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Breaking Fraud Cases October 2019

Breaking Fraud Cases from the Canadian Courts October 2019 – No 1

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.

 

Fraud Conferences and Events

The annual OffshoreAlert Conference was held in London UK this November 11 and 12, 2019. For further information, see OffshoreAlert Conference Europe.

 

Breaking Cases

In this newsletter, we review a jurisdiction motion to have a fraud case held in Canada, an insider trading case where a law firm leaded confidential information, an ill-considered fraud case swept away by a bankruptcy assignment, the extradition of a Canadian to the USA to be tried for fraud, and the sentencing in an identity fraud involving Nigerian organized crime operating in Canada. These are our stories.

Blonde Ambition Investments Inc. v. RJM Ventures LLC, 2019 SKQB 275

Judgment: October 16, 2019, Saskatchewan Court of Queen’s Bench, Counsel William R. Howe for Blonde Ambition Investments Inc.

Issue: Jurisdiction clause to have case heard in the USA if the investment agreement is a prima facie fraud

Blonde Ambitions Investments Inc. discovered that the defendant Richard Meli is the father of Joseph Meli, and that Joseph Meli was the subject matter of US based fraud actions. It seems that the funds of Blonde Ambitions have been lost. The allegations made in Securities and Exchange Commission v. Joseph Meli, et al., No. 17-CV-632 (S.D.N.Y.), was that Joseph Meli ran a Ponzi Scheme. Most of his investors, in that case, lost all or part of their investment money. Joseph Meli was sentenced to 78 months jail and ordered to pay restitution in the sum of $54,000,000.00 USD. Blonde Ambitions alleged that in their action Joseph Meli perpetrated the same kind of fraud on them in Canada that he was convicted of in the SEC action in the USA.

Blonde Ambition commenced their claim in March 2019. The defendants RJM Ventures LLC [RJM] and Richard Joseph Meli [Mr. Meli] did not defend but rather sought an order dismissing or staying the within action against all defendants on the grounds that the Saskatchewan Court of Queen’s Bench was not the appropriate forum in which to try these proceedings. Blonde Ambition Investments Inc. opposed the application and asserted that Saskatchewan was the appropriate jurisdiction for the trial of this matter.

Mr. Meli submitted that in the contract between with Blonde Ambition there was a clause that requires court actions to proceed in the State of Delaware. They submitted that the contract with Blonde Ambition clearly stated that the United States was the appropriate jurisdiction to litigate any disputes. Blonde Ambition complained that the clause is non-sensical. It speaks to “applicable to contracts made and to be performed entirely therein”. Blonde Ambition submitted that the transaction was a fraud and that the jurisdiction of law provision, like the entire contract, should be declared void.

Held: even where a court has the requisite jurisdiction, the court can decline to exercise jurisdiction if there is a more appropriate forum in which to try a proceeding. While the location where the tort occurred may be one factor in the analysis, it does not decide every jurisdiction dispute. The ultimate question is whether there is a clearly more appropriate forum for the hearing of the action.

In this case, it is an obvious and daunting burden for Blonde Ambition to travel to the USA and engage in litigation. The Defendants in the USA sought out the victim in Saskatchewan via telephone.  Blonde Ambition signed the agreement in Canada. The victim funds emanated from Saskatchewan. The Court held that rogues need to understand that contract terms “gained through fraud are never secure”. The Court ruled that Saskatchewan is a more convenient jurisdiction for the case to be heard in as opposed to in the USA.

Costs in favour of the Plaintiffs were ordered in any event of the cause. 

A copy of the decision can be found below:

 

Donna Hutchinson (Re OSC), 2019 ONSEC 36

Judgment: October 23, 2019, Docket: Toronto OSC, Counsel: Matthew Britton for Staff of the Commission

Issue: The difficultly of proving insider trading on those receiving and using confidential information

This proceeding involved allegations of insider tipping and insider trading. Staff of the Commission alleged that the respondent Donna Hutchinson, a former legal assistant at Davies Ward Phillips & Vineberg LLP (Davies), a Toronto law firm, communicated material non-public information (MNPI) about eight potential corporate transactions to her friend, the respondent Cameron Edward Cornish. That was the easy part, as she confessed.

Staff of the Commission further alleged that Cameron Edward Cornish, in turn, communicated some of that MNPI to his friends, the respondents Patrick Jelf Caruso and David Paul George Sidders; and that Cornish, Caruso, and Sidders, while in possession of the MNPI, traded securities of certain of the issuers that were involved in the transactions. This was the hard part.

In 2018, Hutchinson settled the allegations against her. This proceeding continued against Cornish, Caruso, and Sidders. Hutchinson testified at the hearing. Hutchinson was a legal assistant at Davies from 1983 to 2000 and then again from 2003 to 2017. During her time at Davies, Hutchinson worked with lawyers who practiced in different areas, including mergers and acquisitions. Typically, Hutchinson worked for lawyers directly, although for about 14 months during 2012 and 2013 she worked as a floater, covering assistants who were on holidays or sick. Davies terminated her employment in 2017 because of the matters described herein. Hutchinson admitted that she contravened s. 76(2) of the Securities Act by participating in the scheme. She agreed to testify as a witness in this proceeding.

Cornish did not testify. Evidence was lead that at the material times Cornish worked at Brant Securities. He traded securities in Brant’s inventory account. He split any trading profits and losses equally with Brant. During Hutchinson’s three-year break in her employment at Davies (from 2000 to 2003), Hutchinson worked at a bar Cornish owned. She had a personal relationship and lived with him. That relationship ended, but Hutchinson and Cornish have remained friends since then. At one time, Cornish had trading authority in Hutchinson’s brokerage account.

Caruso testified that he met Cornish when they worked together at a securities firm in the early 1980s. Caruso socialized with Cornish outside of work, including with their wives. He met Hutchinson through Cornish, and knew Hutchinson worked for a law firm, but did not know which firm or the practice area in which Hutchinson worked. Hutchinson testified that she met Caruso through Cornish, and that Cornish told her that Caruso traded stock and had money.

Sidders appeared through counsel. He did not attend the hearing. No agreed facts were tendered regarding his background. Evidence in the record established that Sidders worked in the securities industry for over 25 years. In 2005, Sidders opened a trading account at Verdmont Capital Ltd. (Verdmont), a brokerage firm in Panama. In account documentation he completed at the time, Sidders stated that he intended to engage in active day trading, and that he planned to do between 20 and 40 trades per month. Hutchinson testified that she met Sidders through Cornish. Cornish told her that Sidders used to trade stocks.

This case is a long complex decision. It details the elements of insider trading and tipping that a securities prosecutor as to prove. It demonstrates that while convicting the person providing the information may not be difficult, proving a case against persons who allegedly received and used the insider information is difficult, as the available sources of information to those making trades could be from numerous sources.

A copy of the decision can be found below:

 

Sharma v. Sandhu, 2019 MBQB 160

Judgment: October 25, 2019, Docket Winnipeg

Issue: judgment swept away by bankruptcy assignment as the victim issued an ill-considered claim

The applicant sought an order pursuant to s. 178(1)(e) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (”BIA”), that a judgment granted by the court against the respondent is not discharged on the basis that the judgment is a debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation. In essence, the applicant submits that he was induced to make numerous loans to the respondent based on statements that were made by her that are alleged to be false or fraudulent.

The applicant commenced a debt action against the respondent. The claim in the Debt Action was framed as a simple breach of contract. No allegations of fraud or false pretences were made in the pleadings. Since there were no allegations of fraud or false pretences in the Debt Action, the reasons for decision contained no finding relating to the reasons the loans were made or the reasons allegedly given by the respondent as to why she required the loans. Judgment was signed on April 25, 2017. The respondent made an assignment in bankruptcy on May 10, 2017.

The applicant submitted that the bankruptcy system is intended to benefit honest, but unfortunate debtors and the intent of s. 178(1)(e) of the BIA reflects society’s interest in ensuring that dishonest bankrupts cannot use the bankruptcy system to escape the consequences of their wrongful acts. The respondent submitted that when characterizing a judgment for the purposes of s. 178 of the BIA, a court may look at the pleadings and the circumstances that give rise to the judgment and a court should be loath to characterize the judgment based on allegations not made and on facts not pleaded.

Held: a judge is not confined just to the cause of action pleaded in the action that produced the judgment debt. The judge can examine the material filed that led to obtaining the judgment debt, including the facts pleaded in support of the action, any evidence that was presented at the time to secure the judgment debt and any reasons that might have been given.

There are also sound policy reasons for preventing s. 178(1)(d) applicants from seeking to change the foundation for a judgment debt they are seeking to enforce in the bankruptcy. First, it may well be that the claim based on the new foundation for the judgment debt would be statute-barred if advanced on its own. Limitations exist for sound policy reasons. A respondent in a s. 178(1)(d) application should not have to respond to time-barred claims. Moreover, when a lawsuit has been successfully prosecuted based on one cause of action, cause of action estoppel applies to prevent a subsequent lawsuit relating to the same loss being advanced on a different cause of action.

The bottom line: if you want your judgment to survive bankruptcy, you need to have a proper claim drafted by sophisticated fraud recovery counsel. The alleged victim issued a statement of claim that did not allege fraud but only breach of contract. After obtaining a judgment the defendant assigned himself into bankruptcy and had the judgment against him swept away. The alleged victim only had himself to blame for issuing a bad claim.

A copy of the decision can be found below:

 

United States v. Colin Jeffrey Heatherington, 2019 BCSC 1809

Judgment October 21, 2019, Docket Vancouver

Issue: US application In Canadian Courts to extradite Canadian accused of fraud to the USA

Mr. Heatherington was a stock trader at Absolute Capital Management Holdings Limited in Canada. ACMH engaged in penny stock trades to American investors that caught the attention of American regulators. The US alleged that Mr. Heatherington engaged in a cross trading scheme that manipulated and artificially inflated the prices of the securities of 11 US penny stock companies through an offshore hedge fund operating as Absolute Funds. The cross trades created the impression that the stocks were performing well in the market. The US alleged that Mr. Heatherington and others received inflated profits on their investments, plus trading fees and commissions.

The decision focused on whether the offence of fraud as defined in Canada is sufficiently similar to fraud as defined in the US – and more specifically the evidently threshold necessary to prove intent for the purposes of extradition. The Court held that the standard of proof required to establish intent is lower than that required at trial; that the standard required was whether there was sufficient evidence that the accused could be convicted at trial. In the result, Mr. Heatherington was ordered to be extradited to the US to stand trial for fraud.

A copy of the decision can be found below:

R. v. Edugie, 2019 QCCQ 6125

Judgment October 4, 2019, Docket Montreal, Crown Bianca-Catherine Rossi

Issue: Criminal Sentencing – Identify Fraud & Forged Documents

In 1999 Nosa Edugie (“Mr. Edugie”) immigrated to Canada from Nigeria. In 2002 he was granted citizenship in Canada. In 2003 he brought a Nigerian woman to Canada and had children with her. For approximately 15 years he remained off the police radar until his involvement in a $600,000 fraud was made public. On June 11, 2019, he plead guilty to identity theft and forgery. The identity theft charge related to possessing other people’s personal information with the intent to commit fraud. The forgery charge related to possessing false documents with the intent to use them as if they were genuine.

The police alleged that Mr. Edugie was part of a criminal organization led by a “Fred Joseph”. In other words, Mr. Edugie was an organized crime member. The search warrant on Mr. Edugie’s residence revealed that he engaged in the following modus operandi:

  • obtain the victim’s indent information and create a profile sheet with names, dates of birth, address, social insurance number and any other identifier available;
  • create false documents such as identity cards, cheques and pay stubs;
  • inquire with major banks if the victim was a client;
  • designate a “runner” to open accounts at banks where the victim is not a client;
  • the “runner” then deposits counterfeit cheques in the newly opened accounts and withdraws cash or makes cash advances.

This case is an interesting read as the Court gave a lengthy review of the scourge of identity theft that has evolved in the information age. The case is also an interesting read as to why conditional sentences (house arrest) are not appropriate for identity thief rogues, and in particular not for Mr. Edugie. The Court put emphasis on Mr. Edugie’s lack of remorse and his feigned victimization. The Court rejected Mr. Edugie’s submission for a discharge on the basis of a conviction and jail sentence creating travel and border issues, taking him away from his children, and impeding his employment and rehabilitation. The Court held that given Mr. Edugie’s lack of remorse, he was a risk to reoffend. However, for all the tough talk the Court only imposed an 8 month jail sentence and no order for restitution.

The story of Mr. Edugie is similar to what the Court’s often publish in cases dealing with deporting Nigerians who are members of organized fraud syndicates known as Black Axe.  The golden thread through these cases is what the Court referred to with respect to Mr. Edugie as a “lack of introspection” – feigning that he is the victim and having no empathy for the multiple victims whose lives he damages.

A full copy of the decision can be found below:

 

Sponsor

The research and cost to produce this newsletter are 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.