Under a settlement Monday approved by the Ontario Securities Commission, David Horsley agreed to pay $5.6 million to settle class action lawsuits in Ontario and the U.S. and another $700,000 to the provincial regulator to offset investigative costs.
Horsley was accused of failing to ensure the company complied with securities law and of acting contrary to the public interest.
OSC vice-chair James Turner said the chief financial officer is an important gatekeeper in ensuring the integrity of reporting in the financial markets.
"In this case, I think it's fair to say Mr. Horsley substantially failed in his role as CFO," Turner said Monday in approving the provincial commission's portion of the settlement.
"He failed investors and he failed our capital markets."
In addition to the financial penalties, the OSC banned Horsley for life from being a corporate director and officer.
Sino-Forest was once the most valuable forestry company listed on the Toronto Stock Exchange, but collapsed after public allegations of fraud by investment firm Muddy Waters Research prompted investigations by the OSC and police.
Investors lost billions of dollars when the company's stock plunged in 2011 and Sino-Forest ended up being taken over by its creditors in a restructuring under the Companies' Creditors Arrangement Act.
Turner said the $5.6 million to settle the lawsuits was an essential component of his decision to approve the deal.
"This settlement would not be acceptable to me but for the making of that payment," Turner said.
"In effect, the payment into court is comparable to the administrative penalties that I would impose in this matter — had it come before me. So we end up on the same position through this mechanism."
Horsley's class-action settlement is expected to be approved by Ontario Superior Court Justice Geoffrey Morawetz in Toronto and a U.S. bankruptcy judge in New York during concurrent hearings Thursday.
Horsley was not accused of fraud and Turner said there were several factors that were in his favour that helped soften the commission's penalties against him.
Turner said there's no evidence that Horsley was dishonest, reckless or wilfully blind, but he admitted to being unaware of significant problems that should have been communicated to investors.
Turner also noted that Horsley's co-operation in settling the case will reduce the commission's future costs by avoiding a full-blown hearing. In addition, he has agreed to testify at hearings for other former Sino-Forest senior executives that are scheduled to begin in September.
Five other executives — Allen Chan, Albert Ip, Alfred C.T. Hung, George Ho and Simon Yeung — are accused of lying to investors and misleading investigators by engaging in a "complex fraud scheme to inflate the assets and revenue of Sino-Forest," according to OSC documents.
OSC lawyer Hugh Craig suggested Horsley was unsuited to be the CFO of a company like Sino-Forest, which had most of its operations in China even though it was listed on the TSX and did much of its business in Chinese — which Horsley didn't read or understand.
In addition, Horsley had no prior experience in a forestry company or in a multinational company with significant operations in a foreign jurisdiction.
"He admits that he didn't have what he needed to have to do the job and placed undue reliance on the representations made to him by members of the overseas management," Craig said.
Horsley was present at the hearing Monday, but didn't speak and wasn't addressed directly by Turner. His lawyer, Peter Wardle, said that his client's "sin" was one of "omission" rather than "commission" of a crime.
"No evidence has emerged from staff's lengthy investigation that David Horsley was involved in, or had any knowledge, of any fraudulent scheme carried out by others at Sino-Forest," Wardle said.
Horsley stepped down as chief financial officer at Sino-Forest in April 2012 and parted ways with the company in September 2012. He had joined the company in October 2005, prior to the rapid rise in the value of the company's stock prior to the allegations against it.
From June 2006 to March 2011, Sino-Forest stock soared by 340 per cent — from $5.75 per share to $25.30.
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