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Breaking Fraud Cases from the Courts May 27, 2019

 

At Canadian Fraud News, we review the decisions as they are released by Canadian Courts and then publish 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 is taking place in Austin, Texas. This conference brings 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. You can view the agenda for the conference and the speaker list, here.

Breaking Cases

In this newsletter, we review three civil fraud decisions, a securities commission decision and a criminal fraud sentencing decision. 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.

1. Grabenheimer v. Lala and Leadgency Inc., 2019 ONSC 2811 (punitives where plaintiff is also a defendant)

In a decision dated May 3, 2019, the Ontario Superior Court of Justice (civil courts) granted punitive damages to the plaintiff, Grabenheimer, even though he had been a defendant in other proceedings with the same defendant, Lala. Remarkably, Grabenheimer was also granted aggravated damages for anxiety.

The plaintiff, Grabenheimer, issued a claim against his business partner Punit “Peter” Lala alleging that Lala had misappropriated funds from their business partnership operating under the name The Lead Boutique. This was a marketing company. Lala took care of the partnership’s finances and had access to its bank accounts. During the course of operating The Lead Boutique, Lala represented to Grabenheimer that profits generated by The Lead Boutique were poor. Eventually, Grabenheimer reviewed the bank statements of The Lead Boutique and discovered it had been profitable and that Lala had been diverting much of the profits to his own private bank account. Grabenheimer also discovered that Lala had established a company called Leadgency which was operating in competition to The Lead Boutique.

The Court held that Lala was liable for what he had misappropriated. The more difficult issue was computing damages. Grabenheimer sought damages based on “waiver of tort”, being a disgorgement of profits obtained by Lala from operating the competing business, as opposed to simply the liquidated loss being the amount of the funds that Lala removed without authorization from the accounts of The Lead Boutique. The Court held that waiver of tort damages were analogous to damages for unjust enrichment, and that the Court was not prepared to award such damages when a defendant, such as Lala, did not respond to the motion for judgment.

The Court also considered Grabenheimer’s breach of fiduciary duty allegation and the claim for disgorgement of profits as an equitable remedy. The Court held that the breach of fiduciary duty claim had been proven by the nature of his partnership with Lala, but again declined to award damages for the profits Lala had obtained through his competitor company. Rather, the Court held that it was more appropriate to address a potential disgorgement of profits through an award of aggravated and / or punitive damages. The Court held that Grabenheimer had proven some anxiety and depression, and ordered $50,000 in aggravated damages.

The most interesting aspect of this case was Grabenheimer’s claim for punitive damages. The Court held that Lala’s conduct was deliberate and outrageous, and that accordingly a punitive order was appropriate. In terms of quantum, the Court held that due to Grabenheimer’s vulnerability to Lala, a proportionate amount for Lala to pay Grabenheimer was an additional $50,000.

Interestingly, there was no mention in this decision of the action of Infolink v. Grabenheimer, Lala and The Lead Boutique (Court File No.: CV-16-548878), wherein Grabenheimer was accused of participating in Lala’s fraudulent activity. In that case, Infolink only moved for and obtained judgment against Lala and The Lead Boutique for the tort of deceit. The Lead Boutique is the same business that Grabenheimer admitted he and Lala were partners in until discovering Lala was misappropriating funds. In other words, the Court awarded Grabenheimer damages for anxiety and depression for falling victim to fraudulent conduct despite a prior decision holding Grabenheimer had also acted fraudulently.

In the Reasons for Judgment in Infolink v. Grabenheimer et al., the Court held that Grabenheimer and Lala entered into a scheme against Infolink to divert business from Infolink to their partnership, The Lead Boutique. Grabenheimer entered into a settlement with Infolink. Yet, in Grabenheimer’s case against Lala, the Court still granted him a punitive order despite his participating in similar conduct with Lala against his own former employer Infolink. The judgment in the Infolink case was not published. The unpublished Reasons for Judgment in Infolink v. Grabenheimer can be found below.

 

Counsel for Grabenheimer was Jamie Spotswood of the law firm Clyde & Co. in Toronto. The reported decision in Grabenheimer v. Lala and Leadgency Inc., 2019 ONSC 2811, can be found below.

2. Scotia Mortgage Corp v. Pang et al, 2019 ABQB 312 (immigrant mortgage fraud liability)

In a decision dated May 1, 2019, the Alberta Court of Queen’s Bench (civil division) granted the defendant Pang’s motion for indemnification and judgment against his mortgage fraud accomplices. The case is of interest to fraud recovery lawyers as it deals with the liability of a “straw purchaser” in a mortgage fraud scenario.

The plaintiff, Scotia Mortgage Corp., sued the defendant Pang based on a mortgage agreement. Scotia Mortgage later sued a number of others, including a Ms. Reema Ashraf and a Ms. Nazmie Abuid, based on information from Pang that they were responsible for orchestrating the mortgage fraud and for recruiting Pang to be their straw purchaser. Pang settled his litigation with Scotia Mortgage and then claimed against Ashraf, Abuid and others. A trial was held to determine whether the defendants Ashraf and Abuid should be held jointly and severally liable to indemnify the defendant Pang.

The story goes that Pang, then 24 years old and working as a youth and family counsellor, met the defendant Ashraf who led him to believe he could help out immigrants who did not otherwise qualify for a mortgage by applying for one in his name and having the immigrant assume the mortgage a few months later, after he made the initial mortgage payments. For his role in the scheme, he would receive $3,000. Ashraf obtained Pang’s credit report and directed him to a lawyer for the document signing.

At this point, the defendant Abuid took on a central role. Abuid took Pang to see the lawyer. After the property was purchased in Pang’s name, he received his $3,000 from Ashraf, and he had made the first three months of mortgage payments. Pang did not live in the residence. Then Ashraf and Abuid stopped sending Pang funds to make the mortgage payments. Scotia Mortgage demanded payment from Pang. Pang panicked and called a private investigator and lawyer.  Pang learned that it was Ashraf’s family who was living in the home, and that signatures on the Scotia’s agreement documents were not his own.

Pang settled with Scotia Mortgage and then brought action against Ashraf and Abuid for indemnity. The Court held that Scotia was a victim of a mortgage fraud, and that Pang was liable for the fraud. The question was whether Ashraf and Abuid, who had no direct contact with Scotia, were also liable. Ashraf and Abuid denied any liability. The Court found that Ashraf and Abuid were the masterminds in the scheme to fraudulently obtain a mortgage from Scotia. The question then was did they defraud Pang.

The Court held that Pang’s case of fraud against Ashraf and Abuid was also proven. The question then was whether Pang’s fraudulent conduct raised the issue of ex turpi causa sufficient that as a matter of public policy Pang should not be permitted to recover against them. According to the doctrine of ex turpi causa, a person should not be permitted to pursue a legal remedy if it arises from their own illegal act.

The Court held that Ashraf and Abuid had a responsibility of proving that Pang’s conduct should prohibit his claim against them. The Court held that if Pang had intended to defraud the bank or was wilfully blind in defrauding the bank then the doctrine of ex turpi causa would bar his action against Ashraf and Abuid. But if Pang was merely negligent or innocently duped by Ashraf and Abuid, then the doctrine would not bar Pang’s claim against them. In the circumstances, the Court held that although Scotia Mortgage was a victim of mortgage fraud, Pang’s conduct was mere negligent, and not fraudulent, and that the doctrine of ex turpi causa did not bar judgment for Pang as against Ashraf and Abuid. The Court granted complete indemnity as against Ashraf and Abuid for what Pang owed to the bank.

Pang was represented by Brad Findlater of the law firm Anderson James McCall of Calgary. The reported decision in Scotia Mortgage Corporation v. Pang, 2019 ABQB 312 can be found below.

3. Sekerbank T.A.S v. Arslan and Al-Katib, 2019 SKQB 119 (continuing a preservation order)

In a decision dated May 3, 2019, the Saskatchewan Court of Queen’s Bench dismissed a fourth attempt by the defendants to revoke a preservation order granted to the Plaintiff. This case is of interest to fraud recovery lawyers as it addresses the usefulness of preservation orders in multi-jurisdictional litigation.

In its action, the Plaintiff Sekerbank asserted that a transfer made by the defendant Arslan to the defendant Al-Katib of shares in a non-party corporation was a fraudulent conveyance or a fraudulent preference. After discovering the transfer, a preservation order was issued pursuant to the Enforcement of Money Judgments Act, SS 2010, c.E-9.22. The order prohibited the Defendants from dealing further in the shares pending the result of the Plaintiff’s claim against the defendant Arslan in Turkey, and the resolution of the Saskatchewan action.

Saskatchewan’s Enforcement of Money Judgments Act contains statements as often seen in Mareva injunction litigation. The Act provides that if the preservation order is not granted, the enforcement of a judgment against a defendant is likely to be partially or totally unenforceable as a result of transfer, dissipation, destruction, or concealment of an asset by a defendant. The Act provides for release of some of the preserved assets for ordinary living expenses, legal expenses, and expenses to carry on a business. The Act further provides for a defendant to bring a motion to vary or revoke a preservation order.

The Defendants moved to have the preservation order revoked on the basis that the Plaintiff did not prosecute its action in Turkey in a timely manner. The Court held that there appeared to be merit to the Plaintiff’s action in both Turkey (without commenting on Turkish law) and in Saskatchewan, and accordingly the prima facie case to try part of the test had been met. The Court further held that while it was not required to wait until a result in Turkey was issued, there was insufficient evidence that the Plaintiff was not pursuing its action diligently in Turkey or in Saskatchewan. Further, there was insufficient evidence of prejudice to the Defendants if the order was continued. The motion was dismissed.

The Plaintiff was represented by Peter Bergbusch of Miller Thompson LLP in Saskatchewan. The reported decision in Sekerbank T.A.S v. Arslan and Al-Katib, 2019 SKQB 119 can be found below.

4. R.v. Davatgar-Jafarpour, 2019 ONCA 353 (criminal sentencing for fraud in Canada)

In a decision dated May 2, 2019, the Ontario Court of Appeal upheld multiple convictions against Morteza Davatgar-Jafarpour (“Jafarpour”) for fraud, use of forged documents, and conspiracy to commit fraud, but overturned his sentence. This decision is of interest to fraud victims as it demonstrates how little value there is in pursuing retribution against a fraudster through Canada’s criminal justice system, and why seeking retribution through a punitive order in the civil courts is often of greater value to fraud victims.

Mr. Jafarpour was the former executive director of the Settlement and Immigration Services Organization (“SISO”), a government-registered non-profit organization that provided services to new immigrants through various governmental programs. SISO received 80% of its funding from the federal government through the Department of Citizenship and Immigration Canada (“CIC”).

Mr. Jafarpour and another SISO employee, Mr. Ahmed Salama, carried out a large scale multi-year fraud scheme by having SISO submit false information to CIC seeing reimbursement for expenses they had not incurred or paid. The severity of the fraud was not precisely quantified by the trial judge, but was held to be over $2M. Approximately $450,000 was recovered despite Mr. Jafarpour’s attempts to conceal his wrongdoing. SISO employed approximately 150 employees. When the fraud was discovered, SISO was assigned into bankruptcy and all of its employees were laid off. Mr. Jafarpour paid himself a significant salary while he continued to perpetrate his fraud.

Mr. Jafarpour was convicted by a jury after a full and lengthy trial. Yet, for all of his fraudulent conduct, the trial judge only imposed a sentence of two years incarceration. The trial judge held that a mitigating factor against a lengthy sentence was that Mr. Jafarpour had “a difficult and brutal experience in leaving is former homeland.” The Crown appealed, submitting that a proper sentence would be a six year jail sentence.  It should go without saying that embezzling government money earmarked to help newcomers to Canada is a very bizarre way of showing gratitude for being admitted into Canada and then serving in a position of trust.

The Court of Appeal held the two year jail sentence was “demonstrably unfit” as it departed, without reason, from the range of sentences for the type of fraud that Mr. Jafarpour perpetrated.  In other words, the Court of Appeal did not buy into the “former brutal homeland” justification for committing frauds in Canada. The Court of Appeal held that the trial judge’s sentence did not reflect adequate general deterrence and denunciation – which are reflected in the length of jail sentence imposed. The Court of Appeal imposed a sentence of four years’ incarceration.

Mr. Jafarpour then submitted that since the appeal took more than two years to come to the Court of Appeal, and given that he was already released from his two year prison sentence, and given that he declared himself rehabilitated, that he should not be required to serve the further two years for general deterrence and denunciation purposes. Ironically, an immigrant who committed a fraud on the Canadian immigration system declared himself rehabilitated without repaying what he stole.

Notwithstanding that the Court of Appeal held that it was Mr. Jafarpour who contributed to most of the delay in the appeal being heard, the Court accepted his submission, holding that further incarceration could be harmful for Mr. Jafarpour’s rehabilitation. The Court noted that Mr. Jafarpour had only served 8 months of the two year sentence before being granted full parole, and that he would again be out on full parole shortly. So as a final result, an 8 month jail sentence without any restitution being paid, is the result of a $2M+ fraud using a not-for-profit organization to perpetrate a fraud on the government.

A take away for tax payers and fraud victims is that the criminal justice system often leaves the complainant disappointed. There is no mention in this decision of Mr. Jafarpour being required to pay back the over $1.5M that was not recovered. In other words, Mr. Jafarpour exchanged 8 months of liberty for escaping a debt of $1.5M – which of course is far more than he could have legitimately earned in those 8 months. Some may be of the view that a civil judgment with a punitive order would be a greater punishment than that imposed through the criminal system. The Court of Appeal’s decision in R. v. Davatgar-Jafarpour, 2019 ONCA 353, can be found below.

5. Re Dominion Grande, 2019 ,BCSECCOM 150 (liability findings related to mortgage corporation fraud)

In a decision dated April 30, 2019, the British Columbia Securities Commission found the DominionGrand II Mortgage Investment Corporation (“MIC II”), and its directing minds David Scott Wright (“Wright”), Donald Bruce Edward Wilson (“Wilson”) and Patrick K. Prinster (“Prinster”), liable for securities fraud. The decision is insightful into a common problem with private mortgage investment corporations: the unauthorized use of funds raised under false advertising of secured transactions in mortgages. This decision also demonstrates the snail’s pace that securities investigation and litigation moves at.

In a Notice of Hearing dated June 15, 2017 (two years ago), the prosecutors at the BC Securities Commission alleged that between June 2011 and August 2013 (at least five years ago) MIC II and its directing minds Wright, Wilson and Prinster raised approximately $600,000 from 19 investors and a further $500,000 from another 21 investors through a company referred to as MIC III — in other words, the mortgage corporations raised $1.1M from 40 investors.

As in most securities fraud decisions, the Commission pointed out that the criminal test for fraud, as set out in R. v. Theroux, is appropriate to rely on to prove fraud under section 57(9) of the BC Securities Act because the Act does not contain a definition for fraud. As the Act does not provide for jail sentences, and as compelled examinations can be obtained by the Commission from the respondents, the standard of proof for securities offences is the “proof on a balance of probabilities” as opposed to the “proof beyond a reasonable doubt” standard. The evidence relied upon was the respondents’ own documents and evidence as well as complaints from the MIC II investors and the Commission’s investigations.

The primary issues litigated were what representations were made and whether those representations were dishonest or deceitful. The prosecutors alleged that the marketing materials of MIC II represented that the funds provided by investors would be used for mortgages secured by real estate. The respondents strenuously submitted that the investors were buying shares of the mortgage corporation, and that the agreement permitted MIC II to use the invested funds for purposes related to the business of the corporation – whatever those purposes may be.

The decisions discusses at length the wording of the marketing materials of MIC II, and their offering memorandum, as to the use of investor funds. The bottom line was that, although the marketing materials and offering memorandum did represent that investors were buying shares and some funds could be used for business expenses, these issues did not negate the primary relevant representation that the majority of the invested funds would be used to invest in mortgages secured against real property.

Another useful finding in this case is that although the advertising and offering memorandum did inform the investors that the investment was risky, this did not excuse the fact that the respondents used the funds for purposes entirely different than it represented. The respondents’ failure to disclose that investors’ funds would only be placed in mortgages after MIC II hit a certain level of investments, or that investor funds would be used for start-up costs of the corporation, was not accepted. The Commission used the “reasonable investor” test, and held that the investors did not sign on for this risk. This conduct was dishonest and fraudulent.

With respect to the individual respondents, the Commission held that the directing minds of MIC II can be held personally liable for the acts of the corporation (reference section 168 of the BC Securities Act). The individual respondents were responsible for creating the corporation’s marketing materials and operating the its bank accounts (moving money where it should not have gone), and accordingly they were individually responsible for the fraudulent acts of the corporation MIC II. The Commission’s decision in Re DominionGrand, 2019 BCSECCOM 150, can be found below.

Sponsor

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.