At Canadian Fraud News, we review the decisions as they are released by Canadian Courts and publish those which we believe are of interest to private sector civil fraud recovery lawyers and investigators, as well as public law enforcement, securities regulators, and victims of fraud. The cases we report on are generally not published in the main stream media. We also report on significant events taking place in the fraud recovery community.
Fraud Conferences and Events
From April 27 to 30 2019, the Offshore Alert Conference is taking place in Miami. This conference brings together fraud recovery investigators and lawyers, as well as experts ancillary to fraud recover efforts such as accountants, bankruptcy trustees, and journalists. Approximately half of the attendees are from the Caribbean and United States. The other half of the attendees are from jurisdictions around the world. You can view the agenda for the conference and the speaker list, here.
We would also recommend to our readers attending the Canadian Association of Certified Forensic Investigators (ACFI) 21st Annual Fraud Conference being held April 29 & 30, 2019, at the Ontario Bar Association Conference Centre at 20 Toronto Street, Toronto. The ACFI is a not-for-profit Canadian association of fraud recovery specialists that evolved from the US-based Association of Certified Fraud Examiners (CFEs). To review the speaker list of agenda of topics, please see their website here.
In this newsletter, we review two civil fraud recovery decisions demonstrating risks and scope of bank account freezing orders, a civil fraud appellate decision reviewing the test for knowing receipt of the proceeds of fraud, a Charter application to stay proceedings in a criminal fraud case demonstrating, once again, how ineffective the criminal justice process is for fraud recovery, and a sanctions decision from Ontario’s security commission. These are our stories.
1. Amphenol Canada Corp. v. Sundaram, 2019 ONSC 849 (Motion to Set Aside a Mareva Asset Freezing Injunction)
In a decision dated February 4, 2019, the Ontario Superior Court of Justice (civil courts) dismissed a motion to set aside a Mareva injunction—an asset freezing order—made by the spouse of the primary rogue, but granted the motion and relief to an alleged knowing recipient of the proceeds of the fraud. This decision is important as it demonstrates when a Mareva injunction is too wide in scope such that it actually causes injury to the victim who seeks such an order to secure recovery after judgment.
The primary defendant, Sundaram, was a long-term employee of the plaintiff Amphenol Canada Corp. The Plaintiff alleges that Sundaram used its facilities and its staff to produce and deliver widgets, and that he sold his fraudulently manufactured widgets to a corporation called Sundev Technologies Inc. that he created with his spouse, the defendant Ms. Chandra Devappa. The Plaintiff alleges that it was not aware of Mr. Sundaram’s conduct and did not consent to these transactions to Sundev. Some of these products were sold by Sundev to a company operating under the name of MTech Ltd. The operating mind of MTech Ltd.., Mr. Murugesu, was a friend of Sundaram’s and also a former employee of the plaintiff Amphenol Canada. The alleged value of the fraud was $900,000. Norwich orders, requiring financial institutions to disclose transaction records, which were also issued ex parte (without notice) with the Mareva injunction, were not subject to the motions to set aside the Mareva injunction.
Ms. Devappa, Sundev, and MTech Ltd., through its operating mind Mr. Murugesu, sought to set aside the Mareva injunction on the basis that the Plaintiff had not proven a strong prima facie case against them, and on the basis that there was no real risk that they would liquidate their assets before judgment. The primary defendant, Sundaram, did not bring a challenge against the Mareva injunction—implicitly conceding that the Plaintiff had made out a strong prima facie case against him, and that there was a legitimate risk he would dispose of his assets before judgment. Ms. Devappa denied knowledge of the scheme. The Court however imputed knowledge to Ms. Devappa of the scheme on the basis that she prepared Sundev’s invoices and maintained Sundev’s spreadsheets of income and expenses. The Court also imputed knowledge to Ms. Devappa on the basis that her husband, Sundaram, did not contest the Mareva injunction. The Court therefore maintained the Mareva injunctions against the assets of Sundev and Ms. Devappa personally, other than from income that she received from other sources.
With respect to MTech Ltd., the Court set aside the Mareva injunction on the basis that the Plaintiff had not contested nor cross-examined MTech Ltd.’s affidavit evidence that it was not aware that the widgets it purchased from Sundev were derived from a fraudulent scheme. Accordingly, MTech Ltd. argued, and the Court accepted, that the Plaintiff had not established a strong prima facie case against it. MTech Ltd. further argued that there was no viable risk of dissipation as it had ongoing operations, and because the widgets it received from Sundev were only a small percentage of the products that Sundaram had fraudulently created. The Court agreed and set aside the Mareva injunction as it applied to the bank accounts and assets of MTech Ltd. Review the reported decision of this case below.
2. Amphenol Canada Corp. v. Sundaram, 2019 ONSC 2226 (Costs for a Mareva Set Aside Motion)
In a decision dated April 8, 2019, which follows the decision reported above, the Ontario Superior Court of Justice (civil courts) granted costs in the amount of $14,000 to the Plaintiff forthwith (within 30 days) as against the defendants, Ms. Devappa and her company Sundev, on the basis that the Plaintiff was successful in resisting their motion and on the basis that the Plaintiff had made a reasonable offer. Of greater interest to us, however, the Court ordered the victim / Plaintiff to pay costs of $16,000 to MTech Ltd. because it (the Plaintiff) was unsuccessful in resisting MTech Ltd.’s motion.
This decision of ordering costs against a victim of fraud is important as it demonstrates that the risk a victim of fraud takes in seeking to impose a Mareva (asset freezing) injunction based on a knowing receipt action where the corporate defendant has ongoing operations. Victims of fraud are generally sensitive or displeased when cost orders are issued against them. Courts are generally reluctant to freeze bank accounts of companies with ongoing legitimate operations as the risk of causing damage to operating companies far outweighs the risk that an operating company will not have assets to recover against. This is especially the case where the alleged knowing receipt of fraudulent widgets was only a small part of the inputs a company purchased to use. The Plaintiff was represented by Brendan Wong and Graham Splawski of the law firm Borden Ladner Gervais LLP in Toronto. You can review the reported decision of this case below.
3. Wescom Solutions Inc. v. Minetto, 2019 ONCA 251 (Civil Knowing Receipt Appeal)
In a decision dated April 1, 2019, the Ontario Court of Appeal dismissed an appeal by a secondary defendant, one Gabriel Fung, of a trial court decision which held him liable for knowingly receiving $5M in ill-gotten electronic devices obtained from a fraud perpetrated by the Plaintiff’s controller, the primary defendant, Nadia Minetto. Ms. Minetto obtained the electronics at issue by fraudulently using her employer’s AMEX accounts to purchase them from the Plaintiff’s suppliers. Ms. Minetto then sold the fraudulently obtained electronics for cash to Mr. Fung by way of transactions that took place in parking lots in Toronto-area shopping malls. In this way, Mr. Fung was able to obtain the electronic devices at a significant discount. Mr. Fung denied knowing that the electronics he was purchasing were derived by a fraud being perpetrated by Ms. Minetto. The trial court held that Mr. Fung’s conduct amounted to willful blindness, and that constructive (inferred) knowledge was sufficient to find him liable for the tort of knowing receipt of the proceeds of fraud and breach of trust.
The Court of Appeal held that the trial judge had used an incorrect test to establish willful blindness, but that in applying the correct test, the outcome was the same. The Court of Appeal held that the test for willful blindness is not whether the accused should have been suspicious, but whether the accused was in fact suspicious. The Court of Appeal held that the test for willful blindness is the same in civil and criminal cases, and requires a “subjective focus on the working of the defendant’s mind.” In applying the facts to this standard, the Court of Appeal found that Mr. Fung knew the electronics were probably stolen and that he made a deliberate choice not to investigate. In other words, willful blindness is established when a one fails to make inquiries to satisfy themself that the transaction in which they are participating is legitimate because they do not want to know the truth. Such findings are often based on credibility findings. The plaintiff, Wescom Solutions Inc., was represented by John Russo of Pallet Calo LLP and Mellissa Wright of Theall Group LLP. You can review the reported decision of this case below.
4. R. v. Tashanna Mullings, 2019 ONSC 2408 (Fraud Over $1M Dismissed Based on Charter Grounds)
In a decision dated April 16, 2019, the Ontario Superior Court of Justice (criminal courts) dismissed a criminal fraud prosecution against one Tashanna Mullings on the basis that, upon her arrest and detention pending a bail hearing, she was subjected to a strip search that offended the Canadian Charter of Rights and Freedoms. This decision is important to fraud victims as it demonstrates how risky it is for victims of fraud to rely on the criminal justice process for even consideration for restitution.
Tashanna Mullings was an employee of a major bank working as a credit card specialist at the bank’s call centre. During her employment, she gave confidential credit card information from over 100 credit card holders to persons involved in a significant lumber purchasing credit card scheme. The victims of the fraud were American lumber companies. The value of the fraud perpetrated was over $1M. The bank itself suffered a loss of approximately $30,000, as most of the transactions were charged back to the victim American lumber companies. The police conducted a significant investigation resulting in the arrest of the two operating minds of the scheme, Vincent Dogbatse and Eric Hodgi, and their trucker Samuel Aremu.
Without providing any meaningful analysis on the merits of the charges against Ms. Mullings, the Court stayed the criminal case after hearing the Crown’s case on the basis that the police conducted a strip search of Ms. Mullings at the time she was arrested. The police justified the strip search of Ms. Mullings on the basis that she was being held in general population of a detention centre for a bail hearing, meaning the search was justified for the purpose of preventing weapons from entering a jail or police facility. The police also justified the search on the basis of a search for evidence, being small electronic devices that could be hidden in body cavities. As stated, the Court provided no analysis on the merits of the case against her.
The Court, rather, fixated that strip searches are humiliating, traumatic, and degrading experiences for women, minorities, and abuse victims who sometimes perceive the experience as “akin to sexual assault.” Ms. Mullings was a pregnant black woman. The Court also went on to state that “the mere possibility that a detainee may be concealing evidence or weapons is not sufficient to justify a strip search.” The Court concluded that the strip search violated Ms. Mullings’ Charter rights. By way of remedy, the Court concluded “there is no remedy, aside from a stay of proceedings, that would be capable of adequately addressing the harm to the criminal justice system.”
The Court was dismissive of the interests of the victims. The Court held “while the charges are serious with significant losses to the business and the banks, there is no evidence that this remedy would cause additional difficulties for those parties. The harm to the criminal justice system outweighs the value with carrying on with the case.” The Court did not bother to mention that the fraud would have engaged the aggravated sentencing provisions of the Criminal Code. Nor did the Court discuss the non-fulfillment of the government policy objectives for restitution orders and fine in lieu of forfeiture provisions of the criminal justice system. The Court simply put the value of a strip search—which may have a value of a few thousand dollars as a civil claim—over a +$1M organized fraud scheme.
The takeaway for victims of fraud is that the criminal justice system is not a preferable venue to seek recovery. The civil system should generally be viewed as the primary system to seek fraud recovery. One of the victims obtained judgment against Ms. Mullings through the civil courts before this decision was released. Other victims who did not sue before the expiry of a two year limitation period are now without an avenue for recovery. Reference can be made to Gennett Lumber Company v. Mullings, unreported, Court File No. CV-16-558714. Investigation Counsel PC were lawyers for the Plaintiff.
Due to such strip search defence tactics available to defendants in the criminal courts, use of the criminal justice system should be viewed by fraud victims as something to resort to in “lost cause” fraud cases. It is noteworthy that consideration was not made to balancing the interests of the victim as against that of the accused, for example, by way of a reduced sentence. Rather, the Court imposed further trauma to a fraud victim by punishing the police for what the Court perceived as not following a search policy.
The judge involved in this case was Justice Susanne Boucher. Justice Boucher was a government lawyer before being appointed to the bench in November 2018. As a rather new judge, it is noteworthy that Justice Boucher is the author of a text entitled “Understanding Section 8: Search, Seizure and the Canadian Constitution.” Given the judge’s passion for “search” justice, and a background detached from private fraud recovery efforts, one might reasonably infer that such judges fixate upon the social justice interests of criminals and fail to register the interests of victims, nor how victims may feel poorly served by the criminal justice system. Given such a system, one may question why police and other public investigators to not inform fraud victims that the criminal justice system is not a desirable venue to obtain recovery. The Crown was represented by Jason Gorda. You can review the reported decision of this case below.
5. Re Mountainstar Gold Inc., 2019 BCSECCOM 123 ($150,00 Sanction Penalty for securities fraud imposed where no loss quantified)
In a release dated April 9, 2019, the British Columbia Securities Commission ordered Brent Hugo Johnson, a director of Mountainstar Gold Inc., to pay $150,000 as an administrative penalty as a general deterrent to reinforce the lesson that directors of other public issuers should refrain from fraudulent conduct similar to his own. This decision is helpful in civil fraud recovery cases as it discusses the basis of liability as against rogues who are acting as directors of corporate entities to perpetrate their frauds.
Mountainstar raised over $6.4 million from investors from 2011 onward to fund its payments to an entity referred to as “L” under the option agreement. The Securities Commission found that Johnson did not obtain independent legal advice regarding L’s ownership and that he failed to recognize the conflict of interest with respect to this transaction. As CEO, Johnson also failed to cause Mountainstar to conduct the due diligence procedures that would reasonably be expected of public issuers in connection with significant acquisitions. These due diligence procedures would enable a public issuer to confirm title to and the nature of assets being acquired as well as, among other things, the accuracy of public disclosure relating to the acquisition. The Commission also found that Johnson’s lack of fitness to be a director or officer was further exemplified by his failure to disclose in Mountainstar’s MD&A a Chilean court decision material to Mountainstar’s interests on the basis that he regarded the decision to be wrong. The Commission found that this was a blatant failure by Johnson to understand and comply with regulatory disclosure requirements, and a failure in the integrity and honesty required of those who serve as directors and officers of public issuers.
To justify its sanction, the Commission held that accurate and timely disclosure of material information is fundamental to the operation and integrity of capital markets. As an officer and director of Mountainstar, Johnson occupied a position of trust and responsibility. Ensuring compliance with regulatory disclosure requirements is a critical aspect of the role of those appointed as directors or officers of publicly-listed issuers. The seriousness of the misconduct in this case was exacerbated by the repetition of the false or misleading disclosure over a three-year period. It is reasonable to infer that material false or misleading disclosure regarding a publicly-listed issuer’s key project and principal asset causes harm to investors. In this case, it is unlikely that investors would have invested in Mountainstar had Johnson disclosed the truth of the company’s operations. Although in this case there was no specific evidence of the amount of the loss to investors, given the fundamental nature of the false or misleading disclosure, it is reasonably likely that such losses were significant. Further, Johnson had neither admitted to wrongdoing nor understood the seriousness of his misconduct. This points to a need for a significant measure of specific deterrence. The sanctions we impose must be sufficient to ensure that the respondents and others will be deterred from engaging in similar misconduct. You can review this decision below.
The 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.