At Canadian Fraud News, we review the decisions as they are released by Canadian Courts and then published those which 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.
Fraud Conferences and Events
From June 23 to 28, 2019, the Association of Certified Fraud Examiners Conference was held in Austin, Texas. This conference brought together fraud recovery investigators and lawyers, as well as experts that are ancillary to fraud recover efforts such as accountants, bankruptcy trustees, and journalists. The attendees are from jurisdictions around the world. To view the agenda for the conference and the speaker list, please see: https://www.fraudconference.com/
In this newsletter, we review two civil fraud decisions, a securities commission decision, and a criminal fraud appeal. 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 field. These are our stories.
Borrelli v. Chan, 2018 ONSC 1429 (Judgment Upheld in Canada’s Largest Fraud Case)
On June 24, 2019, the Ontario Court of Appeal upheld the judgment of the litigation trust created to attempt recovery in what is known as the Sino Forest Corporation against its co-founder, CEO, and Chairman of the Board of Directors – one Allen Tak Yuen Chan. After a 48 day trial in 2018, Mr. Chan was found liable for fraud and breach of fiduciary duties that he owed to Sino Forest. The trial judge quantified damages at approximately $2.6M. The trial judge issued a $5M punitive order as well.
The Court of Appeal reviewed all four separate but related frauds that the trial judge held Mr. Chan had engaged in. These frauds were classified as the BVI Model Fraud, the WFOE Standing Timber Fraud, the Wood Log Trading Cash Gap Fraud, and the Wood Log Deposit Fraud. The Court of Appeal also reviewed the correctness of the causation damages analysis, upholding the “but for” causation test applied by the trial judge on the “robust common sense approach.” The Court confirmed that only a contributory cause of damage is sufficient for issuing full damages against a director who breaches his fiduciary duty and perpetrates a fraud on its shareholders. Those damages were calculated on the basis of the difference between the financial position a victim would have been in but for the fraud taking place, and the financial position of the victim as a result of the fraud taking place, including such losses that were not even foreseeable to the victim at the time the fraud was perpetrated.
The Plaintiff Sino Forest Corporation Litigation trust by its trustee Cosimo Borrelli was represented by Robert Stanley of Bennett Jones LLP. A copy of the decision can be found below:
Ontario (AG) v. $163,015.29, 2019 ONSC 3973 (CRIA Forfeiture from police fraud investigation)
On June 26, 2019, the Ontario Superior Court of Justice issued its judgment in an application by the Attorney General acting on behalf of the Civil Remedies for Illicit Activities Office (“CRIA”) where the CRIA sought an order for the forfeiture of $163,000 held in the bank account of a Kamal Sehgal. The CRIA presented evidence linking the funds in the bank account to a Canada Revenue Agency phone scam being perpetrated overseas. Mr. Seghal opposed the application on the basis that he legitimately obtained the funds pursuant to something known as a “Hawala” agreement. The Court held that $142,000 in the account was derived from illegal activities and that Mr. Sehgal had proven that approximately $21,000 was derived from a legitimate source. The Court rejected the credibility of the Hawala argument. The Court ordered that $142,000 be transferred from Mr. Sehgal’s account to the government, notwithstanding that Mr. Sehgal had not been convicted of any offence and those involved in the illegal activity were not identified.
This decision is of interest as it sets out the “flags of fraud” that individuals should be alert to lest they become a dupe for those involved in illegal activities. Mr. Sehgal may have been a dupe for those operating the CRA phone scam, but at a minimum he did not heed the flags of fraud and conduct inquiries regarding the funds in his account. The illegal activities in this case were persons in India calling Canadians and posing as CRA employees making demands for taxes. The Attorney General presented various expert witnesses on the scheme to the Court. After the Attorney General had proven the funds in Mr. Sehgal’s account were derived from this scheme, the onus was on Mr. Sehgal to prove the funds came from a legitimate source. Mr. Sehgal’s evidence was that the funds were derived from a “friend of a friend”. This type of hearsay evidence was rejected by the Court. The Court also rejected Mr. Sehgal’s argument that since he was not proven by the Crown to have been involved in the CRA scheme, he should be permitted to keep the funds in his account. The Court held that Mr. Sehgal did not have good title to property if the property was obtained by crime.
The Attorney General was represented by Sandra Di Ciano of the Ontario Treasury Board. A copy of the decision can be found below:
Gennett Lumber v. Hodgi, Court File No. CV-17-570182 (unreported, June 5, 2019)
On June 5, 2019, the Ontario Superior Court (civil division) ordered $25,000, seized by the Toronto Police pursuant to a search warrant from rogues involved in a credit card scheme, be turned over to the victim.
The plaintiff, Gennett Lumber, issued a civil fraud claim while the criminal fraud proceedings were ongoing. The fraud involved some Ghana-based rogues living in Ontario who convinced bank employees to provide them with the credit card information of unsuspecting bank clients. The rogues used the fraudulently obtained credit card information to purchase various items including hardwood and construction materials from US-based suppliers. After the materials were imported into Ontario, they were quickly sold to local construction companies. The Toronto Police eventually traced the activity to one Mr. Eric Hodgi, and executed a search warrant at Hodgi’s apartment. At the apartment, the Police located and seized over $25,000 in cash. One Mr. Eric Bonsu was arrested along with Mr. Hodgi.
Upon learning of the $25,000 seized by police, Gennett Lumber brought a motion in the civil court to have the cash preserved pending the resolution of the criminal action. Eventually a deal in the criminal case was reached between the Crown and Mr. Bonsu wherein the criminal charges were withdrawn against him. Mr. Bonsu advised the Court that the cash was his. The provincial criminal court judge, without notice to us or knowledge of the concurrent civil proceedings, issued an “order for the disposition of property” that the cash seized by the police be given to Mr. Bonsu. Gennett Lumber brought a motion for possession of the cash to satisfy a civil judgment against his roommate, Eric Hodgi and his confederates. The CRIA took no position. Mr. Bonsu opposed.
At the motion, Mr. Bonsu admitted that at the time he was arrested he advised the police officers that the cash was not his. Mr. Bonsu explained that in Ghana the police would beat anyone who claimed ownership of suspicious amounts of cash, and therefore he lied to the police. Mr. Bonsu alleged that he had earned the cash through legitimate employment. Mr. Bonsu, however, did not provide the Court with any corroborating evidence to support his story. The Court concluded there was a strong circumstantial link between the cash and Mr. Hodgi, insufficient links of the cash to Mr. Bonsu, and a lack of credibility to Mr. Bonsu’s story. The Court not only ordered the Toronto Police to turn over the cash to the plaintiff, Gennett Lumber, to satisfy its civil judgments against Mr. Hodgi, but also ordered full indemnity costs for the motion of $11,000 against Mr. Hodgi, even though he was not in attendance.
The plaintiff Gennett Lumber Company was represented by Norman Groot of the Investigation Counsel PC. A copy of the decision can be found below:
Fauth, Re, 2019 ABASC 102 (securities regulators do not punish, only deter)
On June 24, 2019, the Alberta Securities Commission issued its sanction decision in the matter of Vernon Ray Fauth. Mr. Fauth had been found liable for beaching the Alberta Securities Act provisions related to investor fraud. He created a company known as Fauth Financial Group. He and his company were not licenced, although prior to this fraudulent conduct Mr. Fauth had been registered to sell mutual funds and insurance. Over a period of approximately 10 years, Mr. Fauth raised over $15M from investors with unsecured promissory notes. Investors were told their funds were safe, invested in real estate or secured with mortgages. Meanwhile, Mr. Fauth spent most of the money to pay his family and for personal purposes. The funds were deemed to be a total loss. In other words, the story of Mr. Fauth’s fraud mirrors what is published in many securities cases.
Interestingly, the Alberta Securities Commission went to some length in discussing that the maximum “administrative penalty” under their legislation is $1M no matter how egregious the fraud is. They then went on to say that the purpose of an administrative “penalty” is “not to punish” or to “remediate wrongs done to victims”. Rather, the Commission held that the purpose of their “penalties” is to “protect investors” and “prevent future market misconduct.” The Commission went on to say that the purpose of “penalties” is to achieve “specific and general deterrence” of potential fraud. It seems the Commission might as well refer to their sanction as “administrative deterrence” – as there is no punishment function in the regulatory framework. According to their theory, “punishment” can only be meted out by a judge in the civil or criminal courts.
In determining an appropriate “administrative penalty”, the Commission relied on the factors that the civil and criminal courts often mention. It is worth noting that in civil and criminal cases dealing with punishment, the overarching purpose is specific and general deterrence. For this reason, the Commissions’ long discussion distinguishing “penalty” from “deterrence” seems to be a distinction without a difference. The Commission found there were numerous aggravating factors in Mr. Fauth’s conduct and no mitigating factors. Mr. Fauth engaged in a concerted, long-term deceit and did not make restitution. The Commission reviewed numerous investment fraud sanction decisions, and in the end ordered Mr. Fauth to disgorge (pay to the Commission) approximately $2.5M, issued a $400,000 administrative penalty, and ordered Mr. Fauth to pay $250,000 in investigation costs.
To state its sanctions otherwise, the Commission deemed that approximately $3.15M is sufficient deterrence for defrauding investors of $15M. Accordingly, if Mr. Fauth was to pay the Commission the $3.15M they have ordered, he would have benefited by over $10M. The Commissioned deemed these sanctions reflect the “public interest.” A copy of the decision can be found below:
R v. Imola, 2019 ONCA 556 (Fraud Conviction Overturned for Charter Reasons)
On July 3, 2019, the Ontario Court of Appeal overturned the conviction of Christine Imola for a $530,000 fraud perpetrated on her employer. Ms. Imola alleged Crown misconduct and a breach of her rights pursuant to Canada’s Charter of Rights and Freedoms. The Court of Appeal dismissed the appeal with respect to the alleged Crown misconduct. The Court of Appeal allowed the appeal on the Charter issue on the basis that the trial judge did not allow Ms. Imola to make her application before or during her trial. The Court of Appeal held that the conviction was properly registered against Ms. Imola on the evidence, but ordered a new trial limited to the Charter issue of whether Ms. Imola was denied a right to a trial within a reasonable time frame.
There was no mention of the victim’s rights or interests in this decision. If the Court determines there was a breach of Ms. Imola’s Charter rights, the conviction and sentence will be stayed, and the victim will not receive the benefit of a restitution order. This case, like many before it, demonstrate why fraud victims should not rely on the criminal justice system. All fraud victims are well advised to have their claims issued in the civil courts within the two years from discovery of their loss as permitted by the Limitations Act, 2002, SO c.24.
The Crown was represented by Randy Schwartz. A 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.