Settlement offer tabled in long- running Castor Holdings real estate case
19 January 2015

A glimmer of hope has emerged in one of Canada’s longest-running and most contentious legal cases.

A settlement offer has been tabled in the 23-year-old case involving $1.5-billion of negligence claims filed against Coopers & Lybrand Chartered Accountants over its audit of failed Montreal real estate company Castor Holdings Ltd., which collapsed in 1992. Castor provided high-yield mortgage loans to developers, but was accused of grossly overstating its revenues and loan portfolio in its financial statements to investors.

Representatives of Coopers & Lybrand have proposed to pay $220-million to resolve all outstanding claims alleging negligence in its duties as Castor’s auditor, saying that continuing the court battles will leave no money for anyone. The money would come in part from remaining Coopers & Lybrand assets and from contributions by former partners of the audit firm.

Former Coopers & Lybrand partner Michael Macey said the litigation has been “calamitous” for all the parties involved.

In an affidavit filed in court in December, Mr. Macey said 275 partners of the audit firm are facing financial ruin from Castor Holdings claims, even though most had nothing to do with the Castor audit. He said the claims could total an average of $5-million per audit partner.

“If a resolution cannot be reached, the continuation of the prolonged Castor litigation may ultimately force many of the remaining defendant partners to file proposals or assignments in bankruptcy,” Mr. Macey said.

Coopers & Lybrand merged with Price Waterhouse in 1998 after the Castor Holdings case was under way, but a separate company remained behind to hold the remaining assets of Coopers & Lybrand and manage the litigation against it.

Chrysler Canada Inc., which is one of the largest creditors with claims against Coopers & Lybrand, is opposing the settlement proposal. Chrysler’s employee pension plan was an investor in Castor Holdings, and the firm has a $433-million outstanding claim against the auditors.

In a legal filing earlier this month, Chrysler said it was not appropriate for the Coopers & Lybrand numbered company to file for bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA) in December as a strategy to manage the settlement process. Chrysler said CCAA legislation should not be used to shield former audit partners from their liabilities.

Chrysler said the Coopers & Lybrand group delayed the court cases against it for years with a “scorched earth” litigation strategy, using up much of its insurance money that could have gone to claimants.

“To grant discretionary relief under the CCAA in the particular circumstances of this case would be to reward the conduct of the former partners as defendants who over the past 22 years have delayed the inevitable,” the Chrysler motion says.

In a ruling last week, however, Justice Frank Newbould of the Ontario Superior Court rejected Chrysler’s objection and upheld a December decision allowing the Coopers & Lybrand numbered company to seek CCAA protection.

Justice Newbould said plaintiffs representing 71 per cent of the value of the claims against Coopers supported the CCAA filing, while Chrysler represents the remaining 29 per cent of the value of the claims.

He said the other creditors – which include a group of Canadian and German banks – argued in court that they believe the time is now ripe to resolve the case and they have seen a change in attitude a new committee of Coopers & Lybrand partners, giving them hope a settlement deal is finally possible.

“Whether the banks are correct in their judgments and whether they will succeed in this attempt remains to be seen, but they should not be prevented from trying,” Justice Newbould wrote in his Jan. 12 decision.

While 96 different parties launched negligence cases against Coopers & Lybrand over the Castor audit, 56 of the cases have been settled or discontinued over the years, leaving 40 still outstanding.

Only one case – involving claims by the estate of deceased businessman Peter Widdrington – was concluded in court following a lengthy trial, with a Quebec judge ruling in 2011 that Coopers & Lybrand was negligent for its poor audit work.

The decision was expected to serve as a basis to resolve all other outstanding claims, but lengthy trials have been scheduled for remaining claims because they had specific issues that must determined beyond the scope of the Widdrington decision.

Auditors negligent in Castor Holdings collapse, judge rules
The Globe and Mail
Bertrand Marotte
15 Aprirl 2011

A Quebec Superior Court judge has ruled that the auditors for a real-estate-investment company at the centre of a $1.6-billion financial collapse were negligent, ending a 12-year legal battle by investors in Montreal-based Castor Holdings Ltd.

“The whole team at our firm feels incredibly exhilarated,” said Mark Meland of Fishman Flanz Meland Paquin LLP, one of the lead lawyers acting for the investors in Castor, which collapsed in 1992.

“It’s a big, big win.”

Despite the epic length of the case, which is believed to be the longest trial in Canadian history, Friday’s ruling is not likely to be the last word. Prior to the result, both sides said an appeal was expected, no matter who won.

The Castor litigation, which is also believed to be the largest auditors’ negligence case in Canada, could end up having broader implications for the auditing profession across the country.

Many shareholder lawsuits against auditors don't get very far because of previous court decisions that auditors can’t be held professionally responsible for misrepresentations by clients, said Toronto-based forensic accountant Al Rosen.

Friday's decision may help bolster the case for auditors' responsibilities in situations where fraud or other financial irregularities occur, he said.

“I hope it wakes up the rest of Canada, but I'm not expecting any immediate change,” he said. “Perhaps it will encourage lawmakers to pass tougher legislation.”

Castor was the creation of German-Canadian businessman Wolfgang Stolzenberg, who is on the RCMP’s wanted list for alleged fraud and believed to be living in Germany.

Following the collapse, a group of investors – including major European banks, Chrysler Canada Inc.’s pension fund and two Canadian credit unions – filed lawsuits totalling about $1-billion against Coopers & Lybrand, Castor’s auditor, allegedly it failed to properly audit the company.

Their case has dragged on for more than 16 years, 12 of them in court, and included the filing of more than 18,000 exhibits.

In a hefty 752-page decision released Friday, Madam Justice Marie St-Pierre of the Quebec Superior Court ruled that Coopers & Lybrand failed to perform its professional services as auditors, in accordance with generally accepted auditing and accounting standards.

She said Coopers & Lybrand also issued “faulty opinions” concerning Castor’s financial situation.

“This outcome is disappointing for our clients,” said Yvan Bolduc of Heenan Blaikie LLP, a member of the legal team acting for the defendants. He did not rule out an appeal.

“We’re studying [the decision] and when we are done, we will make the appropriate recommendation to our clients.”

Judge St-Pierre’s judgment relates directly to one investor’s case, that of Peter Widdrington – the former chief executive officer of John Labatt Ltd. and chairman of the Toronto Blue Jays baseball club – who died in 2005, when the trial was in its seventh year. The Widdrington ruling sets out the common issues and is binding on other pending actions brought against Coopers & Lybrand by other investors in the Castor fiasco.

The judge ruled that Mr. Widdrington suffered damages as a direct result of negligence on the part of Coopers & Lybrand and ordered that his estate be compensated $2.7-million plus court costs and interest.

The judgment concluded that Castor’s audited financial statements for 1988, 1989 and 1990 were materially misstated and misleading, and that Coopers & Lybrand periodically issued other faulty opinions on its financial position from 1988 to 1991.

The findings of professional negligence are applicable to and binding in respect of the other pending actions against Coopers & Lybrand, which add up to more than $1-billion, according to Mr. Meland.

Mr. Meland, who was present on the first day of the trial back in September of 1998, said it’s gratifying that such a long and arduous legal journey has ended with a win that essentially upholds all of the principal positions put forward by the plaintiff.

Among the reasons the trial – which comprised two proceedings – took so long were the difficulties of gathering evidence from dozens of Castor offices in Canada and abroad, plus an interruption when the presiding judge underwent heart surgery and subsequently had to be replaced.

EY agrees to $10 million settlement with New York

The Lawyers Weekly
By Jeff Buckstein
17 July 2015 issue

Accounting firm Ernst & Young’s United States office has agreed to pay New York state $10 million (all figures U.S.) to settle a civil lawsuit in connection with EY’s audit of Lehman Brothers Holdings Inc. prior to the investment bank’s decision to file for bankruptcy in 2008.

While the amount ultimately paid was only a fraction of the damages initially sought, the settlement will have major ramifications for auditors, say experts.

“After many years of costly litigation we are pleased to put this matter behind us, with no findings of wrongdoing by EY or any of its professionals,” EY spokesperson John LaPlace said.

The lawsuit, originally for more than $150 million in damages, was launched in December 2010. New York State alleged that “E&Y substantially assisted Lehman … engage in a massive accounting fraud, involving the surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet in order to create a false impression of Lehman’s liquidity, thereby defrauding the investing public.”

John Coffee, a professor at Columbia University Law School in New York City, predicted that what he termed “a large settlement against an accounting firm” will resonate throughout the profession.

His view was echoed by Janne Chung, an associate professor of accounting with York University’s Schulich School of Business in Toronto.

“In spite of this settlement being only $10 million [compared to $150 million], auditors should still be looking over their shoulders, and making sure they cross their T’s and dot all their I’s,” she said.

top  contents  appendix  previous  next