IN THE MATTER OF THE
 SECURITIES ACT 
, R.S.O. 1990, c. S.5, AS AMENDED - AND - IN THE MATTER OF ERNST & YOUNG LLP STATEMENT OF ALLEGATIONS
Further to a Notice of Hearing dated December 3, 2012, Staff of the Ontario Securities Commission (“Staff”) make the following allegations:
Overview
1.
 
Ernst & Young LLP (“Ernst & Young”) were the auditors of Sino-Forest Corporation (“Sino-Forest”) between August 2007 and April 2012. During that time, they audited the annual consolidated financial statements of Sino-Forest and represented to its shareholders that they had performed their audits in accordance with relevant industry standards. Shareholders invested significant sums in Sino-Forest in reliance on these financial statements. 2.
 
Ernst & Young, however, failed to conduct their audits in accordance with relevant industry standards. In particular, as outlined further below, Ernst & Young: (a) failed to perform sufficient audit work to verify Sino-Forest’s ownership of its most significant assets; (b) failed to perform sufficient audit work to verify the existence of Sino-Forest’s most significant assets; and (c) failed to undertake their audit work on the Sino-Forest engagement with a sufficient level of professional skepticism.
 
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3.
 
As the auditors of a publicly traded company, Ernst & Young were required to conduct their audits of Sino-Forest’s financial statements in accordance with Canadian generally accepted auditing standards (“GAAS”). Each of Ernst & Young’s failures to comply with GAAS in the course of its audits of these financial statements constitutes a  breach of section 78 of the
Securities Act 
, R.S.O. 1990, c. S-5, as amended (the "Securities Act"). 4.
 
In addition, Sino-Forest filed a number of documents with the Ontario Securities Commission (the “Commission”) which contained Ernst & Young’s representation that they had conducted their audits in accordance with GAAS. Each of these filings constitutes a breach of section 122 of the Securities Act by Ernst & Young.
Background
 5.
 
Sino-Forest is a reporting issuer in the province of Ontario as that term is defined in subsection 1(1) of the Securities Act. Sino-Forest represented that it engaged primarily in the purchase and sale of timber located in the People’s Republic of China (the “PRC”). Until May 9, 2012, the common shares of Sino-Forest were listed and posted for trading on the Toronto Stock Exchange. 6.
 
Ernst & Young is a firm of chartered accountants with a head office located in Toronto, Ontario. It has offices located across Canada, and it is a member firm of Ernst & Young Global Limited, a global accounting organization. 7.
 
Ernst & Young was appointed as the auditor of Sino-Forest on August 16, 2007. Ernst & Young audited the consolidated financial statements of Sino-Forest as at and for its fiscal years ended December 31, 2007, December 31, 2008, December 31, 2009 and December 31, 2010 (respectively, the “2007 Financial Statements”, the “2008 Financial Statements”, the “2009 Financial Statements” and the “2010 Financial Statements” and collectively the “Material Financial Statements”).
 
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8.
 
Between February 2003 and October 2010, Sino-Forest raised approximately US $3.0 billion through the issuance of equity and debt securities to investors. From 2008 onwards, investors relied on the Material Financial Statements in making the decision to  purchase Sino-Forest’s shares and debt securities in both the primary and secondary markets. 9.
 
Between June 30, 2006 and March 31, 2011, Sino-Forest’s share price increased from CDN $5.75 to CDN $25.30, an increase of 340%. By March 31, 2011 Sino-Forest’s market capitalization was well over CDN $6.0 billion. 10.
 
On June 2, 2011, the share price of Sino-Forest plummeted after a private analyst made public allegations of fraud against Sino-Forest. On the same day, the Board of Directors of Sino-Forest established an Independent Committee (the “IC”) “to independently examine and review the serious and wide-ranging allegations” made in the analyst’s report. 11.
 
The IC identified a number of areas of Sino-Forest’s business for investigation, including its ownership of trees and the existence of those trees. The IC prepared and released three reports concerning its findings, dated August 10, 2011, November 13, 2011 and January 31, 2012 (the “IC Reports”). 12.
 
In the IC Reports, the IC presented its findings regarding the issues of tree ownership and tree existence. The IC Reports concluded that there was uncertainty surrounding the legal certainty of Sino-Forest’s claims to a significant proportion of its reported timber assets. In addition, the IC Reports noted significant obstacles to verifying the actual existence of the reported timber assets, including an inability to identify the precise location of the trees which had purportedly been purchased by Sino-Forest.
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