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  
1 Unless 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  
BVIs 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.  
Chans 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 teaserletter. 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.  
Page: 26  
[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. (4th) 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.  
 
Page: 29  
[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  
Page: 30  
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  
   
Page: 32  
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.  
 
Page: 33  
[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  
Page: 34  
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 witnesss 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.  
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[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  
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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  
October  
9,  
2009,  
Christine  
Wong  
at  
Eminens  
emailed  
and  
[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.  
 
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[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 Fieldon 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 Compan