At Canadian Fraud News, we review the decisions as they are released by Canadian Courts and then publish those we believe are of interest to private sector civil fraud recovery lawyers and investigators, as well as public law enforcement, security regulators, and victims of fraud. The cases we report on are generally not published in the mainstream media. We also report on significant events taking place in the fraud recovery community.
In this newsletter, we review three civil fraud decisions, a securities commission decision, and a criminal fraud sentencing. For the reasons set out below, we are of the view that all of these cases are relevant to fraud victims, and investigators and lawyers in the fraud recovery community. These are our stories.
Favretto-Post v. Fontana, 2019 ONSC 4487 (Summary Judgment for Fraud Denied due to Limitations Period Defence)
On July 24, 2019, the Ontario Superior Court of Justice dismissed a motion for summary judgment by the plaintiff victim. The allegation was that the plaintiff, Ms. Favretto-Post (the “Plaintiff”) transferred $150,000 to the fraudster Anna Maria Fontana (“Fontana”) in exchange for a promissory note. The funds were to be used to set up a restaurant. Instead, Fontana gambled the money away. The Court dismissed the motion for summary judgment because the Plaintiff failed to provide the court with damages evidence that was sufficiently “clear and cogent”. The Court ordered a trial to determine the appropriate damages.
What was more interesting was Fontana’s motion for summary judgment based on a limitation periods defence. On September 27, 2010, the Plaintiff transferred the $150,000 to Fontana. In March 2012, Fontana defaulted on payments to the Plaintiff. In August 2012, Fontana declared bankruptcy. On January 16, 2017, the criminal courts convicted Fontana. She was given a two-year conditional sentence (house arrest) and a restitution order of $150,000 with terms to pay $500 per month during the conditional sentence and the remainder thereafter from the proceeds of the sale of her family home. If Fontana did not sell her home during the first 9 months of her conditional sentence, a fine in lieu of forfeiture would be imposed to incarcerate her for the remainder of her sentence: R. v. Fontana, 2017 ONSC 2964. On November 3, 2017, over five years after Fontana defaulted in repayment, the Plaintiff commenced her civil action.
The Plaintiff submitted that she was not out of time because Fontana made a payment towards her debt as part of her restitution payments. The Plaintiff referred the Court to s.13(1) of the Limitations Act, 2002, which provides that if a person acknowledges liability for a claim of a liquidated sum by making a payment, the limitation clock is reset. Fontana argued the limitation clock was not reset because the payments pursuant to the criminal restitution order were involuntary. Both the Plaintiff and Fontana advised the Court this is a novel legal issue. The Court held that there was an insufficient record to decide the issue, and that since the damages issue would need to be decided in any event, summary judgment was not warranted. There was also a fraudulent conveyance issue to be resolved.
The Plaintiff was represented by sole practitioner Michael McKee. A copy of the decision can be found below:
Malcolm Silver & Co. et al. v. State Farm Insurance, 2019 ONSC 4264 (Insurance Coverage Denied for Employee Fraud)
On July 15, 2019, the Ontario Superior Court of Justice dismissed an action brought by a corporation against their insurer for coverage as a result of a $1M employee bookkeeper fraud. The employee was Gwendolyne Martinez (“Martinez”). Between 2013 and 2017, Martinez forged cheques and made unauthorized ABM withdrawals from her victims’ bank accounts.
Martinez did not defend a civil action and plead guilty to fraud in related criminal proceedings. Malcolm Silver & Co. made a claim for coverage to State Farm under the “forgery and alteration” endorsement of their policy. State Farm provided coverage for forged cheques but denied coverage for unauthorized online bank transactions which Martinez made to pay off her credit cards.
The Court held that online banking is not mentioned in the forgery and alteration endorsement, and on this basis, denied coverage. The Court held that the ambiguity respecting online banking was not sufficient to bring it within the contra proferentem principle which would favour a broad interpretation of an unclear coverage provision. The Court noted that it was surprising that this form of fraud had not been litigated before.
The victim, Malcolm Silver & Co., was represented by Stephen Schwartz of Chaitons LLP. It is unknown if this decision has been appealed. A copy of the decision can be found below:
Churchill v. Aero Auction Sales Inc., 2019 ONSC 4766 (Oppression Remedy to Obtain Personal Liability)
On August 13, 2019, the Ontario Superior Court of Justice issued a default judgment imposing personal liability against a Michael Duns (“Duns”) who was the sole director, officer, and shareholder of the defendant Aero Auction Sales Inc. (“Aero Auction”) based on an oppression remedy pursuant to s.248 of the Ontario Business Corporations Act, RSO 1990, c. B.16 (the “OBCA”).
The allegations made was that Duns terminated the employment of the plaintiff, Ms. Churchill (“Churchill”) at Aero Auction, and withheld her wages. As a result, Churchill became a creditor of Aero Auction. About a year after the termination of Churchill, Aero Auction ceased operations and all of its assets were transferred to another company. The oppression allegation was that Duns directed the winding-up of Aero Auction to defeat Churchill’s employment claim. The Court held that it is well established law that a creditor of a company has status to bring an application for an oppression remedy, and that a former employee is a creditor for the purposes of the OBCA.
The problem for Churchill was that Duns transferred all the assets out of Aero Auction to avoid paying Churchill her back wages. Duns was motivated to do so because not only was Churchill an employee, she was also his ex-common law wife and they had three children together. The Court held that a claim for oppression can pierce the corporate veil when it is shown that the officers of a company depleted its assets to render it immune to judgment in favour of a creditor.
The damages aspect of this case was somewhat remarkable. Although the general damages for outstanding wages and vacation pay were only $16,000, the Court ordered $75,000 in aggravated damages on the basis that Churchill was terminated in bad faith, and because of false allegations made by Duns that Churchill had quit. The Court found that Duns made the false allegations that Churchill quit in retaliation for issues that arose in their family law case.
The interesting aspect to this case for our purposes is that conduct short of fraud was found to be sufficient to pierce the corporate veil of a closely held company. Katherine Chau of the firm Van Kralingen & Keenberg LLP were counsel for the plaintiff. A copy of the decision can be found below:
Canadian Manu Immigration et al., Re, 2019 BCSECCOM 255 (Motion to Vary Sanctions Issued by Regulator)
On July 22, 2019, the British Columbia Securities Commission (the “Commission”) rendered its decision in response to a request by Paul Se Hui Oei, the operating mind of Canadian Manu Immigration & Financial Services Inc. (“Manu Immigration”), to review and vary its decisions on liability and sanctions against them and two related companies. This case is of interest as it was not an appeal, but rather based on an application suggesting the Commission misapplied the evidence.
In 2018, the Commission had found Mr. Oei liable for securities fraud. The quantum of the fraud of Manu Immigration and two related companies was approximately $10M. In addition to the usual market involvement prohibitions, Mr. Oei was personally ordered to pay the Commission $4.5M as an administrative penalty and make a disgorgement payment of $3M. Mr. Oei’s company, Manu Immigration, was ordered to pay a $1M administrative penalty and make a disgorgement payment of $3M.
Mr. Oei argued his request to vary the findings of liability and sanctions on the basis that the Commission had erroneously concluded Mr. Oei had the mens rea to commit fraud. Mr. Oei had obtained approximately $13M from investors under the pretense that it would be used to fund the start-up costs of a company operating under the name of Cascade. The Commission found that Mr. Oei had used approximately $8M of the $13M for the operations of Cascade, and had used the remaining $5M for his own personal and other unauthorized purposes. Mr. Oei alleged that the investors knew that this $5M was his commission for raising the funds.
The Commission held that s.171 of the British Columbia Securities Act provides that the Commission may revoke or vary, in whole or in part, a decision that it had previously made where it considers that to do so would not be prejudicial to the public interest. The Commission noted that s.171 is not a mechanism by which its decisions can be appealed, and that appeals of its decisions are to be made to the British Columbia Court of Appeal. Rather, applications under s.171 must be based on new and compelling evidence or a change of circumstances such that it is in the public interest to vary the liability findings and / or the sanctions.
The Commission dismissed the application of Mr. Oei and his Manu Immigration company on the basis that the application essentially was an attempt to re-litigate the original hearing. The original hearing took 12 days and involved 3,500 exhibits. The investors were found to be credible witnesses. The mens rea of Mr. Oei was established using the civil test to a standard of the balance of probabilities. There was no public interest in varying the outcome of the case.
A copy of the decision can be found below:
R. v. Auckbaraullee, 2019 ONSC 2498 (House Arrest Despite not Disclosing Conspirators)
On June 13, 2019, Justice Garton of the Ontario Superior Court of Justice issued a conditional sentenced (house arrest) to Ms. Anissah Auckbaraullee for her role in an $80,000 fraud that she perpetrated on her employer, the Ontario Hospital Association. This case is of interest as it involved a breach of trust where incarceration generally applies but was not imposed even though Ms. Auckbaraullee did not disclose who received the benefit of the stolen funds.
Ms. Auckbaraullee was born and raised in Mauritius, East Africa. When she was a teenager, her father arranged her marriage to a Muslim man who originated from Mauritius but was already living in Canada. Ms. Auckbaraullee had two children with her husband. She eventually left him because he was an alcoholic and abusive. Ms. Auckbaraullee never applied for Canadian citizenship. Yet somehow, through all of this, she became an accounts payable clerk at the Ontario Hospital Association (ie. a position of trust within a governmental organization).
The fraud itself was of a standard variety. Cheques were made payable to six businesses that had not provided services to the Ontario Hospital Association. When the accounting discrepancy was discovered, the OHA hired David Perry and Ron Wretham of the investigative firm, Investigative Solutions Network (“ISN”), to interview Ms. Auckbaraullee. She denied any wrongdoing. The Crown called as witnesses other OHA employees who could have had the opportunity to issue the fraudulent cheques. The case was entirely circumstantial. Of note, the Crown did not call the operating minds behind the six businesses that received the cheques. In any event, based on circumstantial evidence, the Court concluded that it was only Ms. Auckbaraullee who could have issued the fraudulent cheques: see R. v. Auckbaraullee, 2018 ONSC 5545.
With respect to sentencing, the Crown sought 12 to 18 months imprisonment. The Crown opposed a conditional sentence on the basis that an $80,000 fraud involving a breach of trust was a “large scale fraud albeit on the lower end of the category”. The Crown submitted that general deterrence was the most important factor and that conditional sentences should be rare and only granted where there was compelling circumstances. Here, there Ms. Auckbaraullee made no guilty plea, did not disclose who here conspirators were, and did not made restitution payments.
The Court accepted that the $80,000 internal fraud was a “large scale fraud” involving a breach of trust, and that generally speaking, incarceration was required for general deterrence purposes. The Court, however, did not impose incarceration on the basis that Justice Garton felt that the “empirical evidence of the deterrent effect of incarceration was uncertain” and because house arrest can provide “significant deterrence if sufficient punitive conditions are imposed.”
Ultimately, it appears that the Court did not impose incarceration where it should have been imposed because Ms. Auckbaraullee is not a Canadian citizen. If a non-Canadian is sentenced to a term of imprisonment of six months or more, he or she will not have a right to appeal a removal order. Pursuant to the Immigration and Refugee Protection Act, S.C 2001, c.27, a permanent resident may be ordered to be deported upon conviction for the offence of Fraud Over $5,000. According to the Supreme Court of Canada decision in R. v. Pham, 2013 SCC 15, immigration consequences are to be taken into account when sentencing a convicted fraudster.
In the end, Ms. Auckbaraullee was issued a sentence of two years less a day of house arrest, with full access to television, internet and visitors, and access to go into the community for various reasons (somehow this is seen as comparable to incarceration). A restitution order was issued despite the loss being covered by the OHA’s fidelity insurer. It appears the fidelity insurer wished to subrogate against Ms. Auckbaraullee and did so by requesting a restitution order which has slim-to-no chance of ever being paid.
The story of Ms. Auckbaraullee’s fraud does not appear on a Google search. Maybe it will by the publication of this case review. The Crown was represented by Michael Lockner. A full copy of the decision can be found below:
The research and cost to produce this newsletter is sponsored by the civil fraud recovery law firm Investigation Counsel PC. At Canadian Fraud News, we welcome receiving cases from lawyers and others involved in the fraud recovery industry who feel their cases should be published, as well as sponsorship or assistance in creating this publication.
Marina Burghard writes for Canadian Fraud News about fraud-related cases, whistleblower, jurisdiction, identity theft, consumer protection, etc. – essentially about scams and how to protect yourself against this kind of fraudulent criminal behavior. She holds a Master’s degree in Political Science where her interest in criminology grew. Besides fraud, Marina’s scientific interest lies in terrorism, extremism and how to deal with it as a society.