Canada: US$2.6-Billion Fraud Judgment Awarded Against Former Sino-Forest CEO

On March 14, 2018, the Honourable Justice Penny of the Ontario Superior Court (Commercial List Division) released a decision granting a US$2.6-billion judgment to the SFC Litigation Trust for fraud and breach of fiduciary duty in its action against Allen Chan, the former CEO of Sino-Forest Corporation. The decision is the largest judgment of its kind in Canadian history. The case is remarkable in other respects, as well.

The Sino-Forest Fraud

Sino-Forest was a publicly traded company listed on the Toronto Stock Exchange with a market capitalization of approximately $6 billion at its peak. 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.

Sino-Forest seemed like a remarkable success story. Between the 2003 and 2010 financial year-ends, Sino-Forest's revenue grew from $265.7 million to $1.9 billion (an approximately 625% increase) and its assets from grew from $418 million to $5.7 billion (an approximately 1,270% increase). Between August 2004 and October 2010, Sino-Forest used its apparent success to raise approximately $3 billion through debt and equity financing.

In June 2011, a short seller called Muddy Waters Research published a report describing Sino-Forest as a "multi-billion dollar Ponzi scheme ... accompanied by substantial theft." Among other things, the report alleged that Sino-Forest did not hold the full amount of timber assets it reported, that it overstated its revenue, and that it had engaged in undisclosed related-party transactions.

The same day that the Muddy Waters report was released, Sino-Forest's Board appointed an Independent Committee to investigate the allegations in the report. In turn, the Independent Committee retained professional firms to assist with the investigation. After eight months of investigation, the Independent Committee released its final report in January 2012, disclosing that the issues it examined, including timber asset verification and related party transactions and relationships, "proved very difficult to definitively resolve."

Also following the Muddy Waters report, the Ontario Securities Commission (OSC) commenced an investigation into Sino-Forest. In August 2011, the OSC issued an order alleging including that Chan, the CEO of the company, and other certain directors and officers "appear to be engaging or participating in acts, practices or a course of conduct related to its securities which it and/or they know or reasonably ought to know perpetuate a fraud." Among other things, the order cease-traded Sino-Forest's securities and required Chan and other members of management to resign. The OSC delivered a Statement of Allegations in May 2012, alleging that Chan and other members of management "engaged in a complex fraudulent scheme to inflate the assets and revenue of Sino-Forest".

In March 2012, Sino-Forest filed for protection under the Companies' Creditors Arrangement Act, which led to approving a plan of arrangement by the court. The plan, among other things, transferred Sino-Forest's litigation rights to a litigation trust to pursue for the benefit of Sino-Forest's creditors.

In March 2014, the SFC Litigation Trust commenced an action in the Ontario Superior Court against Chan for orchestrating the fraud in breach of the fiduciary duties he owed the company.

The Mareva Proceedings

In August 2014, the SFC Litigation Trust obtained a worldwide Mareva order from the Ontario Superior Court freezing all of Chan's assets. Chan appealed the Mareva order to the Ontario Divisional Court, arguing that the Litigation Trust failed to establish that Chan had assets in Ontario. In a split decision released in March 2017, the Divisional Court dismissed Chan's appeal, holding that the Mareva order was justified by the Court's in personam jurisdiction over the defendant—not whether the defendant has assets in the jurisdiction.

Chan obtained leave to appeal the Divisional Court's decision to the Ontario Court of Appeal. However, Chan abandoned the Mareva appeal shortly after Justice Penny's trial decision was released.

The Trial Against Chan

The trial was held over 46 days in March, April, and May 2017, with closing argument taking place in July 2017. Several aspects of the trial process and judgment are notable.

Electronic Trial

The proceeding was conducted as a "paperless" trial. The affidavits, transcripts, documents, and written submissions were filed in an online database that could be readily accessed by the parties during the trial. Display monitors throughout the courtroom were linked to a computer controlled by the party conducting the examination or making submissions. The affidavits, transcripts, and written submissions were hyperlinked to the documents and cases cited as references.

Commission Evidence out of Country

In July 2016, Chan, who resides in Hong Kong, brought a motion asking that Justice Penny appoint a commissioner to sit in Hong Kong to take his evidence, and the evidence of witnesses Chan intended to call who lived in Hong Kong and mainland China.

Justice Penny held that Chan was a party and was compellable in Ontario by virtue of having attorned to the jurisdiction. However, Chan's non-party witnesses were not compellable. Due to the importance of the assessment of the credibility of Chan's witnesses, Justice Penny held that he (being the trial judge) should take the commission evidence of those witnesses in Hong Kong.

As a result, three weeks of the trial were held in Hong Kong with Justice Penny sitting as the commissioner.

The Decision Against Chan

Justice Penny's decision was released on March 14, 2018, finding that Chan was liable for US$2.6 billion in damages for fraud and breach of fiduciary duty, and punitive damages of C$5 million.

The decision largely turned on the credibility (or the lack thereof) of Chan and his witnesses. Among other things, Justice Penny wrote in his decision that:

  • [he] found the evidence of Mr. Chan, and his other fact witnesses, to be contrived;
  • [Mr. Chan's witnesses'] evidence changed in response to new evidence or when confronted with inconsistencies or other problems with their account of events;
  • [Mr. Chan's witnesses'] explanations were frequently implausible on their face, lacking any ring of truth, and/or unsupported by any contemporaneous documentary evidence; and
  • Mr. Chan's evidence, in particular, was frequently impeached by prior inconsistent testimony under oath on discovery or in affidavits sworn in earlier proceedings in this case.

In the decision, Justice Penny found that Chan secretly controlled many of Sino-Forest's counterparties (i.e., its suppliers and customers) through a complex network of relationships with third parties. The third parties acted as Chan's "nominees", holding positions as directors, officers, and shareholders on his behalf.

Justice Penny further found that Sino-Forest's primary business model under which it claimed to buy and sell forestry plantations within China was a fraud and that "Sino-Forest lacked the requisite documentation to find the standing timber assets, much less prove that it had any ownership interest in them." Justice Penny also found that Chan defrauded Sino-Forest by causing it to fund deposits and advance payments to entities that Chan secretly controlled.

Both parties presented expert evidence on the losses suffered by Sino-Forest. Justice Penny ultimately accepted the evidence of Litigation Trust's expert Peter Steger in arriving at the US$2.6-billion damages figure, being the funds that would have been available to Sino-Forest to invest in legitimate business operations but for Chan's fraud and breaches of fiduciary duty, considering certain amounts already recovered by the beneficiaries of the trust.

Related Proceedings

In July 2017, the OSC released a decision against Chan and other members of Sino-Forest's management finding they perpetrated a fraud. Although the OSC's sanctions decision has not been released, jail time is not an available penalty. The Royal Canadian Mounted Police have initiated no proceedings arising out of the Sino-Forest fraud.

The SFC Litigation Trust continues to pursue outstanding claims against others, including professionals, for the Sino-Forest fraud. The recent judgment against Chan will assist in the prosecution of those claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Alan P. Gardner
In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions