$10.8M settlement against disgraced Chinese manufacturer OK’d by Ontario court

LONDON, Ont.—An Ontario court has approved three settlements valued at $10.85-million in a class-action lawsuit filed in 2011 against Zungui Haixi Corp., auditors Ernst & Young LLP and several underwriters involved in the Chinese footwear maker’s initial public offering.

The IPO raised $39.8-million and led to its shares being listed on the TSX Venture Exchange.

The approved settlements resolve the claim filed by two Zungui Haixi investors who alleged the IPO prospectus and some disclosures by the manufacturer of sportswear and casual footwear were false or misleading.

The settlements end the dispute but aren’t admissions of liability, wrongdoing or fault since all the defendants deny the allegations.

The settlements approved by the Ontario Superior Court of Justice call for Zungui to pay $8.1-million, Ernst & Young to pay $2-million and underwriters CIBC World Markets, Canaccord Genuity, GMP Securities and Mackie Research Capital to pay $750,000.

The court also awarded legal fees, expenses and taxes with interest totalling $2.81-million that will be paid before the remaining $8.04-million settlement is distributed to class members.

Legal fees totalling $2.25-million represent about 20.75 per cent of the gross $10.85-million settlement.

Eligible investors who acquired Zungui shares between Aug. 11, 2009, and Aug. 22, 2011, who haven’t opted out of the settlement by the Aug. 7 deadline must apply for compensation by Jan. 6.

The amount distributed will depend on several factors, including how many people make a claim.

Several people or groups are excluded from making claims, including the defendants and their families, subsidiaries, officers, directors and anyone who acquired Zungui shares in exchange for shares in Southern Trends International Holding Company Limited for work done on the IPO.

The law firm of Siskinds LLP represented plaintiffs Jerzy Zaniewicz and Edward Clarke.

The Ontario Securities Commission conducted hearings in July into allegations of shortcomings by Ernst & Young in its audits of Zungui Haixi.

The regulator claimed that the auditors failed to sufficiently heed “multiple red flags” about the revenue and earnings of the disgraced Chinese manufacturer and retailer.

The OSC stopped trading in the company’s shares in September 2011 after E&Y suspended an audit and advised the company’s audit committee that an independent investigation was warranted.

Subsequently the company’s chairman, Fengyi Cai, and the chief executive, Yanda Cai, were permanently barred from trading securities in Ontario, with the OSC saying they had “demonstrated from their conduct that they are fundamentally ungovernable.”

The OSC also permanently prohibited both from becoming or acting as directors or officers of any publicly traded company in the province.

They were also ordered to pay $63,667 in costs to the commission.