contain bills of lading for the delivery of logs such as the bills of lading attached to

the affirmation of George Ho.”

[694] As a result of Ho’s testimony, Mr. Borrelli conducted further searches of the document

database for bills of lading. Mr. Borrelli found substantially identical copies of seven of the bills

of lading appended by Ho to his affirmation. The bills of lading appended to Ho’s affirmation and

those located by Mr. Borrelli in Sino-Forest’s records, while otherwise identical, differed in two

respects:

(i)

the dates on the bills produced by Ho all show August 12, 2010, whereas the dates

on the bills in Sino-Forest’s records are all in July 2010. The date is important

because August 12, 2010 is the date funds first flowed under the Trevista LTS; and

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(ii)

some of the bills from Sino-Forest’s records identify an associated contract and the

dates of those contracts predate (in some instances by years) the Trevista LTS. In

the bills appended to Ho’s affirmation, the contract numbers and contract dates

appear to have been whited out.

Counsel for Mr. Borrelli argues that these alterations were deliberately made to obscure the fact

that the real bills of lading had nothing to do with Trevista and to give the false impression that

these bills of lading related to, or might have related to, the Trevista transactions.

[695] At trial, in the face of Mr. Borrelli’s evidence suggesting document tampering, Ho sought

to distance himself from the bills of lading attached to his affirmation. During his examination-in-

chief, Ho testified that he had obtained the bills from Alex Lin, a former subordinate at Sino-

Forest, who, he said, in turn had obtained them from Sino-Forest’s records during the OSC

hearings. The bills of lading attached to his affirmation, he emphasized, were never meant to do

more than exemplify the “types” of bills of lading which he thought should be found in Sino-

Forest’s records in relation to Sino-Forest’s transactions with Trevista and Spring Field.

[696] During his cross-examination, Ho was taken through a comparison of the two sets of bills

and it was put to him that someone had altered the bills appended to his affirmation. Ho

maintained that “these are bills of lading between two separate companies or entities that has

nothing to do with [SPR] and/or Trevista … it just puzzles me why we would like to forge this or

whoever forged this or the allegations…”

[697] A careful comparison of the original bills of lading produced by Mr. Borrelli from Sino-

Forest’s records and the attachments to Ho’s affirmation leaves me in no doubt that they are

exactly the same documents with two alterations. The attachments to Ho’s affirmation have had

the contracting party whited out and the dates of the documents have been changed from July

2010 to August 2010. Ho’s original affirmation effectively accuses Mr. Borrelli of not being

forthright, or at least being incompetent, in his review and production of bills of lading. This is in

particular directed to Mr. Borrelli’s statement that there he found no reliable evidence than any

logs were ever delivered by Trevista or to Spring Field. Ho says: “Sino-Panel (Russia) should be

in possession of the bills of lading to demonstrate the chain of custody of logs purchased from

Trevista.” He then refers to the altered bills of lading attached to his affirmation.

[698] It must be concluded that Ho, or someone acting on his instructions, altered the bills of

lading and then put them before the Court as genuine. Ho’s alteration of the bills of lading can

only be viewed as a veiled attempt to validate the legitimacy of the Trevista transactions by

making the bills of lading attached to his affirmation appear to be dated at a time when the

Trevista purchase agreement was extant and by removing the real counterparty’s names which

made it obvious that these documents had nothing to do with Trevista. While it is true that they

were only presented as “examples,” the obvious alteration of the documents, if nothing else, casts

serious doubt on the reliability and credibility of Ho’s evidence.

Page: 123

Project Russia on the Nominee Company Managers List

[699] GED, Trevista, Spring Field, and Trellis all appear on the Nominee Company Managers

List under Project Russia with Ho and Jack Chen listed as the managers. The “Documentation

Signed by Nominee Shareholder(s)” column has a checkmark for 13 of the 15 companies under

Project Russia.

[700] The Nominee Company Managers List records Jack Chen as director and shareholder of

GED with an incorporation date of January 4, 2010. Chen Teng is recorded as the director/legal

representative of seven other companies on the same list under Project Russia and the sole

shareholder of Max Grand. Max Grand holds shares in the remaining six companies of which

Chen Teng is a director.

[701] Chen Teng and Tiffany Chan are the same person. She worked at Eminens for GED. The

“list of companies involved in the Russian project” that Ho sent to Yosanda (described above) was

first sent to Ho by Tiffany Chan. The attached list of companies included Trevista, Trellis, and

Spring Field, as well as many other companies listed under Project Russia on the Nominee

Company Managers List.

Conclusion on Trevista Deposits and Advance Payments

[702] I have concluded, on all the evidence, that Jack Chen operated GED, Trevista and Spring

Field under Mr. Chan and Ho’s authority and direction as Mr. Chan’s nominee. GED, Trevista

and Spring Field were not arm’s length companies. Mr. Chan and Ho knew this.

[703] Mr. Chan secretly controlled Trevista and Spring Field and caused Sino-Forest to advance

millions of dollars to Trevista, and take on similar obligations from Spring Field, all of which had

no real commercial purpose.

[704] These transactions were, in fact, conducted for the purpose of diverting cash from Sino-

Forest to these entities that were controlled by Mr. Chan, for the purpose of benefitting Mr. Chan

and his associates.

Sino-Forest’s Loss

[705] As set out in the Steger Report (dealt with below), Sino-Forest suffered an actual cash loss

of $46.759 million in connection with the Trevista log trading transactions representing:

a) the Trevista deposit balance outstanding of $23.3 million which was written‐off in

December 2012; together with

b) unpaid receivables from Spring Field of $24.9 million, which was written off in December

2011; less

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c) the portion of the unpaid Spring Field receivables that exceeded the amounts paid to

Trevista in connection with the same purported logs, (i.e. fictitious paper profits, which the

Litigation Trust does not claim as a loss) of $1.501 million.

[706] Mr. Chan’s damages report from Mr. Ratner refers to Ho’s evidence when asserting that

Sino-Forest failed to take timely action to recover its deposit and suggests the delay in pursuing

recovery of the deposit was the likely cause of the loss.

[707] Ratner’s analysis trenches on questions of liability and purports to assess the evidence in

relation to the alleged fraudulent dealings. In this respect, it exceeds the appropriate scope of an

expert on damages. In any event, Ratner ignores Ho’s close working relationship with Jack Chen

and how deeply involved Ho was in the undisclosed related party transactions between Trevista,

Spring Field and SPR. As fiduciaries, both Mr. Chan and Ho had clear duties to disclose to the

Board and the IC the circumstances in which Sino-Forest’s money was paid to Trevista, including

the $10 million apparently paid to PLP. Neither of them did so.

[708] The defendant argues that the loss of the deposit is the result of Sino-Forest’s delay in

seeking recovery until 2012. However, Mr. Chan and Ho were fiduciaries. They were deeply

involved, I find, in conducting undisclosed related party transactions with Trevista, Spring Field

and others. They had a clear duty to disclose these conflicts at the time to the Board and later to

the IC and the Monitor. Their failure to do so left independent management in the dark about the

nature of the problem.

[709] Further, Ho admitted on cross-examination that he actually recommended writing off the

balance of the Trevista deposit and advance payments in a report dated March 26, 2012 (just two

weeks before he and Mr. Chan were terminated). The fact that Ho recommended writing off the

deposit further shows that Sino-Forest’s inability to recover the deposit was not the result of any

failing on the part of new management post-Muddy Waters Report.

[710] Instead, the fault lies with Mr. Chan and Ho, who authorized the unsecured payment to

Mr. Chan’s nominee’s company, Trevista, of tens of millions of dollars in purported deposits and

advance payments for logs that were never, and never intended to be, delivered.

Elderbridge

Overview

[711] Sino-Forest paid a $10 million deposit to Elderbridge for the purchase of logs from Inner

Mongolia. Elderbridge was controlled by Jim Lok, who later transferred the shares, and his

directorship, to Marco Lam. Yosanda arranged for the incorporation of the Elderbridge companies

and looked after their administration and regulatory filings. Yosanda prepared the documents for

the change of ownership and control from Lok to Lam. Elderbridge is listed as a nominee

company on the Nominee Company Managers List.

Page: 125

[712] The 2006 supply agreements required the return of the deposit if log deliveries did not take

place. Although no log deliveries took place, no repayments of the deposit took place until Sino-

Forest’s auditors threatened to write off the account receivable in 2011.

[713] At that time, Hung told Lam to make a $1 million payment and it was made within days.

The remainder of the account receivable was, as a result, left on Sino-Forest’s books. No further

payments were ever made.

[714] The evidence leads to the clear inference that Elderbridge was not arm’s length and that it

was controlled by Mr. Chan. The evidence also supports the inference that the entire transaction

was set up as a means of diverting millions of dollars out of Sino-Forest into entities secretly

controlled by Mr. Chan and his associates. This transaction resulted in a $9 million loss to Sino-

Forest.

[715] The plaintiff alleges that Mr. Chan caused Sino-Forest to fund its subsidiaries to pay $10

million in unsecured, interest-free deposits to Elderbridge, purportedly for the long-term supply of

logs from Inner Mongolia. Few, if any, logs were ever delivered to the Sino-Forest Group under

this supply arrangement. Ultimately, only $1 million of this deposit was repaid to the Sino-Forest

Group, resulting in a loss to Sino-Forest of $9 million.

The Transaction

[716] There is no dispute that Mr. Chan authorized the transfer of $10 million from Sino-Forest

to Sino-Wood on March 14, 2006. Sino-Wood then paid $9.5 million to Elderbridge, and another

Sino-Forest subsidiary paid $0.5 million to an equity joint-venture (the “EJV”). Mr. Chan signed

various documents authorizing the payments.

[717] The $9.5 million deposit was made on April 25, 2006, more than three months before a

long term supply agreement was signed on July 30, 2006. Mr. Chan was unable to explain the

reason for this timing. The Agreement relating to the $9.5 million deposit, however recognizes

that the prepayment was made “to evidence [Sino-Wood’s] good faith in negotiating with the EJV

the Master Agreement.”

[718] The $9.5 million deposit agreement provided for Elderbridge’s parent company to create a

fixed charge over its shareholding in Elderbridge in favour of Sino-Wood as security for the

deposit. No charge was ever created.

[719] Despite the supplier’s failure to deliver wood logs or return the deposit in accordance with

the relevant agreements, neither Mr. Chan nor Sino-Forest took any meaningful action to enforce

Sino-Forest’s rights to the delivery of the wood logs or the return of the deposit.

[720] Elderbridge and the EJV were connected to Mr. Chan through Jim Lok. In his

examination for discovery and again under cross-examination, Mr. Chan acknowledged that

Elderbridge was in “Jim Lok’s group”, that “the transaction was with Mr. Lok.” Mr. Chan

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acknowledged he discussed with Lok arrangements for the long-term supply of wood from Inner

Mongolia before entering into a Long Term Supply Agreement with Elderbridge.

[721] The EJV is listed on the Nominee Company Managers List with Jim Lok listed as the

Manager. Elderbridge is listed as the 95% shareholder of the EJV.

[722] Yosanda first selected the names of Elderbridge and Findhelm (Elderbridge’s holding

company) in September 2005, to be used in an earlier project called “Project Khan.” Yosanda’s

evidence at trial was that Lok asked her to purchase these companies. However, there is no

documentary evidence of such a request coming from Lok.

[723] Yosanda periodically received emails (e.g. in May 2008 and February 2011) and invoices

(e.g., in March 2008) from Panocean Secretarial Services relating to matters affecting both

Elderbridge and Findhelm. This included invoices for the payment of annual licence fees and

registered agent/office fees. Yosanda managed the corporate administration of these companies.

[724] Yosanda sent an email in March 2009 to Lok’s secretary requesting Lok to provide

identification documents for Tsui Yan (Lok’s business partner) in order to meet regulatory

requirements for Elderbridge and Findhelm.

[725] Mr. Chan’s explanation for why his secretary at Sino-Forest, rather than Lok or Lok’s

assistant, were looking after the administration of Lok’s supposedly arm’s length company was

that Lok was based in Shanghai. Mr. Chan did not explain why being in Shanghai had any

bearing on Lok’s ability to manage his own business interests or companies. Nor did he explain

why Lok would entrust these matters to an employee of a Sino-Forest counterparty whose

interests were not the same as, and potentially adverse to, Elderbridge.

[726] There are also documents sent from Hung to Lok in which Hung asked Lok to look after

getting signatures on Findhelm resolutions relating to an instrument of transfer and resignation

and to return the originals to him. The required documents were provided by Lok to Yosanda

several days later.

[727] Between 2006 (the year that the Elderbridge Long Term Supply Agreement was executed)

and 2010, few (if any) wood logs were supplied. Even though the $9.5 million deposit agreement

provided that, if logs were not delivered, Elderbridge was required to repay 20% of the $9.5

million deposit each year, no such repayments were ever made.

[728] One excuse advanced for why no logs were delivered was due to the imposition of a

Russian export tax which made it uneconomic for Elderbridge to make actual log deliveries.

While this may be true, it does not explain why the deposits were left with Elderbridge for 5 or 6

years with no action. Indeed, if it were obvious the supplier was not going to deliver due to

prohibitive export taxes, there was all the more reason for Sino-Forest to insist upon return of the

deposits until the tax situation improved.

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[729] There was an increasing level of concern raised by Sino-Forest’s auditor, E&Y, between

2007 and 2010 regarding Elderbridge’s failure to repay the deposit and the EJV’s failure to deliver

wood logs in accordance with the relevant agreements. During cross-examination, Mr. Chan

acknowledged that there had been “management concerns” and that “the auditor raised concern”

about the fact that wood logs had not been supplied and the deposit had not been returned.

[730] Despite these concerns, Mr. Chan did nothing to enforce Sino-Forest’s rights regarding the

repayment of the deposit or the delivery of wood logs to its subsidiaries. In his examination for

discovery, Mr. Chan confirmed that he never personally discussed the return of the $10 million

deposit with his friend Lok, because “[i]t’s too small a deal.”

[731] In August 2010, the Elderbridge supply agreement and the $9.5 million deposit agreement

were restructured to replace the parties associated with Lok with new parties associated with Lam.

[732] Mr. Chan signed the agreement terminating the $9.5 million Elderbridge deposit

agreement and signed a fresh agreement under which Sino-Wood agreed to pay a $9.5 million

deposit to Winner Ally. Although on the face of these agreements, the $9.5 million deposit

should have been returned to Sino-Wood, and then an equivalent sum should have been paid to

Winner Ally, there is no evidence that this receipt and payment ever occurred.

[733] The key counterparties to the restructured transaction were Erenhot Quande and its parent

company Winner Ally. Both companies appear on the Nominee Company Managers List as being

companies managed by Lok.

[734] However, in May 2010, the ownership of Winner Ally was transferred from Lok to Lam.

The restructuring of the Elderbridge deposit consisted of Lam stepping into the shoes of Lok as

shareholder and director of Winner Ally and Erenhot Quande.

[735] It was Yosanda who provided draft resolutions removing Lok as a director of Winner Ally,

replacing him with Lam and transferring ownership of Winner Ally from Lok to Liang Tai (a

company controlled by Lam) for consideration of $1 million. Yosanda sent these documents to

Lok’s secretary to arrange signatures and asked them to “return the originals to me.”

[736] It was Hung who confirmed that Liang Tai was the parent of Winner Ally and asked Lam

to have the Erenhot, Winner Ally and Liang Tai contracts signed.

[737] The Winner Ally deposit agreement provided that the $9.5 million deposit was to be repaid

to the relevant Sino-Forest Group member by way of regular installments. The first installment

was due in May 2011.

[738] During the 2010 financial statement audit, Sino-Forest’s auditors indicated that if the May

2011 initial repayment of the deposit of $1 million was not made, the account receivable would be

reassessed. On May 11, 2011, Horsley asked Mr. Chan to follow up on this payment, otherwise

E&Y would require Sino-Forest to write off the whole $10 million. Mr. Chan sent this email to

Hung who replied that he would “work with” Lam.

Page: 128

[739] Hung then emailed Lam asking for the money and telling him to make the payment from

Winner Ally. Within a few weeks, $1 million was paid to Sino-Forest.

[740] The ease with which Mr. Chan was able to procure the repayment of $1 million when

required, in the circumstances, is strong circumstantial evidence that he executed control over

Lam’s companies and the deposited funds. No repayments of this deposit had taken place for five

years, and no repayments were made after this, in spite of the fact that no logs were delivered.

This too is further evidence that the supply contract and deposit agreement were not bona fide

commercial transactions.

[741] The Sino-Forest Group received no further payments with respect to the outstanding $9

million deposit. The outstanding balance of $9 million was written off in Sino-Forest’s books as

unrecoverable in September 2012, resulting in a $9 million cash loss to Sino-Forest.

Xunxiang

[742] With respect to wood log contracts entered into with Xunxiang, it is alleged that Mr. Chan,

together with members of Inside Management, secretly controlled Guangxi Xunxiang Timber

Import & Export Company Limited (“Xunxiang”), which was a wood log supplier to Sino-Forest.

[743] Sino-Forest paid substantial unsecured deposits to Xunxiang resulting in a loss to Sino-

Forest of at least $85.8 million in cash (prior to taking into account payment of approximately $10

million received under the RAPA).

[744] There are four contracts in particular which found the basis for the plaintiff’s allegations.

The four wood log supply contracts do not clearly identify which of the three Xunxiang

companies was Sino-Forest’s counterparty. According to Mr. Chan’s evidence at trial, “it should

be the Hong Kong or BVI company” but that “I’m just confused myself about this.” There are

three companies all with the name “Guangxi Xunxiang Timber Import & Export Company

Limited” registered, respectively, in the PRC, Hong Kong, and the BVI. The PRC incorporated

Xunxiang is listed on the Nominee Company Managers List with Li Hai Bo as its manager, legal

representative and as a 20% shareholder. Mr. Chan gave evidence at trial that all three Xunxiang

companies were represented by his friend, Li Hai Bo.

[745] It is not in dispute that Sino-Forest’s subsidiaries paid substantial unsecured deposits and

balance payments totalling $87.6 million to Xunxiang under the four log contracts. The deposits

and balance payments were largely funded by Sino-Forest through a complex series of

intercompany loans.

[746] Sino-Forest received only $8.8 million of log deliveries from Xunxiang under the four

contracts. Furthermore, as with Trevista, only a portion of the delivery price for these logs was

actually applied against the deposits already made. Of the $8.8 million, only $1.8 million was

taken from the deposits already made, while $7 million was paid for with a further cash outlay by

Sino-Forest.

Page: 129

[747] The Xunxiang wood log deliveries were on‐sold by Sino-Forest to Trade Allied. Trade

Allied never paid in cash for the majority of these logs. Instead, most of the accounts receivable

were settled via set‐offs against BVI standing timber purchases of $8.3 million in March 2011.

Only $0.9 million was actually received as a cash payment.

[748] A number of documents reveal that Sino-Forest employees were significantly involved in

the management of Xunxiang and drafted documents on its behalf.

[749] Ip regularly received Xunxiang’s balance sheets and information regarding the salaries

paid to its employees, including Li Hai Bo.

[750] Certain Sino-Forest employees were also kept apprised of other internal Xunxiang matters.

For example, Ip and another Sino-Forest employee were copied on an email dated April 8, 2011

sent from Jill Tsang at a Xunxiang email address to Li Hai Bo. Jill Tsang confirmed she had

carried out Li Hai Bo’s instruction to transfer $6 million to his personal Cambodian account and

confirmed that she was in the process of remitting a further $7 million as instructed during a call.

[751] Sino-Forest employees also drafted Xunxiang documents, including invoices and

contracts. For example in January 2010, Lam (China Square) asked Brian Cheung (Sino-Forest)

to prepare the contracts by which China Square would purchase logs from its supplier (i.e.,

contracts not involving Sino-Forest). Lau, Ip and Hung were all copied on this email. A few days

later, Cheung sent Lam copies of a contract between Xunxiang and China Square. Cheung

advised Lam that Xunxiang, China Square’s supplier, was a BVI company and that “payment

terms have been changed to 40% deposit, balance by COD.” In another email exchange, Cheung

is shown to be drafting and revising Xunxiang’s invoices to Sino-Forest for internal review and

approval by other Sino-Forest employees.

[752] Xunxiang was also involved in a chain of transactions with China Square and Bohu. Both

of these companies appear on the Nominee Company Managers List.

[753] China Square is undisputedly Lam’s company; it was a major wood log supplier to Sino-

Forest. Lei could not recall whether he held shares in Bohu but he is recorded on the Nominee

Company Managers List as a 50% co-owner of Bohu. Lei is also recorded as Bohu’s sole

director. Pauline Chan is listed as Bohu’s manager.

[754] Hung, James Lau (“Lau”), and Mr. Chan were all examined on an email dated March 31,

2010 from Brian Cheung (Lau’s subordinate), to Hung, Lau, Ip, and Li Hai Bo. Cheung’s email

attached “the latest” transaction flow chart together with a process chart.

[755] The flow chart depicts logs originating from a Vietnamese supplier being sold to Xunxiang

and in turn sold at a profit of 1% to either China Square or Bohu. The logs are then shown to be

sold at a profit of 20% to Sino-Forest Resources or Sino-Panel Asia and thereafter sold to Trade

Allied (a wood log customer) at a profit of 4%. From there, the logs are shown to pass either to

Page: 130

Shenzhen Hongji (Lei’s company) or an unknown party, with the “Profit:TBD” before ultimately

being sold to a PRC customer with “Profit TBD.”

[756] The chart also reflects different Sino-Forest personnel as being the “Person in charge” for

various steps in the supply chain, including between the suppliers, Xunxiang and Bohu, and the

customers, Trade Allied and Shenzhen Hongji.

[757] Another document attached to the email is a process chart that identified the person in

charge for each transaction. The last key point indicates that where the actual price differs from

the forecast price, the marginal increases are to be allocated to China Square and Bohu, not Sino-

Forest. It states:

Since the quality and quantity of each purchase influence the actual purchase price,

the actual purchase price stands a good chance of being different from the contract

price (usually lower than the contract price). In such case, the difference should

stay in the upstream company of Sino (SFR/SPA), i.e. (CS/BOHU), and the sales

price to the downstream company (TA) would not change.

[758] At trial, Mr. Chan denied any knowledge of the flow of log transactions depicted in the

chart and could not explain why Ip, who had the relationship with Li Hai Bo and could enter into

contracts directly with Xunxiang, needed to insert China Square as a middleman receiving a 20%

profit. Mr. Chan could only say that it:

seems a proposal about a complicated structure to resolve all those logistics of

import/export and re-enter port arrangements. So it’s complicated. It looks like a

proposal. And are all the parties… have all the parties agreed on it? We just don’t

know.

[759] When shown evidence that Sino-Forest employees were drafting contracts and invoices

between Bohu and Xunxiang, Mr. Chan agreed that Sino-Forest employees would not normally be

drafting contracts to which Sino-Forest was not a party. All he could say was that he was “holding

his position until I can find out what that is.”

[760] Hung’s evidence when cross-examined on the flow of logs chart, was that Sino-Forest

employees were “simply providing assistance with the documentation required in the process of

customs clearing.” Hung thought the references to profit margin were simply “an estimate on the

profit margin of each individual company.” In Hung’s view, the flow chart was “a proposal for the

flow of the timber, so that all the colleagues who got involved with the flow of the goods would

know where to provide assistance, or how.”

[761] Hung was also asked about the last sentence of the process chart attached to the email

which instructed that any marginal increase in actual profit be allocated to Bohu or China Square,

not Sino-Forest. Hung said that an arm’s length counterparties’ profit margin was none of Sino-

Forest’s business.

Page: 131

[762] Lau was also cross-examined on Cheung’s March 31, 2010 email and attached flow chart,

along with a number of other emails to which he was a party that depicted Sino-Forest personnel

preparing documents on behalf of Xunxiang. Despite being emailed the chart, Lau was unable to

recall it and denied any involvement in it.

[763] The contemporaneous documents are not consistent with the characterization of the flow

chart as a mere proposal. Sino-Forest employees prepared actual contracts between Xunxiang and

China Square that correspond to the flow chart. Hung and Lau, along with Lam, were all involved

on an email chain in which instructions were given to prepare these contracts. Hung’s explanation

that “within mainland China, often parties help each other out” concedes that something was

actually being done here, and that it was not merely a proposal The last email in the chain says

that the payment terms have been “changed to 40% deposit, balance by COD.” These terms

correspond precisely to the payment terms in the flow chart between China Square and Xunxiang.

Lau’s suggestion that this was a “coincidence” is incredible given the precise and detailed nature

of the documentation of these arrangements.

[764] The claim that the flow chart was merely a proposal is also inconsistent with the evidence

that Sino-Forest employees were also involved in emailing other draft contracts and invoices as

between Xunxiang and Bohu, including arranging for their stamping.

[765] The combined effect of these communications and documents clearly demonstrate that the

Xunxiang log purchases were not with an arm’s length entity and that the transactions were not

bona fide commercial transactions. Xunxiang’s finances were managed (or at least overseen) by

senior Sino-Forest officers, including Ip and Hung. The flow of the transactions and funds was

structured and managed, beginning to end, almost entirely by Sino-Forest personnel working

under Mr. Chan, Ip and Hung.

[766] Essentially no logs were delivered. Xunxiang never returned the deposits. As outlined

below, EPHL only recovered about $10 million of a much larger arbitration award, which was

only possible because EPHL obtained a Mareva injunction freezing some of Xunxiang’s assets

before they, like the balance of the deposit monies, were moved beyond Sino-Forest’s reach.

[767] The Xunxiang transactions were, I find, a fraud designed to divert money from Sino-Forest

to entities secretly controlled by Mr. Chan and his associates.

Sino-Forest’s Loss and the Xunxiang Arbitration

[768] Sino-Forest lost at least $85.8 million in cash on the Xunxiang transactions (prior to taking

into account payment of approximately $10 million received under the RAPA, addressed below).

[769] Prior to the sale of EPGL to New Plantations on April 21, 2016, EPHL sought to recover

the Xunxiang deposits and payments. EPHL obtained a freezing order against Xunxiang which

attached cash in Xunxiang’s bank accounts of approximately $12.5 million. EPHL also instituted

arbitration proceedings against Xunxiang.

Page: 132

[770] The arbitration panel found in favour of Sino-Panel and Sino-Wood, the subsidiaries

which were parties to the contracts. Sino-Forest was awarded $87 million together with interest

and costs. Shortly after this award, EPGL was acquired by New Plantations, which consequently

acquired the rights to the award. Following the acquisition, New Plantations settled the collection

of the award to the extent of the funds secured by the freezing order, about $12.5 million.

[771] EPHL is entitled to 80% of the recovery from the Xunxiang arbitration under the RAPA.

As a result, EPHL received $10 million under the RAPA, which the plaintiff has applied to reduce

the total loss suffered by Sino-Forest.

[772] Mr. Chan’s damages expert, Ratner, criticized Steger’s quantification of this loss on the

basis that he ought to have made an estimate of how much of the $87 million could reasonably be

recovered. Ratner took the position that the Litigation Trust’s damages should be calculated as

though EPHL realized on the entire amount owing under the arbitration award.

[773] I am unable to agree with the defendants’ argument on this point. EPHL did not receive

the entire arbitration award; EPHL only ever recovered its 80% share of the frozen funds actually

recovered. Prior to and during the arbitration, Li Hai Bo refused to disclose what happened to the

tens of millions of dollars that Xunxiang received from Sino-Forest. If Mr. Chan caused Sino-

Forest to pay fraudulent deposits to his nominee, it does not lie in his mouth to say there ought to

have been full recovery on the award. New Plantation’s acceptance of the seized amount in

satisfaction of the entire award reflects the business reality, entirely supported by the evidence in

this case, that Xunxiang was not good for the money and that further pursuit of Xunxiang would

be throwing good money after bad. Mr. Chan is therefore liable for the full extent of Sino-

Forest’s resulting loss that remains unrecovered from Xunxiang.

PT Anka

[774] The plaintiff also argues that a further $7.2 million was diverted through transaction with

PT Anka concerning, not wood logs, but plywood purchases. On December 7, 2010, Mr. Chan,

on behalf of Sino-Wood, entered into a $15 million agreement with PT Anka for the supply of

plywood and authorized the payment of an unsecured deposit to PT Anka of $7.5 million. Mr.

Chan also authorized Sino-Forest’s funding of the deposit.

[775] No plywood was ever delivered to Sino-Forest pursuant to the agreement with PT Anka,

nor was the deposit returned.

[776] The plaintiff concedes that he has been unable to establish any connection between Mr.

Chan and PT Anka.

[777] Instead, the plaintiff asks for a leap of faith. The plaintiff argues that the payment of

unsecured deposits is, of itself, evidence of breach of Mr. Chan’s fiduciary duty and negligence.

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[778] I am unable to agree. It is not sufficient, to prove wrong-doing, merely to show there was a

loss. The lynchpin to the impropriety in the other four cases of deposits lost was the evidence that

the transactions were not arm’s length. That evidence is lacking here.

[779] The claim with respect to PT Anka is therefore dismissed.

Conclusion

[780] The preponderance of probabilities arising from all the evidence surrounding four of these

wood log deposit transactions is that they were a fraudulent mechanism for the diversion of funds

out of Sino-Forest into entities controlled by Mr. Chan or others acting at his direction, for the

purpose of secretly enriching Mr. Chan and his associates in the fraudulent venture.

[781] I accept Steger’s calculation of the wood log deposit fraud loss of $167.4 million. From

this must be deducted the net recovery by EPHL of $10 million, for a net loss to Sino-Forest of

$157.4 million.

March Maple

[782] Mr. Chan was the director and legal representative of three of Sino-Forest’s PRC

subsidiaries, Sino Maple Trading, Sino Maple Shanghai, and Jiafeng Suzhou (the “Floor Paneling

Subsidiaries”). Mr. Chan testified that March Maple was the primary distributor in the PRC of

wood flooring products on behalf of these three subsidiaries.

[783] Mr. Chan testified that in late 2005 or early 2006, Sino-Forest advanced funds to March

Maple for the purpose of establishing retail flooring panel outlets in the PRC. Mr. Chan did not

dispute Mr. Borrelli’s evidence that the amount advanced was RMB 14 million.

[784] March Maple was an undisclosed related party. Mingchen Li, who was a Sino-Forest

employee, was also a 60% shareholder of March Maple. Li held various management positions

with Sino-Forest’s flooring panel subsidiaries from 2002 to 2008.

[785] In his affirmation, Mr. Chan testified that Sino-Forest, through its subsidiaries, purchased

51% of March Maple in 2007 but that the transaction was subsequently reversed. Mr. Chan said

he approved the transaction and its subsequent reversal.

[786] It appears that the transaction was reversed because David Horsley, Sino-Forest’s Chief

Financial Officer, raised significant concerns about the acquisition. In an email to Mr. Chan on

December 16, 2007, Horsley said:

I learned from EY that we purchased Sino-Maple? Who was responsible for the

deal? Are we going to have to write-off the 11 million receivable. What is the

business case for buying the company. Under the authorization policy, you and I

should have seen this deal and both signed off on the deal. This raises concerns on

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EY part and my part. We need to see the financial statements to see if there is an

11 million write-off.

[787] Mr. Chan was confronted with this email during cross-examination. He retreated from his

affirmation and testified that he did not actually know what happened: “yeah I don’t know. And

also I don’t even know whether it was actually done or reversed.”

[788] On April 13, 2012 and October 8, 2012, two of Sino-Forest’s floor paneling subsidiaries

provided cash guarantees in the total amount of about CAD$13 million for two loans obtained by

March Maple from a PRC bank. A chop with Mr. Chan’s name appears alongside the Sino-Forest

subsidiary chop on each pledge. March Maple defaulted on the loans and the cash pledges were

called on, resulting in a loss to Sino-Forest of about CAD$13 million in today’s currency.

[789] In his affirmation, Mr. Chan testified that his personal chop had always been kept in the

Sino-Forest PRC branch office. After June 2011, he had no access to his personal chop. He

speculated that if there were guarantees using his chop, they were likely done with the approval of

new management. In any event, Mr. Chan deposed that he played no role in these guarantees in

2012 and his chop was used without his knowledge or consent. When pressed on this issue in

cross-examination, Mr. Chan said that he would need to “make investigation into why a chop with

my name is put there.”

[790] Although this transaction is highly suspicious, I am not satisfied the evidence rises to a

preponderance of probabilities that Mr. Chan fraudulently caused Sino-Forest to issue guarantees

for the March Maple loans. Unlike the transactions analyzed above, there is no evidence linking

Mr. Chan personally to March Maple or suggesting Mr. Chan or his friends personally benefited

from the loans. There is no evidence about who placed these loans or when or why this was done.

There is no evidence about how or why Sino-Forest agreed to pay on the guarantees. Mr. Chan’s

chop was used, but after he resigned from office and no longer had access to Sino-Forest’s

premises. Apart from the fact that his chop was used, there is simply no evidence linking Mr.

Chan to this transaction or to this loan. For these reasons, I am unable to conclude that Mr. Chan

is liable for the loss of CDN$13 million in connection with the March Maple loans.

Greenheart

Overview

Plaintiff’s Allegations

[791] The plaintiff contends that an early, and perhaps exploratory, use of secret nominees to

conceal self-dealing and fraud by Mr. Chan occurred in connection with Sino-Forest’s ultimate

acquisition, between 2007 and 2010, of a company called Greenheart Group Limited (Greenheart)

and its subsidiary, Greenheart Resources Holdings Limited (GRHL). The two companies are

collectively referred to as the Greenheart Group.

Page: 135

[792] GRHL was a BVI company whose primary business was owning and operating natural

forest concessions in Suriname, South America.

[793] Fortune Universe and Montsford were two BVI companies that held approximately 29%

of GRHL’s total issued share capital in early August 2007.

[794] A number of contemporaneous documents, many found on Yosanda’s computer, indicate

that Mr. Chan secretly controlled Fortune through the appointment of Lei Guangyu as his nominee

director and shareholder and Montsford through the appointment of John Zeng, again as Mr.

Chan’s nominee.

[795] Mr. Chan was aware by 2007 that GRHL was in serious financial difficulties and

considered by at least one investor to be “technically insolvent.” In May 2007, Lei (then GRHL’s

Chairman) advised Mr. Chan and other shareholders that the GRHL business was not viable and

ought to be closed down.

[796] Mr. Chan, without disclosing either GRHL’s financial and operational problems or his

secret interest in the company, nevertheless caused Sino-Forest, through a series of transactions

between July 2007 and 2010, to obtain a majority interest in GRHL by acquiring (a) shares in

GRHL (including from Fortune and Montsford) and (b) a majority interest in GRHL’s majority

shareholder Greenheart.

[797] Sino-Forest ultimately invested $202.2 million in Greenheart Group through cash, loans

and the issuance of shares, even though the Greenheart Group operated at a loss in each of the

years 2007 to 2011.

[798] Following the CCAA Plan, the Sino-Forest Group’s interests in GRHL and Greenheart

were sold and Sino-Forest suffered a loss of at least $93.2 million through this investment

orchestrated by Mr. Chan.

[799] In contrast to the $93.2 million loss suffered by Sino-Forest, Mr. Chan made a secret profit

of $37.86 million from the Greenheart transactions through his undisclosed interests in Fortune

and Montsford.

Defendant’s Position

[800] The defendant denies that he held any interest in Fortune or Montsford or that he earned

any secret (or other) profit from that interest. The defendant testified on this issue, and lead

additional evidence from others, including Yosanda, Lei and Zeng.

[801] Mr. Chan became aware of Suriname forestry opportunities through Jim Lok, whom he

had known since 1994, Lei Guangyu, whom he had known since the 1980s, and Tommy Lui.

They were all investors in Greenheart and its predecessor corporation Super View International

Limited (“Super View”).

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[802] In 2004, Lei subscribed for shares representing 22.75% in Super View through his

company Shenzhen Hongji for $7 million. Shenzhen Hongji had been a PRC state owned

enterprise that Lei bought into when he left a position with the PRC government. A PRC

government owned corporation continued to own 20% of Shenzhen Hongji during the period

Shenzhen Hongji held shares in GRHL.

[803] Lei produced an agreement by which Shenzhen Hongji acquired the shares and bank

records showing he paid for this investment. Lei played an active role in GRHL’s affairs as

Chairman and in the detailed monitoring of its business and affairs in 2006 and 2007.

[804] Lei had been a friend of Mr. Chan’s for over 20 years. Lei testified that around the time

Shenzhen Hongji subscribed for Super View shares, he decided to hold the shares in a BVI

company. He knew Yosanda had experienced in setting up BVI companies and asked Mr. Chan

for Yosanda’s assistance. Mr. Chan told him to contact Yosanda directly. He did so, asking

Yosanda to take care of all the formalities. Yosanda then proceeded to prepare all of the

incorporating documents for Fortune Universe.

[805] Zeng was also an investor in Super View and conducted negotiations to purchase his

shares during 2004 and the first half of 2005, eventually committing verbally in 2005 to purchase

175 million shares.

[806] Zeng also asked Yosanda to help set up his BVI company. Zeng is a PRC trained lawyer,

qualified in 1993. He co-founded the Kai Tong law firm in 2007. Zeng had known Mr. Chan

since 2000 and, by 2004, they were friends. Zeng testified that although he was a trained lawyer

working at a PRC law firm in 2005, the firm was not strong in forming overseas companies. Zeng

testified that it was “easier” for Yosanda to take care of the formalities and procedures for setting

up a BVI company for him.

[807] Because he travelled frequently, he also asked Yosanda to take care of all matters relating

to the operation of Montsford, including keeping copies of the corporate documents, the company

chop and passing on Zeng’s instructions on various matters relating to the company. Any

documents, including share certificates relating to Montsford, were kept for him by Yosanda in

Hong Kong.

[808] In October 2006, Lei and Zeng attended a social dinner with Mr. Chan. Zeng threw out

the idea of selling his interest in Greenheart. Mr. Chan said he would consider buying it. Lei also

said he was interested in selling. Lei and Zeng did not pursue the idea and Mr. Chan never raised

it with them again either.

[809] After this dinner, Mr. Chan asked Yosanda to prepare share transfer documents in case he

decided to purchase Lei and Zeng’s interest. Yosanda prepared the documents and sent them to

Mr. Chan’s lawyer, May Tsui, for comments. She received comments back but the share transfer

documents were never used because Mr. Chan never pursued the purchase.

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[810] Zeng testified that, although he verbally committed to buying 175 million Super View

shares in the first half of 2005, he did not sign the relevant documents making him the sole

shareholder and director of Montsford until 2006 or 2007. These documents were backdated to

January 2004, the date of incorporation of the company.

[811] According to Yosanda, in March, 2007, Zeng telephoned her asking whether draft

documents had been prepared for Zeng to resign as a director and appointing Mr. Chan as a

director and transfer of Zeng’s shares. Yosanda confirmed to Zeng that the documents had been

prepared. After the call she went back to check by opening the draft document on her computer,

then clicked ‘save and close.’ Zeng told her “when it is needed, I will call you.” Yosanda never

actually sent the documents to Zeng because he never told her he needed them.

[812] By early 2007, a Sino-Forest subsidiary had entered into an agreement with, and started to

order logs from, GRHL. Alfred Hung said Sino-Forest’s overall strategy was that Sino-Forest

would enter into a long-term supply agreement for Suriname logs in conjunction with an equity

investment. In the spring of 2007 plans crystallized for GRHL to go public through a reverse

takeover (“RTO”) of a shell corporation listed on the Hong Kong stock exchange.

[813] GRHL needed to fund the RTO. In order to raise the necessary funds, GRHL made a

rights offering to existing shareholders. In May 2007, GRHL forwarded correspondence to

Yosanda and Hung concerning shareholders Fortune and Zeng regarding the rights offering of

Class B shares which was to close 5 June 2007.

[814] The Class B rights offering was priced attractively to encourage existing shareholders to

take up their allotment. Mr. Chan says he indicated to GRHL that if there was a shortfall on

subscriptions for the rights, Sino-Forest would take up the remainder. In the end, existing

shareholders took up all of the rights on offer.

[815] Lei sent a message to Mr. Chan, wanting to speak to Mr. Chan about the rights offering,

Lei had expressed very critical views about GRHL operations and management immediately prior

to this. Mr. Chan did not respond to Lei’s message. Mr. Chan said he was certain Lei was calling

about Sino-Forest’s intentions about doing a deal with GRHL. Since Sino-Forest had firm plans

by that time about how it was going to participate in GRHL, Mr. Chan felt it was untenable for

him to speak to Lei about those plans.

[816] Lei decided not to take up the rights offering available to Fortune. He testified that he

never discussed the matter with Zeng and only later found out that Zeng had taken up the rights

offering, including the shares allotted to Fortune.

[817] Zeng took up the GRHL rights offering and bought all the shares allotted to Montsford.

He also had Montsford buy the allotments of other shareholders, such as Fortune, who decided not

to take up the rights offering. Montsford ultimately held about 1.6 billion shares in GRHL.

[818] Under the July 2007 Master Sales and Purchase Agreement between GRHL and Sino

Capital Global Inc., GRHL was committed to sell a stated quantity of Suriname logs over a stated

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period at a fixed price. The 2007 agreement also granted an option to acquire one billion shares of

GRHL at a price of $0.006. Sino-Capital immediately exercised the option, paying $6 million.

The second part of the transaction was completed a month later when the takeover was completed.

A shell company, Omni Corp Limited (“Omni Corp”), purchased 60% of GRHL, for a total value

of $80 million. This compared very favourably to the $6 million price Sino-Forest paid for 1

billion Class B shares which translated into a total capitalization for GRHL of under $46 million.

[819] In the August 2007 Omni Corp transaction, Sino-Forest sold 60% of its GRHL shares.

Sino-Forest received cash and securities worth $6,298,077, thus receiving all of its initial

investment back while still retaining 40% of its interest in GRHL.

[820] There is no evidence that Sino-Forest or its subsidiaries received deficient performance

from GRHL in respect of its purchase of Suriname logs under the Master Sales and Purchase

Agreement. Further, the investment by Sino-Capital of $6 million to acquire 1 billion shares of

GRHL immediately prior to the Omni Corp reverse takeover transaction proved to be a very

provident transaction for Sino-Capital because it recovered substantially more from its investment

than the cost while still retaining 40% of its interest.

[821] Lei testified that he sold the Greenheart shares held by Fortune between 2007 and 2010 for

cash, shares and convertible bonds. This included Sino-Forest shares, which he later also sold.

The proceeds went into Lei’s Hong Kong bank account.

[822] Zeng also sold his GRHL shares at about the same time but had no Hong Kong bank

account. Zeng deposited Montsford’s sale proceeds into Lei’s bank account. The money

deposited by Montsford was subsequently dealt with in accordance with Zeng’s instructions.

[823] Lei testified that he owed money to Zeng and that Zeng was indebted to Mr. Chan. Lei

said that, at Zeng’s request, he remitted funds received by Fortune Universe and Montsford to a

third party in order to repay: a) Lei’s debt to Zeng; and b) Zeng’s debt to Mr. Chan.

[824] Zeng also testified that he owed money to Mr. Chan, which he said was unrelated in any

way to his purchase of Super View or GRHL shares. When Montsford earned cash from its

GRHL investment, Zeng used that money to repay a portion of the loan he owed to Mr. Chan.

[825] In 2011, Lei decided to sell the Sino-Forest shares he held through Fortune. He contacted

Mr. Chan to ask whether it was a good time to sell. Mr. Chan, however, did not want to discuss it

with him. Mr. Chan advised Lei to ask Yosanda for details on how to sell the stock. Lei called

Yosanda to request her help.

[826] On Yosanda’s advice, Lei opened a securities trading account with a broker in Hong

Kong. Yosanda liaised with Lei’s secretary to establish the account. Yosanda advised Lei not to

sell all his shares in one go as this might suppress the price. He therefore sold the shares in a

number of transactions.

Page: 139

Overview of Conclusion

[827] In my view, the preponderance of the probabilities of the case, having regard to the

evidence as a whole, is that:

(a)

(b)

(c)

(d)

(e)

Lei and Zeng were Mr. Chan’s nominees. Mr. Chan was the beneficial owner of

Fortune and Montsford;

Mr. Chan caused Sino-Forest to invest in the Greenheart Group while concealing

his interest in Fortune and Montsford from Sino Forest and the Board;

Mr. Chan had inside information about the dire financial situation Greenheart

Group was in but did not disclose that information to Sino-Forest and the Board;

Mr. Chan made a secret profit from his investment in the Greenheart Group

through Montsford and Fortune of $39.65 million; and

Sino-Forest, although its investment initially appeared provident, ultimately

suffered a loss of $93.2 million on its Greenheart Group acquisition.

My reasons for reaching these conclusions are set out below.

The Formation of Fortune and Montsford

[828] Mr. Chan does not deny that his assistant, Yosanda, helped set up and administer both

Fortune and Montsford throughout their corporate existence. Mr. Chan denies that this indicates

he had an interest in these companies. Rather, Mr. Chan says that his secretary was only assisting

his friends, Lei and Zeng.

Montsford

[829] While Montsford appears to have been involved with GRHL as far back as December

2005, the contemporaneous documentary record gives no indication that Zeng was involved with

Montsford at that time.

[830] Xu Ni, Sino-Forest’s legal officer, attended a meeting on December 13, 2005 regarding the

Suriname project. In a December 22, 2005 email, she forwarded minutes of that meeting to the

other attendees and to Yosanda “for Allen’s reference.” The email and minutes make no

reference to, and were not sent to, Zeng.

[831] The minutes do make reference to actions to be taken by Montsford in connection with the

Suriname project and, in particular, the reorganization of Super View into Greenheart and

Montsford’s participation in the “operational” aspects. Montsford appears on the signature page

of the minutes as “present” without reference to Zeng, whereas Lei, Lok and ‘Thomas Kok’ are

named in person and, of course, Xu Ni was herself present. The fact that Mr. Chan received the

Page: 140

minutes while Zeng did not, even though Montsford’s involvement was expressly contemplated,

is inconsistent with Zeng’s involvement in 2005.

[832] Mr. Chan’s evidence in chief was that:

At some point in 2005, Lei and Zeng each separately contacted me to ask for help

in setting up a BVI company for the holdings of the Suriname company… After

Zeng picked the company name Montsford from the list of companies provided by

Yosanda, Yosanda told me about this. I told her to tell Tommy. He was in charge

of the Suriname business.

[833] In cross examination, however, when confronted with Xu Ni’s email and minutes, Mr.

Chan said he could not “remember at which point in time that John Zeng became the owner of

Montsford.”

[834] Mr. Chan could not explain why Zeng was not named in the minutes or copied on Xu Ni’s

email even though this was supposed to have been three months after Zeng chose the name

Montsford and agreed to invest.

[835] There are no contemporaneous documents that reflect Zeng exercising any substantive role

as director and shareholder of Montsford. Zeng attached no documents to his affirmation to

support his claim that he was an investor in GRHL. Zeng was never copied on any email

correspondence to shareholders regarding GRHL’s business and operations.

[836] Mr. Chan, on the other hand, was copied on a significant volume of correspondence long

before Sino-Forest ever had an interest in GRHL.

[837] During his evidence at trial, Zeng refused to disclose from whom he purchased his shares

in Super View, relying on an alleged “confidentiality” provision in an agreement “signed”

between him and the seller. This agreement was not produced. Zeng was impeached on this

answer, which was inconsistent with an answer given under oath to the same question when cross-

examined in prior interlocutory proceedings. At that time, Zeng had relied upon a purported

“privilege” claim in order to avoid disclosing the identity of the seller.

[838] Zeng was then asked when he paid for the Super View shares. Having previously referred

to a written agreement, he further amended his version of events and said there was a verbal

agreement reached towards the end of 2005. All he could say was that he paid for the Super View

shares between 2005 and the “first half of 2007” and that he could not recall how much he paid

for them.

[839] Although Zeng asserted Montsford was his company, he flatly refused to say how much he

paid, when he bought it or who he bought it from. Zeng steadfastly refused to agree to even the

most obvious, simple questions about his acquisition of Montsford and GRHL shares. Zeng was

difficult and evasive. His interpretation of documents was frequently at odds with the plain

Page: 141

language used. His evidence was contrived and inconsistent with both contemporaneous

documents and the evidence of other witnesses. I found Zeng to be a most unreliable witness.

Fortune and Spirit Land

[840] Lei testified that Fortune was always his company. Lei’s company, Shenzhen Hongji, paid

US$7 million for Fortune’s shares of Super View. Lei asked Mr. Chan if Yosanda could assist in

setting up Fortune, since Yosanda was experienced in setting up BVI companies.

[841] I found Lei’s explanation implausible given that:

(a) Lei is an experienced business man with his own secretary, Nancy;

(b) Lei and his wife co-owned Spirit Land, a BVI company which also held shares in

GRHL. Lei was asked at trial who handled the incorporation and administration of

this company. Lei’s response was that: “My wife found her people to do the work. I

had not asked her about that.” Lei and his wife were therefore able to incorporate

Spirit Land without help from Yosanda.

(c) Lei also gave evidence that he had another BVI company, Recent Fortune.

Yosanda confirmed under cross-examination that she had not assisted Lei in

incorporating Recent Fortune. Lei was able to set up and run Recent Fortune

without Yosanda’s assistance.

[842] Unlike Zeng, Lei was willing to disclose how Fortune acquired its shares in GRHL.

According to Lei, Fortune’s GRHL shareholding originated from the purchase of Super View

shares by his company, Shenzhen Hongji. Mr. Chan and Lei relied upon this as proof that Fortune

was really Lei’s company. However, in cross-examination Lei was eventually forced to admit in

the face of documentary evidence that he held funds belonging to Mr. Chan in Shenzhen Hongji

and, he said, invested Mr. Chan’s money in various securities from time to time on a purely

discretionary basis.

Lei and Zeng Become Nominee Directors and Shareholders

[843] Lei and Zeng took no independent steps to have their directorship and ownership of

Fortune and Montsford formalized despite the passage of at least twelve months from when they

selected their companies in September 2005. Similarly, Yosanda, whose assistance they had

sought, took no steps to install them as directors until late 2006 for Fortune and March 2007 for

Montsford.

[844] Lei’s and Zeng’s disinterest in formalizing their appointments to Fortune and Montsford is

consistent with their acting as Mr. Chan’s nominees since the formalization process only occurred

at the same time that Yosanda set up a nominee shareholding structure to ensure that Mr. Chan

controlled both entities.

Page: 142

[845] Draft resolutions were found on Yosanda’s computer recording the resignation of Lei and

Zeng as directors of Fortune and Montsford respectively, and appointing Mr. Chan as replacement

director of each company, together with share transfer documents transferring the shares in both

companies to Mr. Chan for a consideration of HKD$1.

[846] Mr. Chan denies that these documents made Lei and Zeng his nominees. Instead Mr. Chan

claims that these documents resulted from the social dinner with Lei and Zeng during the fall of

2006 in which the three discussed a possible sale of Fortune and Montsford. At this dinner, Lei

and Zeng both discussed selling their shares in GRHL to Mr. Chan. Mr. Chan asked Yosanda to

prepare documents “just in case.” However, according to Mr. Chan, Zeng and Lei, this proposed

transaction did not proceed. Both Zeng and Lei testified that they did not pursue the matter

further after the dinner party. The contemporaneous documentary evidence, however, indicates

that the evidence of Mr. Chan, Lei and Zeng on this point is not correct.

[847] It is uncontroverted that neither Lei nor Zeng had been appointed as the director of Fortune

or Montsford at the time of the purported social dinner in October 2006. Nor had either been

formally recorded as the shareholder. Lei was appointed the first director and shareholder of

Fortune later in October 2006. Zeng was not appointed first director and shareholder of

Montsford until March 2007.

[848] The evidence supports the conclusion that the preparation of these first appointment

documents coincided with the timing of the preparation of the share transfer documents in each

case. The Fortune nominee documents were prepared in October 2006 and the Montsford

nominee documents were prepared in March 2007.

[849] During her cross-examination, Yosanda attempted to explain the last modified date of

March 16, 2007 on the Montsford nominee documents by claiming that Zeng called her on March

16, 2007 to follow up on the share transfer documents. This caused her, she said, to check on the

documents and then press save and close. This testimony is in conflict with Zeng’s evidence that

he never followed up on the casual dinner discussion with Mr. Chan and Lei after the fall of 2006.

[850] Another document found on Yosanda’s computer is an executed instrument of transfer

from another BVI company, called Max Move Developments, to Montsford dated March 8, 2007.

It indicates that Montsford paid HKD$1 for its 175 million shares in GRHL on March 8, 2007.

This document also supports the conclusion that Montsford’s nominee documents were not

prepared until March 2007, some five months after identical documents were prepared for

Fortune. It suggests that Zeng did not need to execute nominee documents for Montsford until

Montsford actually acquired its shareholding interest in GRHL. That did not take place until

March 2007.

[851] Another reason to reject the evidence of Mr. Chan, Zeng and Yosanda on this point is that,

although Lei testified in chief that both he and Zeng offered to sell Mr. Chan their shares in

GRHL at the October 2006 dinner, Lei changed his evidence during re-examination. In re-

examination, Lei repeatedly stated that it was not until after he resigned as Chairman of GRHL,

Page: 143

which occurred in May 2007, that he became aware that Zeng had invested in GRHL. If Lei did

not know that Zeng invested in GRHL until May 2007, it is not possible that he attended a dinner

in October 2006 at which both he and Zeng offered to sell Mr. Chan their interests in GRHL.

[852] Further evidence that the Greenheart share transfer documents were nominee documents as

opposed to simply documents for a possible future transaction can be found in a letter to Zeng

found on Yosanda’s computer. The letter was created on March 16, 2007, the same day that the

Montsford nominee documents were prepared. The letter says in part:

Lawyer Zeng,

The attachment is a pre-signed document, the content of which is that you resign as

a director and appoint Allen as a director; also, please transfer shares to Allen.

Thank you!

(Remarks: It will not be dated for now, and it will be dated in the future when

necessary.)

[853] The fact that Yosanda prepared a letter to Zeng requesting that he sign the Montsford

nominee documents but leave them undated (until needed) makes it clear that Yosanda was setting

up a nominee structure for Montsford on Mr. Chan’s behalf.

[854] While the plaintiff only found unexecuted Word versions of the Fortune and Montsford

nominee documents on Yosanda’s computer, there is evidence that they were in fact signed.

[855] Yosanda kept an index listing the contents of a safe inside Mr. Chan’s office. This index

was found on her computer. The index has an entry for “Fortune Universe & Montsford’s BVI

documents for change of directors and shareholder.” Yosanda initially admitted during her cross

examination that this was a reference to executed share transfer documents.

MR. BELL: Okay. And Mr. Lei and Mr. Zeng, they ultimately signed these share

transfer documents, as you call them, didn’t they?

A. They did sign.

Q. And you ultimately kept those signed transfer documents in the company safe

that was kept in Allen Mr. Chan’s office, didn’t you?

A. Correct.

[856] Later, however, Yosanda resiled from this admission. When confronted again with this

entry in her index to the contents of Mr. Chan’s safe, Yosanda claimed that she put draft, unsigned

versions of the documents in the safe “for easy retrieval” and because “I was afraid that I may lose

them.”

Page: 144

[857] I am unable to give any credence to this latter evidence. It simply makes no sense. There

is no reason to put unsigned, draft Word documents in a locked safe; Word documents are

routinely, and easily, found on and retrieved from the computer on which they were prepared and

stored. That is, in many ways, the point of a computer.

[858] I find that Yosanda’s evidence was contrived. She initially made an entirely logical

admission that the documents stored in Mr. Chan’s locked safe were signed, not merely drafts.

Later, realizing she had mistakenly gone off script by telling the truth, she resiled from that

evidence and made up an implausible alternative. I found Yosanda to be a very unreliable

witness. She was evasive and argumentative. She repeatedly placed farfetched or implausible

interpretations on contemporaneous documents which were completely at odds with her own

recorded communications at the time. Where her testimony differs from contemporaneous

documents, I prefer the contemporaneous documents and reject her after the fact interpretations.

Yosanda Administered Fortune and Montsford’s Affairs

[859] There is no dispute that Yosanda dealt with most (if not all) administrative matters

pertaining to Fortune and Montsford from 2005 to 2011.

[860] One aspect of Yosanda’s management was the direction of payment of proceeds received

by Fortune and Montsford on account of their shareholdings in GRHL. The evidence clearly

establishes that these directed payments included $256,000 to Mr. Chan’s alma mater and

$328,000 to Mr. Chan’s companion.

[861] Mr. Chan, Lei and Zeng explain these payments as follows:

(a)

Zeng did not have a Hong Kong bank account so he asked Lei if proceeds payable

to Montsford could be paid into Lei’s account. Lei agreed;

(b)

(c)

Zeng had previously borrowed money from Mr. Chan;

Zeng used the proceeds received from Montsford and paid into Lei’s account to

settle his loan to Mr. Chan by way of directed payments;

(d)

Lei also allowed Zeng to use the proceeds received from Fortune (Lei’s company)

to settle Zeng’s loan to Mr. Chan on the basis that he and Lei kept a running loan

account.

[862] There is no documentary evidence of any loan (other than an IOU) or accounting to

support the existence of Mr. Chan’s loan to Zeng or Zeng’s running account with Lei.

[863] During cross-examination, neither Zeng nor Lei were able to explain why such a circuitous

route was adopted to distribute funds that were ultimately paid for Mr. Chan’s benefit or why

Zeng did not simply instruct that payments to Montsford be paid to Mr. Chan directly to satisfy

Page: 145

Zeng’s purported debt. The strong inference to be drawn in the circumstances is that the circuitous

flow of funds was meant to conceal the fact that Mr. Chan was the ultimate recipient.

[864] The assertion by Lei and Zeng that it was Zeng directing this flow of funds also does not

accord with contemporaneous emails. Yosanda’s direction to Nancy (Lei’s assistant) on

December 12, 2007 (this was copied to Hung) informed Nancy that monies were coming into

Lei’s account and that Yosanda would give instructions later on what to do with the money.

[865] In another email exchange between Lei’s secretary and Yosanda on March 4, 2009,

dealing with further share proceeds, Nancy attached three deposit slips for payments deposited

into Lei’s bank account, stating “total 3 pages but only two are for yours.” It is clear in the

context that “two are for yours” is a reference to Fortune and Montsford. The third deposit slip

for a smaller amount related to proceeds due to Spirit Land, the company owned by Lei and his

wife.

[866] Mr. Chan could provide no explanation when confronted with this email on cross-

examination. Yosanda speculated that Nancy must have assumed that interest payments made to

Fortune and Montsford would be dealt with in the same manner as a previous transaction in which

payments had been directed to Mr. Chan’s companion.

[867] I simply do not accept Lei, Zeng or Yosanda’s evidence. The documents make it clear

what was going on. Yosanda, on Mr. Chan’s behalf, was calling the shots. This is because it was

known to all that this was beneficially Mr. Chan’s money. The undocumented loans, the

circuitous flow of funds, the nonsensical speculations about what Lei’s secretary, who did not

testify, may or may not have been thinking – these things are fabrications to conceal the central

fact that emerges out of all these arrangements: Montsford and Fortune were Mr. Chan’s

companies and the proceeds of sale of their assets (GRHL and Sino-Forest shares) were Mr.

Chan’s funds.

2007: GRHL in Financial Distress

[868] There are many contemporaneous documents indicating that Mr. Chan had extensive

involvement in GRHL’s affairs long before the Sino-Forest invested in the company. In his

affirmation, Mr. Chan tried to explain away this involvement by claiming that he was monitoring

“the Suriname project from a distance” with a view to possibly having Sino-Forest invest at some

stage. However, this explanation cannot be reconciled with the large number of emails and

minutes of meetings sent to Mr. Chan about this project. These documents reveal Mr. Chan’s

deep involvement in the affairs of GRHL over a number of years before Sino-Forest became

involved. The depth of his involvement is consistent with a personal and financial interest.

[869] This is relevant for two reasons: (a) it constitutes additional circumstantial evidence that

Mr. Chan had an undisclosed financial interest in GRHL at the time he caused Sino-Forest to

invest; and (b) it shows that Mr. Chan was fully aware of the extreme financial difficulties GRHL

Page: 146

was facing at the time he caused Sino-Forest to invest funds in order to bail out the floundering

company.

[870] Prior to receiving Sino-Forest’s investment in July 2007, Mr. Chan was aware GRHL was

in serious financial difficulty. In a lengthy email to Mr. Chan on March 9, 2007, one investor,

David Van Oppen, reported to Mr. Chan:

Allen, I think the situation needs some serious attention. Six months ago Tommy

told us that the company could comfortably run on its own cash flow even without

an IPO. Today it is technically insolvent…Can we sit down and discuss?

[871] Tommy Lui, another shareholder of GRHL, sent emails to Mr. Chan in which Lui argued

that Mr. Chan owed a duty to GRHL to help resolve its financial difficulties. Liu said that if Mr.

Chan did not make himself available for a key monthly meeting in April 2007, “it will be unfair

for the other parties to shoulder all the responsibilities and not getting appreciated for their

efforts.” Mr. Chan speculated during cross-examination that Lui was simply urging him to have

Sino-Forest invest in GRHL “for the pending IPO that they are planning.”

[872] In another email from Lui to Mr. Chan dated April 26, 2007 with the heading “We need to

meet and communicate,” Lui expressed his disappointment with Mr. Chan and stated that GRHL’s

business “cannot continue without a clear direction and firm commitment from the shareholders.”

When cross-examined on this email, Mr. Chan denied that the email was a communication from

one GRHL shareholder to another. Again, Mr. Chan contended that Lui was trying to pressure

him into having Sino-Forest invest in GRHL.

[873] Mr. Chan replied to Lui’s email of April 26, 2007 by referring to his “long & substantial

supports for the subject venture” which had left him “nothing on [his] conscience for they are

material, fundamental and significant.” Mr. Chan went on to say that everyone had agreed to

move forward “regardless percentage of success.”

[874] In a report dated May 6, 2007, which was presented at a meeting between Mr. Chan, Lok,

Lui and Lei on May 9, 2007, Lei provided his detailed observations on GRHL’s operations

following an onsite inspection. Lei, who was GRHL’s Chairman at the time, concluded that the

chances of successfully carrying out large scale tree harvesting or wood processing in Suriname

were “very small.”

[875] During cross examination, Lei tried to distance himself from the views expressed in his

report by reference to extraneous, undocumented events. For example, Lei’s report points out that

the cost to GRHL of harvesting logs in Suriname was $85 per cubic metre, when the market value

of the logs was only $65 per cubic metre. Lei sought to qualify this negative fact at trial by

reference to a proposal to buy three barges, which would have reduced harvesting costs. There is

no mention, however, of barges or any other cost reduction measures in his report. Nor did any

independent evidence support this assertion.

Page: 147

[876] In May 2007, Liu sent Lei and Mr. Chan an email confirming Lei’s recommendation to

“close down the business.” Liu goes on the describe, in Lei’s “own words,” that “next week’s

plan was for Allen to consider if Allen did not mind losing money even after having heard your

report.”

[877] A little more than two months after Lei presented his report to Mr. Chan and

recommended closing down the business, Mr. Chan caused the Sino-Forest to invest $6 million in

the company.

[878] Mr. Chan also caused a Sino-Forest subsidiary to enter into a July 20, 2007 Master Sale

and Purchase Agreement with GRHL. Under the 2007 agreement, Sino-Forest’s subsidiary

agreed to purchase 34,285 cubic metres of Suriname logs at a price of $175 per cubic metre. This

is nearly three times the market price contained in Lei’s report, prepared only two months earlier.

[879] Sino-Forest’s subsidiary also agreed to pay a $3 million unsecured deposit (representing

50% of the total purchase price) upon signing the 2007 agreement “in order to lock up the supply

of the Surname Logs during the contractual period.”

[880] Both Mr. Chan and Lei tried to explain away the pricing discrepancy by highlighting the

purported quality of logs covered in the 2007 supply agreement. Schedule 1 of the agreement

provides that logs from thirty species of trees qualify as Suriname logs for the purpose of the

agreement.

[881] Lei’s report proceeded on the basis that while there were 60-70 species of timber in

GRHL’s plantations, only about 30-40 had “commercial value” and “only 10-20 species are

commonly seen in the market and more suitable for selling” at a market price of about $65 per

cubic metre. This assessment, based on the more exclusive quality of 10-20 species, is completely

at odds with the price of $175 per cubic metre stipulated in the 2007 agreement for 30 species.

Sino-Forest, therefore, paid a three million dollar unsecured deposit to lock down the exclusive

“right” to pay three times the going market rate for logs in Suriname. This incongruity was never

explained.

The 2007 Rights Issue

[882] There is no dispute between the parties that:

(a)

in late May 2007, GRHL offered its existing shareholders 4.2 billion new class B

shares at $0.001 per class B Share on the basis of two class B Shares for every one

ordinary share held (the “Rights Issue”);

(b)

(c)

Fortune was allocated 910 million Class B shares for a purchase consideration of

$910,000;

Fortune did not take up these shares;

Page: 148

(d)

(e)

Montsford participated in the Rights Issue and, while it was only initially allocated

350 million Class B shares, it ultimately took up 1,597,830,000 shares.

Montsford’s take up of Class B shares moved it from having a relatively modest

shareholding of GRHL to becoming the single largest shareholder of GRHL, as at

August 20, 2007, holding 23.22% of GRHL’s shares.

[883] In an email dated June 6, 2007, Lei’s secretary Nancy emailed Yosanda seeking Mr.

Chan’s instruction on what to do about the rights offering. It says:

The attached documents concern Greenheart and additional shares. Please send to

Allen. Lei says concerning Fortune Universe Limited whether to participate in the

issuance of stock, you need Allen’s decision. Please convey thank you!

[884] Mr. Chan and Lei gave conflicting evidence on the purpose of this email:

(a) during his examination for discovery, Mr. Chan stated that he had no recollection of

receiving the email;

(b) in his affirmation for trial, Mr. Chan deposed that he was aware of “Lei’s message”

of June 6, 2007 but did not respond because he “was certain that [Lei] wanted to

speak about Sino-Forest’s intentions respecting doing a deal with GRHL but since

Sino-Forest had firm plans by that time about how it was going to participate, it was

untenable for [Mr. Chan] to speak to Lei;”

(c) Mr. Chan then again contradicted himself during cross-examination, stating that he

believed that Lei had not wanted to take up the Class B shares and was asking

whether Sino-Forest would be interested in taking them from him. This made three

mutually exclusive explanations from Mr. Chan that were each given under oath.

None of these explanations acknowledged the clear wording of the email; i.e., that

the decision was Mr. Chan’s, not Lei’s, to make;

(d) Lei was taken in his evidence-in-chief to the email. He testified that after receiving

the rights offer notice, he believed GRHL was not doing very well and he was not

familiar with the issuance of new shares. He asked his secretary to write to Yosanda

to ask for Mr. Chan’s views and comments because Mr. Chan was familiar with the

issuance of new shares in Hong Kong. This is yet another explanation for the email

and is, like the others, wholly inconsistent with the plain words used at the time.

[885] Mr. Chan’s evidence is clear that:

(a)

as of the date of the rights issue, Sino-Forest was not entitled to participate as it

was not a shareholder in GRHL;

(b)

Mr. Chan had indicated to Lui that if there was any shortfall (i.e. shareholders not

taking up the full subscription) he should speak to Mr. Chan about Sino-Forest

possibly taking up the shortfall; and

Page: 149

(c)

Sino-Forest ultimately did not participate in the rights issue as “existing

shareholders were eager and all rights were taken up.”

[886] Mr. Chan’s evidence that Sino-Forest did not participate in the rights issue is confirmed by

GRHL’s share register. Sino Capital was the only Sino-Forest company to acquire GRHL shares

and it did so pursuant to an option exercised under the 2007 supply agreement, not the rights

offering. Sino Capital paid $6 million for 1 billion GRHL shares (i.e. six times the price per share

offered under the Rights Issue) by way of cheque dated July 23, 2007.

[887] Montsford, in addition to its 350 million Class B share allotment, took up approximately

1.25 billion unallocated Class B shares for a total number of almost 1.6 billion Class B shares.

[888] Arithmetically, a large part of Montsford’s excess Class B Shares must have comprised

Fortune’s right to 910 million shares. When asked on cross-examination whether he knew

Montsford had taken up Fortune’s allocation, Mr. Chan claimed that he did not have a clear

recollection.

[889] Zeng’s evidence concerning how Montsford acquired its Class B shares pursuant to the

rights offerings was vague and inconsistent:

(a)

(b)

(c)

he would not agree on how much he spent in acquiring these Class B shares despite

clear evidence that the shares must have cost $1.6 million;

he could not recall whether he discussed the rights offering with other GRHL

shareholders, only that he did not discuss it with Lei;

he did not know whether the majority of the Class B shares he purchased had been

originally allocated to Fortune as he had worked through a “middle man” whose

identity he refused to disclose other than to say it was not Mr. Chan; and

(d)

he could not recall where he got the money or how he paid $1.6 million for the

Class B shares, given his previous evidence that he did not have a Hong Kong bank

account. Instead, he refused to accept that he had in fact paid $1.6 million while

simultaneously speculating about other possible means by which he could have

purchased the shares.

[890] Contrary to Mr. Chan’s evidence that Sino-Forest did not participate in the rights issue,

Hung and Yosanda both testified at trial that they thought Sino-Forest did participate and that

Hung authorized a payment for these shares on that basis. Yosanda stated that Mr. Chan was the

source of her understanding that Sino-Forest in fact took up shares in the rights issue.

[891] Yosanda also gave evidence that she had no recollection of doing anything for Zeng or

Montsford with respect to taking up shares under the rights issue.

Page: 150

[892] Hung was cross-examined on an email chain between Yosanda and Daphne Tse (at

GRHL) spanning the period June 25, 2007 through to July 19, 2007 titled “Remittance of

US$858,000”. This chain discussed a “shortfall” payment to be made under the rights issue, its

method of calculation and when payment could be expected.

[893] Hung agreed that this email chain related to payments to be made under the rights issue.

He recalled the discussion he had with Yosanda regarding payment and confirmed his evidence-

in-chief that “This should be an investment made by Sino-Forest. I think I have given instructions

to my colleague. My colleague would then carry out the remittance of the funds according to the

approval or authorization documents.”

[894] At trial, Yosanda was taken to a similar email chain culminating in an email from Yosanda

to Hung dated July 16, 2007 in which Yosanda stated “Alfred, there will be an additional shortfall

of 52,000. I spoke to Allen and he agrees on this the total # of shares for Allen will be 910,000.”

Yosanda did not recall the email but reiterated her understanding that the payment related to Sino-

Forest taking up shares in the rights issue.

[895] In contrast, Mr. Chan’s evidence on this email chain was that Sino-Forest never took up

any shares under the Rights Issue. Mr. Chan said:

(a)

(b)

GRHL was “trying to get Sino-Forest to take up the shortfall”;

he did not to know whether “910,000” meant “shares or money” although it is clear

from the email that it could not have been shares;

(c)

(d)

(e)

he considered the email chain confusing due to the reference to Lei, Lok and Van

Oppen;

the reference to shares “for Allan” was “about whether Sino-Forest will take up the

shortfalls of any rights issue;” and

he questioned whether Hung in fact ever made the payment.

[896] On July 19, 2007, in an email exchange between Yosanda and Daphne Tse, Yosanda

advised that “Alfred told me that he gave instruction for remittance yesterday. It should be arrive

your bank today.” Daphne responded that “Our bank just confirmed that the following amount

[US$ 858,000] has been received.” Mr. Chan was unable to explain why Hung was processing

payment for shares that were, on the evidence, ultimately acquired by Montsford.

[897] The most probable inference to be drawn is that these shares were acquired beneficially for

Mr. Chan and that Mr. Chan (and Hung) were arranging payment for Fortune’s Class B share

allotment ultimately taken up by Montsford.

Page: 151

Sale of Montsford and Fortune’s Sino-Forest Shares

[898] When Sino-Forest acquired Greenheart, both Fortune and Montsford received Sino-Forest

shares as partial payment for their GRHL shares. It is not in dispute that Yosanda was involved in

the sale of Fortune’s Sino-Forest shares over the period from late November 2010 to February

2011 and Montsford’s Sino-Forest shares over the period from December 2010 and into early

January 2011.

[899] The plain reading of an email dated November 24, 2010 from Yosanda to Lei’s secretary

demonstrates that Fortune’s Sino-Forest shares were not beneficially owned by Lei:

President Lei is a director and a shareholder of Fortune Universe. Fortune Universe

now holds 144,019 shares of Sino-Forest. We want to sell those shares, so we

want to invite president Lei to come to Hong Kong to open a stock trading account

for Foutune [sic] Universe, otherwise the shares cannot be sold.

[900] Yosanda, in an attempt to explain away the email, stated in her affirmation that when she

typed “we” she intended to refer to “Lei”. I do not accept Yosanda’s explanation because:

(a)

Yosanda conceded at trial that she would never refer to Lei without a title such as

“President Lei”;

(b)

if “we” was replaced with “President Lei” the email would make no sense.

Yosanda would be telling Lei’s secretary something that Lei would surely have

told his own secretary himself; and

(c)

the only reading of the email that makes any sense is that Yosanda, on Mr. Chan’s

behalf, is directing that the shares be sold because they were not Lei’s, but Mr.

Chan’s.

[901] Further support for this conclusion is found in an email chain between Yosanda and

Nancy, which commenced with an email dated February 16, 2011. Yosanda confirmed that “Lei

sent a text message telling Allen that the stock is in the account and can be sold, the total [no. of]

stock is 144,019…”

[902] Subsequent emails in the chain make it abundantly clear that Yosanda was following up on

the sale in order to ascertain how much Lei had obtained. Yosanda thereafter told Nancy where to

deposit the proceeds, namely into an account of Eminens, Mr. Chan’s sister’s business.

[903] Yosanda also advised Nancy that for the “sake of book keeping” Eminens would prepare a

contract for Lei to sign. The content of these emails are completely inconsistent with Yosanda’s

explanation that she was simply “helping” Lei. These emails made it clear Yosanda was looking

after Mr. Chan’s beneficial interest in the proceeds of sale of Fortune’s investment.

Page: 152

[904] Lei testified that he wanted to know whether it was a good time to sell Sino-Forest stock,

so he called Mr. Chan. Mr. Chan said he could not comment but to ask Yosanda. Then, after

Yosanda helped sell the shares, Lei asked Mr. Chan for help avoiding foreign exchange controls

in China. Mr. Chan told him to leave the money with his sister, Pauline, at her company, Eminens.

[905] I do not accept the explanations of Mr. Chan, Yosanda and Lei about the disposition of

Fortune’s Sino-Forest’s shares. Their evidence is inconsistent with the plain words of the

contemporaneous written communications. It is contrived and implausible. It answers none of

these vexing questions: If Mr. Chan felt uncomfortable discussing the disposition of Sino-Forest

stock, how is it any less inappropriate for his executive assistant to do it? Why would Lei, an

experienced business man and currency trader, suddenly need Mr. Chan’s assistant to explain how

to dispose of publicly traded stock. Why of all possible investment advisors in Hong Kong, did

Mr. Chan recommend, and Lei choose, the business of Mr. Chan’s sister, which was not an

investment advisor or currency trader?

[906] I find, on a balance of probabilities, that Mr. Chan, through Yosanda, was directing the

sale of Fortune’s Sino-Forest shares. This was, I also find, because Lei was only a nominee – Mr.

Chan was the beneficial owner of Fortune and controlled its assets.

[907] There is less documented evidence concerning the sale of Montsford’s shares and the

ultimate fate of those proceeds. However, the sale of Montsford’s Sino-Forest shares took place

in exactly the same time frame as the sale of Fortune’s Sino-Forest shares. If Zeng and Lei were

acting independently, as they claim, it seems highly unlikely that each of them, two or three years

after acquiring the Sino-Forest shares, would, within a few weeks of each other, decide to sell

them. In all of the circumstances, I find, on a balance of probabilities, that Mr. Chan, through

Yosanda, also directed the sale of Montsford’s Sino-Forest shares.

[908] The proceeds of this sale were transferred to Zeng’s HSBC account and thereafter

transferred to a China merchant bank account in the name of Momentom, with some of the

proceeds transferred to Eminens. Momentom appears on the Nominee Company Manager List

with “John” listed as its manager. It is not in dispute (Ratner, Mr. Chan’s damages expert has

acknowledged) that Momentom paid Mr. Chan $2.223 million dollars in 2011 and 2012. This is

further evidence from which it can logically and reasonably be inferred that Mr. Chan was the

beneficial owner of Montsford and that he received monies ultimately derived from Montsford’s

sale of GRHL-related securities.

[909] All this evidence supports the conclusion that the profits earned by Fortune and Montsford

of $37.86 million were secretly Mr. Chan’s profits. These profits were earned by Mr. Chan

through deceit and in breach of his fiduciary duty to Sino-Forest. The evidence also supports the

conclusion that Sino-Forest paid out a total of $202.247 million to acquire the Greenheart Group.

This interest was sold to New Forest, an arm’s length purchaser, in 2014 for a total of $109.034

million.

Page: 153

[910] Thus, Sino-Forest suffered a further $93.28 million loss on its investment in Greenheart.

This loss was the direct result of Mr. Chan’s deceit and breach of fiduciary duty. The issue of

quantification will be addressed below in the “Damages” section of these Reasons.

Application of the Facts to the Law

Fraud

[911] As noted earlier, the tort of civil fraud has four elements:

(i)

the defendant made a false representation;

(ii)

the defendant had some level of knowledge of the falsehood of the representation;

(iii) the false representation caused the plaintiff to act; and

(iv) the plaintiff’s actions resulted in a loss.

I will review each of these elements below.

(i) False Representations

[912] False representations include misrepresentations by omission, silence, half-truths, inaction,

or the non-disclosure of material information.

[913] Mr. Chan made false representations to Sino-Forest. He caused Sino-Forest to record

billions of dollars in fictitious assets and hid assets and ownership interests through companies

which he controlled by nominees. He concealed the use of non-arm’s-length entities, which he

controlled, to conduct business with Sino-Forest. He used a deceitful documentation process to

conceal this fraud from the company. Information that was disclosed to Sino-Forest constituted

half-truths which added to the deception.

[914] Corporate directors, as fiduciaries, must disclose material information to the corporation

and their failure to do so is a misrepresentation. Canadian courts have repeatedly held corporate

directors liable for fraud on the basis of knowing-disclosure. Among other things, Mr. Chan

purposely and with intent to deceive failed to disclose non-arm’s-length transactions and caused

Sino-Forest to invest hundreds of millions of dollars without disclosing these conflicts.

(ii)

Mr. Chan Knew the Representations were False

[915] Knowledge of the falsehood of the representation can take several forms:

(a)

(b)

the defendant knew the statement was false;

the defendant lacked an honest belief in its truth; or

Page: 154

(c)

the defendant made the statement recklessly and did not care

whether it was true or false.

[916] Mr. Chan was clearly aware of the falsity of his representations. Mr. Chan knew that he

and Inside Management substantially and falsely inflated the revenues, profits and assets of Sino-

Forest. He knew that Sino-Forest lacked the documents necessary to prove the ownership and

location of the standing timber that constituted so much of the company’s recorded wealth.

[917] Mr. Chan’s motive or intention is immaterial. All that is required is that Mr. Chan was

aware of the falsity of the representations, lacked an honest belief in their truth or was reckless as

to their truth: Bruno Appliance and Furniture Inc. v. Hyrniak, 2014 SCC 8, 2014 1 S.C.R. 126, at

para 18, quoting Derry v. Peak (1889), 14 App Cas 377 (HL) at 374.

(iii) Mr. Chan’s False Representations Caused Sino-Forest to Act

[918] Whether Sino-Forest actually relied on the false representations is a question of fact that

may be inferred from all the circumstances. The plaintiff is not required to show that the false

representation was the sole inducement of Sino-Forest’s actions but only that it was a material

influence. If the defendant’s misrepresentation was calculated to induce reliance or had the

natural effect of inducing reliance, the Court can infer that the plaintiff relied on the

misrepresentation from all the circumstances. If a misrepresentation is obviously material, it is a

natural inference that the plaintiff relied on it.

[919] Mr. Chan’s false representations caused Sino-Forest to raise billions and to entrust Mr.

Chan and Inside Management with these funds. Between 2007 and 2010, Sino-Forest raised in

excess of USD$2.1 billion and CAD$800 million in Canada’s debt and capital markets. Sino-

Forest relied on Mr. Chan’s representations about the legitimate nature of the business operations

in deciding to raise these funds, incurring obligations to lenders and shareholders and entrusting

the funds to Mr. Chan. Mr. Chan’s representations were material. The evidence is clear that the

Sino-Forest relied on them. I find that Sino-Forest never would have entrusted the company and

its assets to Mr. Chan in the absence of the fraudulent misrepresentations.

(iv)

Sino-Forest’s Actions Resulted in a Loss

[920] As discussed in more detail below, the actions that Sino-Forest took in reliance on Mr.

Chan’s false representations caused it to lose billions of dollars.

[921] The fact that Mr. Chan may not have personally profited from every transaction is not a

defence. The defrauding party need not have profited from his or her fraud to be held liable. A

plaintiff can suffer damages whether or not the defendant has personally benefitted.

Breach of Fiduciary Duty

(i)

Mr. Chan Owed Fiduciary Duties to Sino-Forest

Page: 155

[922] As the CEO, a director and Chairman of the Board of Sino-Forest, Mr. Chan owed the

Sino-Forest fiduciary duties. Mr. Chan was charged with managing the assets of Sino-Forest

honestly and in a manner consistent with the objects of the corporation. Mr. Chan’s fiduciary

duties included an obligation: (a) to act in good faith and in the best interests of the corporation;

(b) not to abuse his position for personal gain; and (c) to avoid conflicts of interest with the

corporation. Directors and officers must serve the corporation selflessly, honestly and loyally:

Canada Business Corporations Act, R.S. 1985, c. C-44, s. 122; People’s Department Stores Ltd.

(1992) Inc. (Re), 2004 SCC 68, at para. 35.

(ii)

A Trustee-Like Position in Relation to Sino-Forest

[923] As CEO, director and Chairman, Mr. Chan owed fiduciary duties akin to those of a trustee

because he exercised control and management over Sino-Forest’s assets. Corporate directors are

not true trustees. They are, however, in a closely analogous position. The duties of loyalty and

good faith that they owe to the corporation are akin to those imposed upon trustees. The

obligations of directors who are involved in the control and management of corporate assets are

closely analogous to those of trustees in relation to trust property. Directors and officers who

manage or control property of the corporation have an obligation to ensure that property is used in

furtherance of specified purposes of the company. For this reason, a misapplication of corporate

assets by a director can be akin to a breach of trust.

[924] Mr. Chan owed fiduciary duties towards Sino-Forest akin to the obligations of a trustee

because of the high degree of control and management that he exercised over Sino-Forest’s assets.

As set out in detail above, Mr. Chan orchestrated all the transactions which ultimately led to Sino-

Forest’s collapse. He gave instructions and authorization to the activities of other members of

Inside Management. Mr. Chan had ultimate control over nearly all aspects of Sino-Forest’s

operations and very little, if any, decision-making occurred without his knowledge and approval.

(iii) Breach of Fiduciary Duty

[925] Mr. Chan breached his fiduciary duties to the corporation. He violated his duty to act in

good faith with a view to the best interests of the corporation by pursuing his personal interests

and those of his friends and associates. He abused his position for personal gain by making

personal profits from transactions that harmed the corporation and funnelling funds to entities that

he controlled or benefited from. He violated his duty to avoid conflicts of interest by causing the

payment of Sino-Forest funds into transactions with corporations that he secretly beneficially

owned or controlled.

Page: 156

Negligence/ Duty of Care

[926] Although breach of Mr. Chan’s duty of care as an officer and director of Sino-Forest was

pleaded in the alternative, very little of the evidence or argument was directed at this particular

cause of action.

[927] A basis for liability in negligence has not been established. The claim for damages for

negligence is therefore dismissed.

Damages

[928] The basic measure of damages in tort is the difference between the financial position of the

plaintiff as a result of the tort and the financial position of the plaintiff as it would have been if

there had been no tort. In the tort of deceit (fraud) the compensable results of the tort are not

limited to results that are of the type that should have been reasonably foreseeable by a person in

the position of the defendant at the time the defendant committed the tort. Rather, while they

include all the results of the type that should have been foreseeable, they go beyond that to the

unforeseeable type of results that nonetheless flow from the deceit, only stopping when, on a

common sense view, the chain of causation is broken by becoming too attenuated or by a new,

intervening cause: Rainbow Industrial Caterers Ltd. v. Canadian National Railway, (1990) 67

D.L.R. (4th) 348 (B.C.C.A.), at para 36, aff’d 1991 SCC 27.

[929] Under this principle Mr. Chan is liable to pay damages for all losses caused by his

fraudulent conduct, even if such losses were unforeseeable. The general principle in assessing

damages in tort is the amount required to restore the plaintiff to the position the plaintiff would

have been in if the tort had not occurred.

Causation

[930] In all claims for damages, the plaintiff must prove a causal relationship between the

conduct which constitutes liability and the losses suffered. Determining causation requires the

exercise of common sense. The Court may make an adverse inference against the defendant

where the defendant fails to rebut the plaintiff’s case, or if the defendant’s own wrongdoing has

made it difficult to assess causation.

[931] Causation in tort law is essentially a practical question of fact which can best be answered

by ordinary common sense rather than abstract metaphysical theory. Causation in tort does not

require scientific or precise proof. Courts apply the “but for” causation test in a robust, common

sense manner. If the plaintiff adduces evidence connecting the defendant’s breach of duty to the

plaintiff’s injury, the court may infer that the defendant’s tort caused the loss even in the absence

of scientific evidence of the defendant’s precise contribution: Snell v. Farrell, [1990] 2 S.C.R.

311. The legal burden remains with the plaintiff, but in the absence of evidence to the contrary

adduced by the defendant, an inference of causation may be drawn although positive or scientific

proof of causation has not been adduced: Snell, at para. 34.

Page: 157

[932] When the plaintiff adduces evidence connecting the defendant’s tortious conduct to the

injury suffered, it is appropriate for the court to infer the defendant’s liability for these injuries in

the absence of a credible explanation by the defendant. Evidence is to be weighed according to

the proof which it was in the power of one side to have produced and in the power of the other to

have contradicted: Blatch v. Archer (1774), 98 E.R. 969, at p. 970.

[933] This is especially the case where the facts lie particularly within the knowledge of the

defendant. The Court may infer causation in the absence of evidence to the contrary. The Court

may make such inferences even if the plaintiff adduces little affirmative evidence and lacks

positive or scientific proof of causation. The Court may make an adverse inference against the

defendant if the defendant fails to provide a credible explanation to rebut the evidence adduced by

the plaintiff. This is not a reverse onus. Instead, it is merely the application of a “robust and

pragmatic approach to the…facts” and is consistent with the trial judge’s fundamental role in

weighing evidence: Snell, at paras. 33-34.

[934] Canadian courts have applied this basic evidentiary principle to fraud and breach of

fiduciary duty. Adverse inferences may be drawn against defendants as long as the plaintiff has

made reasonable efforts to adduce evidence to link the defendant’s conduct to the harm suffered

and the defendant provides no credible explanation. The court assessing damages will not

demand exacting proof of the precise loss from fraud or breach of fiduciary duty, but instead draw

an adverse inference against a defendant found to have been fraudulent or in breach of fiduciary

duty unless that defendant leads evidence to disprove the amount or cause of the loss, Huff v.

Price, (1990) 76 D.L.R. (4th) 138 (B.C.C.A.), at para. 38.

[935] It is also a well-established legal principle that the Court is entitled to resolve evidentiary

difficulties against the wrongdoer who created them. As the Ontario Court of Appeal ruled in

Ticketnet Corp v. Air Canada, (1997) 105 O.A.C. 87, at para. 85: evidentiary difficulties should

be resolved against the wrongdoer “where the wrongdoer’s own actions make it difficult for the

innocent party to prove its loss or where the facts needed to prove the loss are known solely by the

wrongdoer and the wrongdoer does not disclose these facts to the innocent party.” The Court of

Appeal cited the Supreme Court of Canada in Kohler v. Thorold Natural Gas Co, (1916) 52

S.C.R. 514, at 530-31, where Duff J. held:

[A]s against a wrongdoer, and especially where the wrong is of such a character

that in itself it is calculated to make and does make the exact ascertainment of

damages impossible or extremely difficult and embarrassing, all reasonable

presumptions are to be made.

See also 581257 Alberta Ltd. v. Aujla, 2013 ABCA 16, 542 A.R. 123, at para. 56.

[936] It is not necessary that the defendant’s actions be the sole cause of the injury. As long as

the defendant is part of the cause of an injury, the defendant is liable for all loss suffered by the

plaintiff even if the defendant’s act alone was not enough to create the injury. All that is required

Page: 158

to establish “but for” causation is that the defendant caused or contributed to the plaintiff’s injury,

and the existence of other preconditions does not provide the defendant any defence.

[937] In this case, Sino-Forest’s collapse was triggered by the revelations in the Muddy Waters

Report but was caused by the inability of the company to demonstrate that:

(a)

(b)

it owned BVI standing timber assets worth $2.9 billion; and

its standing timber and wood log trading operations were bona fide, conducted with

arm’s-length counterparties at fair market value.

It could not do so because, as I have found, through Mr. Chan’s fraud and breach of fiduciary

duty, Sino-Forest did not own standing timber worth $2.9 billion and engaged in secret, related-

party transactions.

[938] Mr. Chan concealed the use of non-arm’s-length counterparties and the diversion of funds

to those counterparties in the form of the wood log skimming and deposit frauds. The relative

success of his concealment cannot be a basis for denying the plaintiff damages.

[939] It has been proved, on a balance of probabilities, that Sino-Forest did not own BVI

standing timber assets worth anything close to $2.9 billion. It has also been proved on a balance

of probabilities that Sino-Forest’s BVI standing timber and wood log trading operations were not

bona fide and were not conducted with arm’s-length counterparties. Mr. Chan directed a massive

fraud, in breach of his fiduciary duties to the company, in which he caused Sino-Forest to

misrepresent its assets (it did not own 520,000 ha of BVI standing timber) and their value (the

BVI standing timber “asset” had no value).

[940] In my view, the causal link between Mr. Chan’s misfeasance and the total collapse of

Sino-Forest has been established on the evidence.

Determining the Quantum of Damages

[941] The question then becomes, how to calculate a value for the attendant loss?

[942] Much like causation, the determination of quantum is also a matter of common sense. The

Ontario Court of Appeal has held that where damages are by their nature difficult to assess, the

court “must do the best it can in the circumstances.” The plaintiff has an onus to prove the facts

upon which damages are estimated but where the assessment is difficult because of the nature of

the damage proved, the difficulty of assessment is no ground for refusing substantial damages,

“even to the point of resorting to guess work,” Martin v. Goldfarb, (1998) 41 O.R. (3d) 161, at

para. 75. The difficulty of determining quantum can never excuse the wrongdoer from paying

damages.

[943] It follows that determining quantum is a process of holistic assessment, not precise

mathematical calculation. While expert evidence is admissible and may be useful, assessment of

Page: 159

damages is ultimately a task for the court and not for accountants or other mathematical and

statistical experts.

[944] As long as the plaintiff makes reasonable efforts to assess quantum, it will fall to the

defendant to lead evidence to disprove the amount of the loss. The plaintiff’s obligations to

adduce evidence are determined by the circumstances and the plaintiff is not required to do more

than is reasonably possible: see Martin at para. 75.

[945] The central complicating factor in the calculation of damages in this case is that the BVI

standing timber model was essentially a cashless model. Due to the unique characteristics of

foreign (BVI) companies operating in China and foreign currency controls, the BVI standing

timber model was based on ploughing paper profits back into the purported acquisition of ever

greater stands of timber in China. Little or no money came into or went out of Sino-Forest in

connection with trading in BVI standing timber itself. When Sino-Forest bought a plantation from

a Supplier, it sold another plantation to an AI. Sino-Forest did not pay the Supplier for the new

plantation. Sino-Forest did not receive payment from the AI on the sale of the old plantation.

Rather, Sino-Forest directed AIs to pay Suppliers, not Sino-Forest.

[946] Sino-Forest’s asset base in BVI standing timber grew, but Sino-Forest received no cash

flow on these transactions. At one level, therefore, one could argue that, upon the collapse of the

BVI standing timber model, Sino-Forest suffered no loss. It paid nothing for the asset so if the

asset turned out not to exist, or to have no value, Sino-Forest suffered no damage.

[947] This approach would ignore, however, the effect of having carried the BVI standing timber

assets on the books of the company – an asset which, by 2011, was valued at $2.99 billion.

[948] From a financial perspective, the largest impact of representing this value of Sino-Forest’s

principal asset in its audited financial statements was that it enabled Sino-Forest to go to the

capital markets and raise money. The damages experts do not disagree over this at least – the

Sino-Forest business model required cash infusions for operating expenses precisely because the

BVI standing timber model generated no cash revenues. Indeed, I accept the evidence of Mr.

Borrelli and Steger that Sino-Forest was, in fact, loss-making in all years from 2005 to 2011 when

the effect of paper profits generated through trading in BVI standing timber is removed from

Sino-Forest’s books.

[949] This gives rise to one of the central disputes between the parties over damages

quantification. Steger seeks to step over this problem by calculating the loss, not as a function of

specific losses resulting from specific fraudulent activities or the tracing of funds into Mr. Chan’s

hands, but by looking at:

(a)

the difference between the amount raised on the capital markets and the ultimate

demonstrated value of Sino-Forest’s undertaking; and

Page: 160

(b)

the amount by which Sino-Forest’s assets were written down following the various

investigations and attempts at realizing value that took place between June 2011

and the CCAA proceedings in 2013.

[950] The defendant’s damages expert, Ratner, argues that a critical flaw in Steger’s

methodology is the failure to calculate damages on a fraudulent activity by fraudulent activity

basis. I will turn to that dispute in the next section of these Reasons.

Steger Evidence

[951] Sino-Forest issued its last audited financial statements as of December 31, 2010 and its last

unaudited financial statements as of June 2011. Sino-Forest operated under Mr. Chan’s leadership

until he resigned in August 2011. Steger used June 30, 2011 as a proxy for the end of the period

Sino-Forest was under the direction of Mr. Chan.

[952] Sino-Forest continued to operate on a progressively reduced basis until March 2012 when

it filed for and obtained orders under the CCAA. Some adjustments were therefore required to

reflect the limited impact of post-Chan business activity on the June 30, 2011 cash balances.

[953] Steger was retained to calculate damages on behalf of the plaintiff. He performed two loss

calculations. First, he calculated the loss suffered from Mr. Chan’s malfeasance as the difference

between:

(1)

the cash Sino-Forest raised from the debt and equity issues between 2004 and

2010. This was cash, Steger posited, that would have been available to invest in

profit generating assets but for Mr. Chan’s actions; less

(2)

the actual cash recoveries from the sale of Sino-Forest’s assets, (the “lost cash

calculation”).

[954] Second, Steger traced, and summarized, the write-downs suffered by Sino-Forest on the

false and inflated asset values perpetrated by Mr. Chan’s actions. This, Steger calculated as the

difference between:

(a)

(b)

the reported value of Sino-Forest’s assets of as of June 30, 2011; and

the net realized value of those assets following Mr. Chan’s departure,

(the “write-down calculation”).

(i)

The Lost Cash Calculation

[955] Sino-Forest raised gross proceeds in the debt and equity markets of $2.929 billion from

2004 to 2010. From these proceeds, Sino-Forest incurred share and debt issue costs and made

Page: 161

certain principal debt repayments. The net cash available to Sino-Forest after payment of these

costs was $2.588 billion.

[956] Steger assumed that available cash would have been deployed in profit-making investment

of some kind, at a rate at least sufficient to cover the cost of Sino-Forest’s debt and its debt and

equity issuing costs. This “proxy” return, the cost of debt and the debt and equity issue costs, was

$477.8 million. Thus, total cash assumed to be available to Sino-Forest was $3.065 billion.

[957] To date, EPHL has recovered only $438.5 million from its disposition of all of Sino-

Forest’s assets.

[958] Based on this analysis, Steger concluded that, but for Mr. Chan’s fraudulent activity, Sino-

Forest would have had $2.588 billion available for investment in profit-generating assets. To that

amount, Steger added the proxy return of $477.9 million, for a total of $3.065 billion. Because

EPHL recovered $438.5 million for all of Sino-Forest’s assets, Steger credited that amount against

the total, to calculate Sino-Forest’s loss at $2.627 billion.

(ii)

The Write-down Calculation

[959] Sino-Forest also had cash flows from operations. It generated cash receipts from some of

its business activities and spent cash on operating costs, log purchases and the like. Sino-Forest

paid no dividends.

[960] Both Mr. Borrelli and Steger determined, through different methodologies, that from 2005

to 2010, Sino-Forest generated little or no positive net cash flow. Mr. Borrelli reversed from

Sino-Forest’s general ledger the effects of the alleged fraudulent activity in the BVI standing

timber model, the wood log skimming and the wood log deposits. He concluded that after these

adjustments, Sino-Forest would have been reporting net losses in each year from 2005 to 2010.

[961] Steger reviewed Sino-Forest operations at the financial statement level. His analysis

showed that Sino-Forest’s cash flows and accounting income were solely on account of the cash

raised from the debt and equity markets and paper gains on BVI standing timber trading converted

into ever increasing BVI standing timber asset values. Based on this analysis, for example, when

the BVI standing timber trading “profits” are excluded, Sino-Forest should have shown a loss of

$365.1 million in 2010 rather than the $840.1 million profit reported in the audited financial

statements.

[962] Sino-Forest’s reported assets, specifically for BVI standing timber, accounts receivable,

log deposits and investments in GRHL of June 30, 2011 were $3.8 billion.

[963] The value of the assets transferred to EPHL on January 30, 2013 was only $564.8 million.

This $3.2 billion reduction reflected the write-downs made, following Mr. Chan’s departure, to

estimated net realizable value. This was mostly the write-down of BVI standing timber assets, a

Page: 162

write-down of some $2.77 billion.⁹This write-down reflected EPHL’s conclusion that Sino-

Forest did not own and could never realize economic value from its BVI standing timber assets.

[964] In Steger’s alternative approach, therefore, he calculated total write-downs suffered by

Sino-Forest (on what he assumed for the purposes of his analysis, were false or inflated values of

BVI standing timber assets, receivables and wood log deposits) as follows:

BVI Standing Timber $2,777.5 million

Accounts Receivable

Log Deposits

Total

$368.9 million

$101.8 million

$3,244.3 million

[965] Steger recommended adopting the “lost cash” calculation – a loss of $2.627 billion, rather

than the “write down” calculation of $3.244 billion.

Ratner Evidence

[966] Mr. Ratner of Glass Ratner Advisory & Capital Group LLC, a forensic accounting firm

based in Atlanta, Georgia, was initially retained to assist another forensic accounting firm, Froese

Forensic Partners, to provide independent forensic accounting and loss quantification advice in

relation to this action. In the end, Mr. Froese did not testify, so only Mr. Ratner’s opinion was

before the Court.

[967] Ratner was asked to do three things:

(1)

(2)

(3)

review the Steger report and provide comments on Steger’s report and on Steger’s

reliance on Mr. Borrelli’s pre-filed evidence;

review and analyze data and other information relevant to the loss quantification;

and

prepare a report setting out his findings and conclusions.

Ratner did not prepare a loss quantification report of his own and offered no opinion on Sino-

Forest’s loss beyond his critiques of Steger’s analysis.

⁹The difference between this number and the $2.99 billion referred to earlier in these Reasons is

one of timing. The $2.7775 billion figure is the value of the BVI standing timber taken from the

EPHL financial statements immediately prior to being written down to nil in 2013. The $2.99

billion value is the value of the BVI standing timber recorded in Sino-Forest’s financial

statements as of June 2011, immediately prior to the release of the Muddy Waters Report.

Page: 163

[968] At the heart of Ratner’s criticism of the Steger report is Steger’s implicit assumption that

all of the cash raised on the capital markets from 2004 to 2010 was lost due to Mr. Chan. Ratner

says that while this approach may have merit in a simple theft or Ponzi scheme scenario, it is too

simplistic in the circumstances of this case, given that Sino-Forest operated numerous legitimate

businesses.

[969] Ratner argues that Steger made the following five basic errors in his analysis:

(1)

Steger used an inappropriate and flawed damages methodology, given the facts and

circumstances in this matter, that results in the overstatement of potential damages;

(2)

Steger failed to investigate and quantify the damages contended to have been

suffered by Sino-Forest that “but for” the alleged actions of Mr. Chan, would not

have been incurred;

(3)

(4)

Steger failed to trace funds paid to Mr. Chan to his benefit;

Steger appears to have calculated damages that duplicate those claimed by the debt

and equity holder plaintiffs in a separate class action; and

(5)

Steger relied on the Borrelli affidavit in significant aspects of alleged wrongdoing

by Mr. Chan where Mr. Borrelli chose to ignore contrary facts that provide

reasonable explanations for the actions of Mr. Chan.

(i) Flawed Methodology

[970] Ratner argues that Steger used an inappropriate and flawed damages methodology given

the facts and circumstances in this matter that results in the overstatement of potential damages.

Ratner makes the following specific criticisms on this issue:

(1)

the selection of an appropriate measure of damages is dependent on the unique

facts and circumstances of each specific case. Steger’s damage approach and

methodology does not consider the unique facts and circumstances relevant to this

case. Instead, he implicitly assumes Sino-Forest’s entire operations were

equivalent to a Ponzi scheme or theft and measures damages as the net cash losses

realized by Sino-Forest’s debt and equity investors;

(2)

(3)

for purposes of assessing Sino-Forest’s losses, Steger explicitly assumes that Mr.

Chan is solely liable for those losses. This assumption results in Steger failing to

investigate or consider specific causal links, if any, between the alleged actions of

Mr. Chan and Sino-Forest’s damages;

Steger failed to perform any analyses or identify any verified evidence that Sino-

Forest had the attributes of a classic Ponzi scheme or fraudulent investment scam

Page: 164

to support his assumption that Mr. Chan is solely responsible for Sino-Forest’s

losses;

(4)

(5)

Steger’s damage methodology fails to consider mitigation and overstates cash

damages by approximately $645 million representing the reduction in cash that

occurred during the post-Chan period which was not caused by the alleged actions

of Mr. Chan;

Steger’s damages methodology further overstates damages by hundreds of millions

of dollars representing the portion of debt and equity capital raised that was used to

acquire legitimate operating business assets such as Homix, Mega Capital,

Greenheart Group Limited, Mandra Forestry Limited, WFOE standing timber and

planted plantations, and other capital assets, irrespective of the subsequent

liquidation value of those assets;

(6)

(7)

Steger further overstates damages by improperly applying zero value to a

significant portion of Sino-Forest’s assets transferred to EPHL (i.e., the BVI

standing timber) instead of properly using the fair value of those assets, which are

higher than zero; and

while there are differing viewpoints and opinions among the parties as to the actual

value of almost $2.8 billion of BVI timber assets written down to zero, Steger only

acknowledges that the actual value recovered in the future would reduce his

damages. However, Steger did not apply an estimate for that future value and did

not reduce his damages by the arbitration award against Xunxiang. Ratner argues

full credit should be given for the face amount of the Xunxiang arbitration award

($87 million), not just the amount actually recovered by EPHL of $10 million.

(ii)

Failure to Investigate

[971] Ratner argues that Steger failed to investigate and quantify the damages contended to have

been suffered by Sino-Forest that “but for” the alleged actions of Mr. Chan, would not have been

incurred. Ratner argues that:

(1)

Steger’s assumption that all of Sino-Forest’s debt and equity cash raises were

wholly lost due to the alleged actions of Mr. Chan is contradicted by the economic

realities that some of those proceeds were used to acquire other operating assets

and some losses were caused by external economic and industry factors;

(2)

accordingly, Steger should have identified and investigated the specific fraudulent

transactions allegedly caused by Mr. Chan and then properly quantified the

elements of damage associated with those transactions. This approach would

involve a series of analyses based on evidence rather than using a blanket,

unproven assumption about liability that is contradicted in many instances by other

facts and circumstances;

Page: 165

(3)

(4)

moreover, the “but for” methodology requires the expert to consider and quantify

the impact of external factors on the damages calculated. In other words, the expert

must consider if external factors such as the economy, regulatory issues,

competition, or the industry, to name a few, accounted for some portion of the

losses. Steger performed no such analyses;

had Steger performed an industry analysis, he would have determined there was

significant evidence that certain external factors such as climate, industry pricing,

and lack of a registration system for certificates of title contributed to significant

valuation losses that were systemic to the industry and not caused by the alleged

actions of Mr. Chan; and

(5)

the failure to consider and quantify losses from climate, economic, regulatory, or

other industry factors overstates damages by the amounts attributed to those

factors.

(iii)

Failure to Trace Funds to Mr. Chan

[972] On the issue of Steger’s failure to identify specific frauds allegedly committed by Mr.

Chan and to trace funds paid to his benefit, Ratner argues:

(1)

there is a disconnect between the order of magnitude of damages calculated by

Steger of approximately $2.6 billion and the absence of evidence or tracing of

funds directly benefitting Mr. Chan, whose alleged actions purportedly caused the

damages;

(2)

(3)

even on the basis of Steger’s assumption that Mr. Chan is liable for all of Sino-

Forest’s cash losses, Steger does not investigate or trace the $2.6 billion of alleged

cash losses arising from the alleged fraud to the direct benefit of Mr. Chan;

Steger’s calculation of cash losses of $2.6 billion is contradicted by analysis of

cash uses that shows an increase in cash of $1.2 billion over the 2004 to 2010

period and cash used for acquisitions and other transactions not disputed by Steger

totaling an additional $1.4 billion.

(iv)

Duplication of Damage Claims

[973] Ratner argues that Steger has calculated damages that duplicate those claimed by the debt

and equity holder plaintiffs in a separate class action. Specifically, Ratner argues:

(1)

Steger’s approach to damages incorrectly includes claims excluded from the Sino-

Forest Litigation Trust that appear to have been reserved exclusively for the

securities class action. In duplicating these claims, he fails to consider or account

for the economic impact of those non-trust claims thereby demonstrating a

Page: 166

fundamental flaw in his damage methodology that duplicates the damages across

two sets of claims;

(2)

(3)

Justice Perell certified the class action claim and set out the causes of action

against each defendant, and discussed the many common issues of fact in the class

action plaintiffs’ claims; and

as such, the class action is now certified and authorized to move forward with those

specific claims against Mr. Chan, among others, related to the sale of the securities

and seeking to recover the value of their investments. Despite the fact that these

claims are specifically reserved exclusively for the class action, Steger appears to

have effectively calculated his damages to include these claims.

(v)

Reliance on Mr. Borrelli’s Evidence

[974] Ratner argues that Steger unreasonably relied on the Borrelli affidavit for all of the

significant aspects of alleged wrongdoing by Mr. Chan. Steger did not evaluate whether Mr.

Borrelli had chosen to ignore contrary facts that provide reasonable explanations or were helpful

to Mr. Chan.

Analysis

[975] In my view, most of Ratner’s criticisms of Steger’s approach:

(a)

(b)

proceed from a misconception of what Steger was asked to do;

involve Ratner’s view that certain evidence, which supports Mr. Chan’s defence on

liability, was not given sufficient consideration. This, it seems to me, exceeds the

viable scope of the expert’s role on damage quantification by getting into disputed

facts going to liability; or

(c)

are founded on legal argument, again not an issue for expert opinion.

The most significant criticisms fall into six general categories. I will address each of them below.

i) Assumed Liability

[976] Ratner, in proposing many of his criticisms, raises various alternative factual scenarios and

refers to evidence relied upon by Mr. Chan as not having been given sufficient consideration in

Steger’s report.

[977] This misconceives the nature of Steger’s assignment. The question of whether there was a

fraud or a breach of fiduciary duty is not for Steger (or Ratner, for that matter) to decide. That

issue is the principal issue of fact before the Court, on which I heard evidence for over 40 days

(only three or four of which involved expert evidence on damages).

Page: 167

[978] A prime example of Ratner’s approach involves the question of whether Steger should be

criticized for having assumed the BVI standing timber assets have zero value. Ratner points to

some of the evidence (relied upon by Mr. Chan) in support of the position that the BVI standing

timber assets do have value. An example is Ratner’s reference to the Moelis report.

[979] The problem is that whether or not the BVI standing timber assets exist and whether they

have any value is a central disputed issue of fact in this case. It is not a matter for Ratner, or

Steger, to decide. Most of this trial is has been consumed with the question whether Sino-Forest

owned the BVI standing timber assets and what if any value these assets had. Six years after the

fact, Mr. Chan has come forward with no evidence that the former Sino-Forest BVI standing

timber assets (now “owned” by New Plantations) have been identified, located or had their

ownership confirmed, much less monetized. I have found as a fact that Sino-Forest did not own

the BVI standing timber asset and that its value was nil.

[980] Ratner agreed in cross-examination that the best indication of value is what an arm’s-

length purchaser is willing to pay. The pre-CCAA attempt to sell the BVI standing timber assets

produced nothing. The Monitor’s efforts to identify value while Sino-Forest was under court

supervision also produced nothing. EPHL, although highly motivated to realize the highest

possible value, wrote the BVI standing timber assets down to nil. This was supported by EPHL’s

auditors, KPMG.

[981] The one piece of evidence Ratner points to as demonstrating a “flaw” in Steger’s

methodology is what was described in the evidence of Brough as a “marketing” piece prepared by

Moelis. The Moelis document suggests there may be value in the BVI standing timber. This was

prepared for the consideration of Danny Wu, one of the principals brought to the 2016 EPHL deal

by Mr. Chan himself. It is Mr. Chan, and no one else, who has steadfastly maintained the BVI

standing timber assets exist and have value. New Plantations, in the end, did not conduct any

material due diligence on the BVI standing timber and paid nothing for it. The RAPA, which

covers any realizations on BVI standing timber, has yet to produce any payouts. The Moelis

document is not evidence that the BVI standing timber asset was real.

[982] Steger’s reliance on Mr. Borrelli’s evidence is, as noted above, not an appropriate criticism

of Steger, as such. Mr. Borrelli’s evidence merely engages the central factual issues in this case.

That is not a question for the damages experts.

[983] Steger candidly admitted in his written and oral evidence that liability was assumed in his

analysis. If liability were not proved, he said, his analysis of damages would have no application.

Ratner’s criticism on this point is, in my view, attacking Steger for something he was not asked to

do. It also assumes Mr. Chan’s evidence and arguments on liability; this goes beyond the

competence of a damages expert to address. In wading into this issue, Ratner has, in my opinion,

trespassed into questions of disputed fact on the issue of liability which are beyond the scope of a

damages enquiry.

Page: 168

[984] In this respect, Steger’s opinion is no different from the opinion of virtually all experts; it

proceeds on the basis of assumed facts. Here, the assumed facts are specifically related to liability

on the basis advanced by the plaintiff in this lawsuit.

[985] Ratner sought to advance evidence supportive of Mr. Chan’s defence on liability. The

factual matters referred to by Ratner were the focal point of much of the evidence at trial. I have

found that the essential factual underpinnings of Steger’s opinion have been established on the

evidence. I have found that most of the factual assertions pointed out by Ratner have not been

established.

ii) Post-Chan Loss of $644 Million

[986] Ratner argues that Steger’s damage report fails to take account of a $644 million cash

reduction that took place post-Chan. Steger explains this, however, on the basis that he did take

account of certain specific post-Chan losses, but these are minimal. The bulk of these

expenditures was incurred in respect of commitments made during Mr. Chan’s management or

expenditures incurred in the course of Sino-Forest’s collapse, including investigation costs,

CCAA costs and the cost of EPHL’s recovery activities. Whether these losses are attributable to

Mr. Chan is a question of law, causation and foreseeability, not a question for damage

quantification.

[987] The defendant says, as well, that of the $644 million spent between June 2, 2011 and

January 31, 2013, the largest single amount, $188 million, was paid out to the “senior note

holders.” The defendant argues that Mr. Chan could not possibly be responsible for the payment

out, by Sino-Forest, of this amount, as Sino-Forest was “legally required” to pay it under the terms

of the debt instruments. Including this $188 million in the amount for which Mr. Chan is found

liable would result, he says, in double recovery.

[988] One of Mr. Chan’s witnesses, Dickson Chau, testified that he was hired by New

Plantations to review the cash payments made out of the $898 million cash available to Sino-

Forest after June 2, 2011. He found that $644 million was spent. The focus of Chau’s affirmation

and his viva voce evidence at trial was the amount spent on professional fees – $137 million. No

mention was made of the payments to senior note holders. No supporting documents were

provided. Chau simply says in his supplementary affidavit that, as part of his investigation, he

prepared a spreadsheet containing the information obtained and/or verified during his

investigation. He said he inadvertently forgot to attach the spreadsheet to his first affirmation

(which highlighted the professional fees issue). Chau therefore attached the spreadsheet to his

supplementary affirmation. Buried in the spreadsheet on the seventh page is one line styled

“senior noteholders.” It contains one entry – $188,405,456 with the notation, “senior notes –

repayment and interest, other waiver fee.”

[989] The defendant raised this issue for the first time in written argument. It was not referred to

in oral argument.

Page: 169

[990] I tend to agree with the defendant as a matter of principle that if some of the $898 million

in cash available after June 2, 2011 was used to pay off debt obligations, that expenditure could

not properly be characterized as a “loss” to Sino-Forest caused by Mr. Chan’s fraud or breach of

fiduciary duty.

[991] Steger, conceptually at least, also agrees with this because, in his analysis of the period

prior to the CCAA proceedings, he deducted from the amount raised in the capital markets the

amount used to make principal repayments between 2009 and 2012 of $237.670 million to reach

the net cash available from capital raises.

[992] The problem with the defendant’s argument lies in the manner in which it came before the

Court. I am not satisfied that one line in an Excel spreadsheet prepared by Chau in the context of

addressing a very different issue, without any supporting original documents or entries, constitutes

proof on a balance of probabilities that $188 million was actually paid to the senior noteholders

out of available cash between June 2, 2011 and January 31, 2013. Steger’s report does not itemize

when or in what amounts particular repayments of debt were made which make up the $237

million total repaid from 2009 to 2012. Steger does say, however, that these calculations are

based on repayments made “prior to the CCAA proceedings.” Chau’s spreadsheet also contains

expenditures up to January 31, 2013, the effective date of the CCAA plan (the initial order was

made March 30, 2012).

[993] It is likely, therefore, that, even if Chau’s spreadsheet is accurate, the $188 million

allegedly paid to Sino-Forest’s debtholders, is already credited within the $237 million reduction

made by Steger to reach net cash available from the capital raises. The defendant’s evidence

simply does not address this issue.

[994] For these reasons I am not prepared to adjust Steger’s calculations to make any further

reduction for this item.

iii) The Legitimate Businesses

[995] Ratner complains that Steger failed to account for the fact that Sino-Forest operated some

unambiguously legitimate businesses and spent some of the cash raised acquiring, operating and

maintaining these assets. If trading losses resulted from the acquisition and later disposition of

these legitimate businesses, the defendant argues, that loss was not caused by the defendant’s

fraud and should not be included in any calculation of damages against him. Steger’s analysis, in

my view, does account for this. All of Sino-Forest’s viable businesses and assets were sold. The

benefit of those assets is embodied in the purchase price paid by New Forest and New Plantations

in arm’s-length transactions on the open market, following whatever due diligence they deemed

appropriate.

[996] It must also be remembered that Sino-Forest’s investments in low marginal value assets,

such as WFOE planted plantations, although legitimate businesses, were used to mask the

significant frauds being perpetrated in the BVI standing timber and wood log trading businesses.

Page: 170

The cost of employees, facilities and the like, although they cannot be traced to Mr. Chan’s

personal benefit, were necessary to enable the fraudulent BVI standing timber model to continue

undetected. The risk of market value loss on the sale of such assets should, in the circumstances,

fall on the defendant.

[997] In a similar vein, the defendant argues that the plaintiff has not proved that any of the

impugned transactions did not take place at fair market value. In my view, fair market value is

largely irrelevant in the circumstances of this case. I say this because the plaintiff does not argue

that the amounts paid for assets were not at fair market value. Rather, for example, in the context

of wood log trading deposits, the plaintiff alleges that Mr. Chan caused Sino-Forest to divert funds

to non-non-arm’s length entities that he secretly controlled, knowing that logs would never be

delivered. Or, in the context of BVI standing timber trading, the plaintiff accepts, indeed relies

upon the fact, that no funds were transferred at all.

[998] The one possible exception is the Greenheart/GRHL acquisitions. The plaintiff alleges

that Mr. Chan caused Sino-Forest to invest $202 million in this acquisition when he had an

undisclosed interest and knew the business was not viable. Following the CCAA plan, Greenheart

was sold to New Forest for $108.5 million, resulting in a loss suffered by Sino-Forest of $93.5

million.

[999] Ratner says Steger erred by overstating Greenheart losses in two ways:

(1)

(2)

there was a good business case for the investment; and

Steger’s loss calculation is based on the value of Greenheart when it was sold in

2014, not when it was acquired in 2007.

[1000] The first issue is a question of fact on a disputed issue. It is not for Ratner (or Steger) to

say whether there was a good business reason for Sino-Forest to invest in Greenheart in 2007. I

have already found, earlier in these Reasons, that Mr. Chan’s interest in Greenheart (through

Montsford and Fortune) was not disclosed and that he caused Sino-Forest to enter into the

Greenheart acquisition with a blatant, undisclosed conflict of interest. I have also found that, due

to his lengthy and intimate investment in Greenheart prior to Sino-Forest’s investment, Mr. Chan

had a detailed knowledge of the frailty of Greenheart’s business and financial position, which he

likewise did not disclose to Sino-Forest.

[1001] Further, as Steger pointed out in his reply report:



Sino-Forest paid effectively $9 million in July 2007 to GRHL at a time when

GRHL only had a modest concession right previously purchased in 2005 at $1.2

million and as at December 31, 2006 GRHL only had inventory worth $986,000;

and



there is no evidence of any substantive wood deliveries under the 2007 Supply

Agreement.

Page: 171

[1002] On the second issue, Ratner criticizes Steger for failing to take into account Poyry’s

“independent valuations” of the GRHL plantations. These criticisms are misplaced for the

following reasons:



The Poyry valuations are irrelevant to determining Sino-Forest’s loss. Mr. Chan

caused Sino-Forest to first invest in GRHL without disclosing to Sino-Forest his

personal interests in GRHL or the problems it was facing. The fact that the Poyry

valuations were obtained by Greenheart along the way is of no consequence. Mr.

Chan, through his breach of fiduciary duty and fraud, caused Sino-Forest to invest

money in the Greenheart Group which would otherwise not have been invested.

The arithmetic is not in dispute – Sino-Forest suffered the cash loss calculated by

Steger as a result of the Greenheart transactions. Mr. Chan is, I find, liable for that

loss.



In any event, Mr. Chan elected to call neither the GRHL representatives

responsible for instructing Poyry to prepare the valuations he seeks to rely upon

nor the Poyry employees responsible for preparing the valuations. Accordingly, it

is not known what instructions Poyry received and what concerns Poyry might

have articulated to GRHL management concerning matters they were instructed to

assume. For example, as noted by Steger in his report, the 2007 Poyry valuation

was prepared under instruction from Greenheart to adopt a “standing stock

valuation.” Poyry in its 2007 valuation specifically noted limitations in respect of

this method of valuation – among other things, that it assumes all of the standing

volume in a particular resource can be marketed at one specific point in time

without impacting demand, prices or the related cost of doing so. Poyry assumed

that “all the merchantable volume within the concession is harvested and sold at

midnight 31st July 2007.”

[1003] Ratner criticizes Steger for supposedly ignoring documents disclosing that the transactions

were supported by approvals of the Sino-Forest Board of Directors. There is no documentary

evidence that the Sino-Forest board of directors had prior knowledge of, let alone approved, Sino-

Forest’s initial acquisition in GRHL. Mr. Chan gave evidence at trial that he believed Judson

Martin, a fellow director of Sino-Forest, was aware, among other things, of his discussions with

Lui, Lei and others prior to Sino-Forest first investing “because he’s a big supporter of Greenheart

transaction.”

[1004] Mr. Chan was forewarned during his cross-examination that Martin would be examined on

what he knew and when he came to get such knowledge about Mr. Chan’s various discussions

with Lui, Lei and Lok. Mr. Chan elected late in the trial not to call Martin to give evidence

despite my order that defence counsel could cross-examine Martin as opposed to leading his

evidence in chief as would ordinarily be the case. As a result, Martin’s evidence regarding the

Greenheart Group is unknown. It is a reasonable inference that if Martin’s evidence would have

been helpful to Mr. Chan, Martin would have been called as a witness.

Page: 172

[1005] Ratner criticizes Steger’s Greenheart loss calculation on the basis that, prior to the release

of the Muddy Waters Report, Sino-Forest’s investment in Greenheart was trading at prices above

Sino-Forest’s average cost per share. Greenheart’s share price dropped post-Muddy Waters as it

was “impacted by the negative publicity and allegations arising from its association with Sino-

Forest.”

[1006] Ratner argues that Steger inappropriately calculated Sino-Forest’s loss based on a

distressed sale price (i.e. the actual net proceeds received from the sale of Sino-Forest/EPHL’s

interests to Newforest post-CCAA). During his oral testimony, Ratner proposed that June 1, 2011

(i.e. pre-Muddy Waters) be the date used to “normalise the stock price.” This, according to

Ratner, would result in Sino-Forest making a $42.5 million gain from its Greenheart investment,

rather than a loss.

[1007] It seems to me that this is a case where the principle of equitable damages applies: Canson

Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534, at paras. 67-68.

[1008] Mr. Chan was a fiduciary. He caused Sino-Forest to invest in Greenheart when he had an

undisclosed interest. This was a breach of his fiduciary duty owed to Sino-Forest.

[1009] Mr. Chan’s role as CEO and Chairman was not as a trustee, to be sure, but it was “trust-

like.” Mr. Chan’s fiduciary obligation as the senior officer and director of Sino-Forest placed

upon him the obligation to deal with Sino-Forest’s property, including funds available, for the

benefit only of Sino-Forest: Guerin v. R., [1984] 2 S.C.R. 335, at para. 104.

[1010] Equitable compensation is determined by analogy to the principles of trust law. Equity is

concerned with restoration of the actual value of the thing lost through the breach of duty, in this

case Sino-Forest’s funds raised on the capital markets. Equitable compensation is assessed at the

date of trial, not, like common-law damages, at the date of the breach. And, equity presumes the

trust funds will be invested in the most profitable way or put to the most advantageous use:

Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744, 87 O.R. (3d)

321, at paras. 48-49.

[1011] Failure to disclose Mr. Chan’s interest was a breach of Mr. Chan’s fiduciary duty. Sino-

Forest is entitled to be put in the position it would have been if the breach had not occurred, i.e., if

the investment had not been made. Sino-Forest is not required to bear the risk of market

fluctuation between the date of acquisition and the date of sale. The fact that the discovery of Mr.

Chan’s fraud had a negative effect on the market value of the Greenheart asset is not a market risk

Sino-Forest has to bear. I therefore find that Sino-Forest was, in the circumstances, not required

to prove that the Greenheart investment of $202 million was not at fair market value at the time

was made. It is sufficient that Sino-Forest suffered a loss in fact, provided the realization was not

improvident. There is no evidence that the sale of Greenheart to New Forest was an improvident

realization in the circumstances.

Page: 173

iv) Other Causal Effects

[1012] Ratner also argues that Steger failed to eliminate the possibility of other market forces or

industry factors that might have contributed to Sino-Forest’s loss. To the extent this argument

seeks to encompass the problem of fire-sale prices in a bankruptcy, it is again a question of

causation, foreseeability and, ultimately, law. Who bears the risk of lower than market values in a

bankruptcy scenario is not for the damages expert to decide. In the circumstances of this case, I

find it is Mr. Chan who bears that risk. He knew, or must be deemed to have known, that the

discovery of his conduct would send Sino-Forest into a tailspin.

[1013] To the extent this argument contemplates completely external forces affecting market

values in the forestry industry generally (such as typhoons or insect infestations), there is simply

no evidence there were any external forces of this nature affecting value. It is not the plaintiff’s

obligation to exclude every possible contributor to a decline in value. The plaintiff has made his

theory clear – the collapse of Sino-Forest was the result of Mr. Chan’s fraud. The plaintiff has

established there was a fraud and that over $2.7 billion in assets did not exist. It was for the

defendant to show that there were other factors contributing to the loss. Mr. Chan failed to lead

any evidence that any external factors contributed to Sino-Forest’s losses.¹⁰

[1014] In any event, Steger did adduce evidence in reply to Ratner’s critique which shows that

forestry industry stock market returns worldwide, in 23 markets, generated largely positive returns

during 2010 to 2014. This tends to rebut any suggestion of industrywide forces contributing to

Sino-Forest’s loss.

[1015] Ratner also alludes, in this context, to difficulties in the registration system for plantation

ownership in China. This is another case where Ratner has trespassed into disputed issues of fact

going to liability and taken what I would describe as an argumentive or advocate’s point of view.

The plantation registration system in China was the subject of a great deal of evidence from both

fact and subject matter expert witnesses during the trial. It is the role of the Court to assess

whether those problems existed and the extent to which they had an impact on Sino-Forest’s BVI

standing timber holdings, not the role of damages experts. To the extent there were problems with

the registration system, I have found that Mr. Chan exploited those weaknesses in the commission

of his fraud. They were, in that sense, a tool rather than a cause.

v) The Transaction by Transaction Approach

[1016] The question of whether Mr. Chan may only be held liable for specific amounts resulting

from losses due to specific frauds, or whether Mr. Chan can only be found liable for amounts

specifically traceable to him as a result of his misfeasance or breach of fiduciary duty, are legal

questions, again not questions for the damages experts.

¹⁰This is not a case like Livent where there was evidence of losses unrelated to the defendants’

liability for failure to discover the fraud (see, for example, paras. 308 to 326).

Page: 174

[1017] In my opinion, the defendant has improperly equated the need to prove a causal link

between the loss and the defendant’s conduct with the alleged need to prove damages on a

“transaction by transaction” basis. Ratner says it should be done this way but offers no basis for

this; it is merely advanced as his opinion on how a proper loss calculation should be done.

Counsel for the defendant have similarly offered no legal authority for this proposition.

Importantly, Ratner did not perform, try to perform, or even hint at the methodology one would

use to perform the so-called “transaction by transaction” analysis, the absence of which he says so

fatally flawed Steger’s approach.

[1018] The defendant has not justified the transaction by transaction approach as the sine qua non

of an appropriate loss calculation, in law or in damage calculation practice. The loss suffered as a

result of Mr. Chan’s fraud was more than the sum of specific losses attributable to individual

transactions or components of the fraud.

[1019] It is clear that some transaction by transaction analysis has been done, for example with

respect to the Greenheart and wood log trading frauds. But, as noted earlier, the BVI standing

timber model was a cashless model. Even if the BVI standing timber assets were misrepresented

and have no value, they were not bought with cash. No amount of “transaction by transaction”

analysis will produce any loss. Does this mean that the BVI standing timber fraud caused no loss

to Sino-Forest? I do not think so.

[1020] Based on fraudulent misrepresentations about the nature and value of the BVI standing

timber assets, Mr. Chan caused Sino-Forest to raise money in the capital markets. When the fraud

was uncovered, and the dust settled, more than half the money was gone. To the extent those

funds went into the acquisition of assets, the value of those assets was realized through the EPHL

sales process. What was left in cash on June 2, 2011 was largely consumed in propping up and

managing the enterprise during the extended crisis brought on by the disclosure of the fraud and

its ongoing investigation (including the ongoing concealment by Mr. Chan and Inside

Management).

vi) No Evidence of Benefit to Mr. Chan

[1021] The defendant, through Ratner, also argues that the determination of damages for fraud

requires a matching of the benefit received with the loss, which they say Steger did not do. In a

similar vein, Ratner also argues that to determine the loss attributable to the defendant, a tracing

must be performed of funds diverted to the alleged perpetrator. I do not accept this argument. It

is simply wrong in law. The defrauding party need not have profited from his fraud to be held

liable in damages: Fiorillo v. Krispy Kreme Doughnuts Inc., (2009) 98 O.R. (3d) 103, at paras. 75-

76; French v. Skead, (1877) 24 Gr. 179 (Ch.), at para. 7.

Summary of Quantum

[1022] The plaintiff has adduced evidence that connects the loss suffered by Sino-Forest to Mr.

Chan’s breaches on a common sense view of causation. Between 2007 and 2010, Sino-Forest

Page: 175

raised in excess of USD$2.1 billion and CAD$800 million in Canada’s debt and capital markets.

This money belonged to the corporation. I find as a fact that, but for Mr. Chan’s deceit, Sino-

Forest would never have undertaken obligations of this magnitude to lenders and shareholders or

entrusted this money to him and Inside Management. Mr. Chan, rather than directing Sino-

Forest’s spending on legitimate business operations, poured hundreds of millions of dollars into

fictitious or over-valued lines of business where he engaged in undisclosed related-party

transactions and funneled funds to entities that he secretly controlled. The loss of these funds to

Sino-Forest was directly related to Mr. Chan’s fraud and breach of fiduciary duty. The fact that

Mr. Chan was able to conceal where a great deal of the money went after it was paid out to these

non-arms’ length third parties cannot defeat the plaintiff’s claim. Accordingly, Mr. Chan is liable

to Sino-Forest to return the property that went missing as a result of his fraud and breaches of

fiduciary duty by making good the loss suffered by Sino-Forest.¹¹

[1023] Mr. Chan has failed to provide any credible response to rebut the evidence that the

plaintiff has adduced to link his breaches of duty to the injury suffered. Nor has Mr. Chan’s

expert witness been able to provide substantive responses that hold up to scrutiny against the facts

as I have found them to be.

[1024] Mr. Chan refused to disclose information that would have assisted Sino-Forest to

determine and mitigate its damages at an earlier stage. Mr. Chan misled Sino-Forest’s Board, its

auditors, and the IC, causing the company and its advisors to waste time and money investigating

transactions that Mr. Chan knew were improper but which he and Inside Management concealed

throughout.

[1025] The undeniable fact is that billions of dollars of forestry assets purportedly owned by Sino-

Forest remain unaccounted for despite nearly six years of investigations by a number of

sophisticated parties and experienced professionals, each highly motivated to find those assets.

Sino-Forest spent tens of millions of dollars conducting these investigations. Mr. Chan, himself

perhaps the most highly motivated of all, has also failed to come forward with any evidence

confirming the validity of Sino-Forest’s title to 520,000 ha of standing timber held in the BVI

model or any evidence that these assets had material value.

[1026] The evidence establishes that Sino-Forest raised net cash proceeds of approximately

$2.588 billion. Steger reasonably assumed that Sino-Forest would have earned a return of

approximately $477.853 million had it invested that cash, using Sino-Forest’s issue costs and debt

interest as a proxy for a minimum rate of return. Accordingly, but for the fraud perpetrated by

¹¹Although not raised by the parties, another argument might be that, but for Mr. Chan’s deceit,

Sino-Forest could never have raised the net amount of $2.588 billion in debt and equity in the first

place. In my view, the same result obtains, however. The raising of $2.588 billion involved

incurring concomitant obligations and liabilities to third parties, the bond holders and the

shareholders. But for Mr. Chan’s deceit, Sino-Forest would never have incurred those obligations

and/or liabilities.

Page: 176

Mr. Chan on Sino-Forest and Mr. Chan’s breaches of fiduciary duty, these funds totalling $3.065

billion would have been available to Sino-Forest to invest in legitimate business operations.

[1027] EPHL recovered $438.5 million on its sale of Sino-Forest’s assets. Mr. Chan’s own

damages expert, Ratner, admitted that the actual price paid for a property in an arm’s-length

transaction is the best possible evidence of its value. As such, approximately $3,065,985,000 of

Sino-Forest’s monies were converted into assets ultimately worth only $438,509,000 (this

includes $10 million realized from the Xunxiang arbitration). The delta, being $2,627,512,000, is

Sino-Forest’s loss.

Alternate Measures of Quantum

[1028] If I am wrong in this conclusion that the appropriate measure of damage is the difference

between the amount raised by Sino-Forest in the capital markets and the realized value of the

assets which remained, I would rely on Steger’s fallback position based on the write-downs of

Sino-Forest’s assets, $3.2 billion.

[1029] If neither of these measures of damages were appropriate, it would be necessary to fall

back on the amounts of the specific losses resulting from specific acts of fraud or breach of

fiduciary duty. These proven amounts total $812.43 million, consisting of:

(1)

(2)

(3)

(4)

(5)

loss from the wood log cash gap fraud ($333.2 million);

loss from the wood log deposit fraud ($167.4 million);

loss from the Greenheart transaction ($93.28 million);

an accounting of profits (also Greenheart) ($39.65 million);

the cost of Sino-Forest’s investigation following the Muddy Waters report (total

cost of all professional fees $137.9 million); and

(6)

Mr. Chan’s remuneration ($41 million).

From this total amount would have to be deducted net realization of $438,509,000, for a final

compensation award of $375,923,000.

[1030] The losses incurred from the wood log cash gap fraud, the wood log deposit fraud and

Sino-Forest’s investment in Greenheart have been dealt with earlier in these Reasons. I will

therefore briefly describe the issues relating to the disgorgement of profits, the disgorgement of

Mr. Chan’s remuneration and the cost of the investigation.

Page: 177

Accounting for Profits

[1031] As a fiduciary, Mr. Chan may be held liable to account for profits that he has obtained as a

result of conduct in breach of his fiduciary duty.

[1032] The House of Lords in Regal (Hastings) Ltd. v. Gulliver, [1942] 1 All ER 378, held that

the directors were severally liable to account to the company for profits made on the sale of

shares:

[T]he respondents were in a fiduciary position and their liability to account does

not depend upon proof of mala fides. The general rule of equity is that no one who

has duties of a fiduciary nature to perform is allowed to enter into engagements in

which he has or can have a personal interest conflicting with the interest of those

whom he is bound to protect.

[1033] A fiduciary’s liability arises from the mere fact of a profit having been made from a

breach. The profiteer, however honest and well-intentioned, cannot escape the risk of being called

upon to account.

[1034] In Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592, the Supreme Court of

Canada endorsed these basic principles established in Regal Hastings. The Supreme Court has

continued to hold that a fiduciary who breaches his or her fiduciary duty must account for and

disgorge any profits received, even if the beneficiary suffered no loss; the relevant cause of action

is the breach of fiduciary duty and the fiduciary’s gain.

[1035] Steger calculated the profit made by Fortune and Montsford on these transactions at

$37.86 million, attributing $1.792 million to the estimated cash value for GRHL shares prior to

Sino-Forest’s first investment.

[1036] Ratner calculated the profit (net cash received) derived by Fortune and Montsford as $31

million. The difference is that Ratner attributed $8.669 million as value for GRHL shares prior to

Sino-Forest’s investment. Ratner’s opening value, however, ignores the fact that GRHL was

effectively insolvent in 2007. Its chairman, Lei, was recommending that operations be shut down

prior to Sino-Forest’s bailout. It is, in my view, inappropriate to attribute a $8.67 million value to

Greenheart pre-Sino-Forest investment.

[1037] In any event, even Ratner acknowledges that Fortune and Montsford collectively made a

profit of at least $31 million on their shareholdings in GRHL.

[1038] I conclude that Mr. Chan earned a secret profit on personal investments made in the

Greenheart Group in breach of his fiduciary duty to Sino-Forest in the amount of $37.861 million.

He is therefore liable to disgorge that amount.

Page: 178

Repayment of Compensation and Bonuses Received

[1039] The Court has the discretion to order a fiduciary to pay back benefits received as a result

of, or during the period of, his or her wrongdoing, including any bonuses payable. The

circumstances of the particular case and the need to achieve the goals of restitution and deterrence

govern the exercise of this discretion.

[1040] The Court also has the discretion to order a fiduciary to pay back compensation received

during the period of his or her wrongdoing. The circumstances of the particular case and the need

to achieve the goals of restitution and deterrence govern the exercise of this discretion as well.

Members of senior management such as directors and officers are not just employees and the law

will hold them to a “strict ethic” to deter their misconduct.

[1041] Ordering repayment of compensation is appropriate where the corporation would have

dismissed the fiduciary for cause had the corporation known of the fiduciary’s breach of duty.

[1042] As the CEO and Chairman who exercised control over corporate decision-making, Mr.

Chan must be held to a strict ethic. Had Sino-Forest known about the scale of Mr. Chan’s fraud,

which he actively concealed from the corporation, he would have been dismissed for cause. He

never would have received the $41 million that he received between 1995 and 2012. The vast

majority of this amount, I should point out, was received in Mr. Chan’s final years at Sino-Forest,

during the most expansive phase of the BVI standing timber and wood log trading frauds. Many

of the bonuses that Mr. Chan received were discretionary and Mr. Chan only acquired these

bonuses because of his fraud and breaches of fiduciary duty that concealed his wrongdoing from

Sino-Forest.

[1043] Therefore, I find Mr. Chan liable for $41 million, representing the compensation that he

received, which he is required to disgorge. This compensates Sino-Forest by way of restitution

for money that it never would have paid Mr. Chan had it known of his frauds and breaches of

fiduciary duty.

The Costs of the Investigation

[1044] Mr. Chan is liable for all consequential and special damages, including the costs incurred

by Sino-Forest to investigate Mr. Chan’s fraud. Sino-Forest spent tens of millions of dollars

investigating fictitious transactions and the explanations proffered by Mr. Chan and Inside

Management to hide the manner in which he had committed fraud and breached his fiduciary

duties. It does not lie in Mr. Chan’s mouth to argue that Sino-Forest should not be entitled to

recover the cost of investigation when Mr. Chan’s non-cooperation and concealment was both the

cause of and increased the cost and duration of, those same investigations. Moreover, as even Mr.

Chan’s own damages expert, Ratner, acknowledged in cross-examination, it was reasonable for

Sino-Forest to investigate whether the allegations contained in the Muddy Waters Report were

true, to keep paying regular business expenses during these investigations, to attempt to recover

its assets, and to defend itself in litigation.

Page: 179

[1045] One of Mr. Chan’s witnesses, Dickson Chau, testified that over $137 million of the cash

available to Sino-Forest on June 2, 2011 was eventually spent for professional fees on

investigations, the CCAA proceedings, EPHL’s realizations and other matters. While this is a

staggering sum, it is not surprising that a financial collapse of this magnitude and complexity

would give rise to extremely high professional and related expenditures. Costs of this nature are

an entirely foreseeable consequence of Mr. Chan’s fraud and breach of fiduciary duty.

[1046] The gist of Mr. Chau’s evidence seemed to be, however, that New Plantations, the

purchaser of EPHL in 2016, may seek to challenge the amount and propriety of these payments. I

find this a startling proposition. Mr. Chau, who is a forensic accountant and not a principal of

New Plantations, seemed to assume, incorrectly, that New Plantations, when it acquired EPHL in

2016, acquired the right to the $898 million of cash available in Sino-Forest’s accounts on June 2,

2011. To the contrary, all New Plantations acquired was the cash available in EPHL’s accounts in

2016. This suggestion by Chau also ignores the fact that payment by Sino-Forest of most, if not

all, of these professional fees was publicly approved by Court order in the CCAA proceedings

over four years ago.

[1047] If I were wrong in my adoption of Steger’s approach to damages, therefore, I would

nevertheless have included in my determination of a specific transaction-based recoverable loss

against Mr. Chan Sino-Forest’s costs incurred in investigating Mr. Chan’s fraud as well as the

professional fees incurred to deal with the financial collapse and insolvency of Sino-Forest which,

as I have said, resulted from and were a foreseeable consequence of Mr. Chan’s fraud. The total

amount, net of recoveries, for all the specific losses is, as outlined above, $373,923,000.

Punitive Damages

[1048] Punitive damages are available where there is high-handed, malicious, arbitrary or highly

reprehensible misconduct that departs to a marked degree from ordinary standards of decent

behaviour. Such damages are used to deter the defendant and others from similar misconduct in

the future, and to mark the community’s collective condemnation of what has happened. In

situations of fraud and breach of fiduciary duty, punitive damages are appropriate “[w]here the

actions of the fiduciary are purposefully repugnant to the beneficiary’s best interests” and “the

impugned activity is motivated by the fiduciary’s self-interest”: Mark Ellis, Fiduciary Duties in

Canada, (Scarborough, ON: Carswell, 1993), at 20-35 – 20-36, 1980 ed. quoted by McLachlin J.

(as she then was) in Norberg v. Wynrib, [1992] 2 S.C.R. 226, at para. 112.

[1049] In this case, Mr. Chan abused his unique position as a fiduciary to orchestrate an extremely

large and complex fraud, resulting in the loss by Sino-Forest of billions of dollars. An award of

punitive damages is entirely appropriate in this case. Given the sums involved, any award of

punitive damages could only be token in nature. Nevertheless, in the circumstances, I award

punitive damages of $5 million.

Page: 180

Costs

[1050] I direct counsel to confer on how best to deal with the issue of costs. They shall do so in

advance of a case conference where the procedure and timetable will be resolved. Counsel shall

provide my assistant a series of dates convenient to them for this case conference.

Penny J.

Released: March 14, 2018

Page: 181

Appendix A

List of Witnesses

Plaintiff’s Witnesses

Name

Role in Litigation or at SFC

Cosimo Borrelli

Chartered Accountant, Managing Director of Borrelli Walsh Ltd., Trustee of

the SFC Litigation Trust

James Dubow

James Engen

James Hyde

Paul Brough

Chief Executive Officer (CEO) of Emerald Plantation Holdings Ltd. (EPHL)

(the corporation to which SFC’s assets were transferred on 31 January 2013)

Managing Director in the corporate finance practice at FTI Consulting

Canada Inc., and the court-appointed Monitor of SFC’s CCAA proceedings.

Member of SFC’s Board of Directors and Directors’ Audit Committee as of

September 2004, chair of the Audit Committee as of January 2005.

Former Chief Restructuring Officer (CRO) of SFC, former Chairman and

Chief Executive Officer (CEO) of Emerald Plantation Holdings Limited

(EPHL).

Steven Henderson

Thomas Maradin

National Forensic Investigation Services Leader at PricewaterhouseCoopers

LLP (PwC), a Canadian leader of the investigation into SFC from June

2011-January 2012. PwC was an advisor to the Independent Committee of

Directors of SFC.

Vice-President, Risk Management at SFC from September 2005 – June

2010, Vice-President, (Corporate) Finance at SFC from June 2010 –

December 2012, consultant to SFC from December 2012 – January 2013.

Experts

Peter Steger

Principal at Cohen Hamilton Steger & Co., Inc. retained by the Litigation

Trust to perform an independent assessment of the losses suffered by SFC

Qin Tianbao

Song Li

Luojia Distinguished Professor of Environment and Resources Law,

Associate Dean for the School of Law, Director of the Research Institute of

Environmental Law at Wuhan University, engaged to provide expert

evidence on forestry law of the PRC.

General Manager of Beijing Zhonglin Assets Appraisal Co., Ltd. Retained

by the Plaintiff to provide expert evidence on practices related to ownership

of standing timber in the PRC

Page: 182

Defendant’s Witnesses

Name

Role in Litigation or at SFC

Chan Tak Yuan (also known as CEO and Chairman of the Board

Allen Tak Yuan Chan)

Hung Cham Tong (also known as Vice President, Corporate Planning, Banking and Sales (employee of SFC

Alfred C.T. Hung)

since 1999)

Ho Siu Lung George (also known Chief Financial Officer and Vice-President Finance, Sino-Panel (Asia) Inc.,

as Zhaolong He, may also be and Vice-President Finance, SFC from October 2009 to April 2012

known as George Ho)

Lau Kok Chun (also known as Vice President, Business Development of Sino-Panel (Asia Inc.), formerly a

James Lau)

subsidiary of SFC

Lei Guangyu

Part owner of Shenzhen Hongji Investment Development Company Ltd.

(Hongji), as well as other companies. Owner of Fortune Universe BVI

Lim Hoe Pin

Xu Ni

Executive Director of Greenheart Group Ltd., assisted in the acquisition of

the Emerald Plantation Group Ltd. by New Plantations Ltd.

SFC’s Vice-President of legal affairs (employee of SFC from October 20000

to Dec 2013)

Chiang Wai Yan (also known as Executive Secretary of Allen Mr. Chan since 2003

Yosanda Chiang)

Zeng Haibin (also known as John Lawyer whose firm, Kai Tong, acted occasionally for SFC subsidiaries in

Zeng)

the PRC. Also acted for Mr. Chan personally. Owner of the Montsford BVI

William Ardell

A director of the independent committee appointed by SFC’s board; member

of the Special Restructuring Committee of SFC’s Board

Experts

Glass Ratner Advisory & Capital Experts retained on behalf of Mr. Chan to provide independent forensic

Group LLC accounting and loss quantification expertise

Chau Tat Sun (also known as Investigator for EGPL

Dickson Chau)

Randall Peerenboom

Wang Jin

Lawyer and professor retained to give evidence on forms of investment and

business practices in the PRC

Law professor at Peking University, engaged to provide expert evidence on

Page: 183

PRC law as it relates to forestry practices

Xiao Dong Hao (also known as Forestry consultant, RISI, with expertise in PRC forestry management and

Gavin Hao)

development

CITATION: Borrelli v. Chan, 2018 ONSC 1429

COURT FILE NO.: CV-14-10684-00CL

DATE: 20180314

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

COSIMO BORRELLI, in his capacity as trustee of the

SFC LITIGATION TRUST

Plaintiff

– and –

ALLEN TAK YUEN CHAN

Defendant

REASONS FOR JUDGMENT

Penny J.

Released: March 14, 2018