Breaking Fraud Cases November 2019

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Breaking Fraud Cases from the Canadian Courts November 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 Offshore Alert Conference is being held in Miami this April 19 to 21, 2020. For further information, see OffshoreAlert Conference Miami.

 

Breaking Cases

In this newsletter, we review decisions from two Mareva injunction set-aside motions. These are most instructive to those involved in fraud recovery. We also review two criminal sentencing and a securities sentencing decision. These are our stories.

Voysus Connection Experts Inc. v. Shaikh, 2019 ONSC 6683

Judgment: November 20, 2019
Counsel: Larry Keown for the Plaintiff

Issue: Mareva Set-Aside Motion; regarding the use of unlawfully obtained evidence

In April 2019, the Plaintiff, Voysus Connection Experts Inc. (”Voysus”), commenced an action against the Defendants, who are all former employees of the Plaintiff, alleging fraud, conspiracy, breach of fiduciary duty, breach of trust, unjust enrichment and conversion. The claims are based on two alleged fraudulent schemes.

The defendant, Tayyab Shaikh, was an employee of Voysus from 2010 to 2019. By 2018, Tayyab was the Chief Operating Officer for Voysus. The defendant, Anisha Shaikh, was employed by Voysus holding the position of Operations/Contact Centre Manager. Tayyab and Anisha are spouses. They were married in 2018. The defendant, Afira Saleem, also known as Afira Shaikh, is Tayyab’s sister and worked as a Training and Quality Assurance Manager at Voysus. All of the other defendants are alleged to be related to either Tayyab or Anisha.

Voysus alleges that Tayyab, Anisha and Afira conspired to defraud Voysus by hiring 9 admitted “Family Member Defendants” and 9 “Alleged Family Defendants” as employees and putting them on the payroll even though they performed little or no work for Voysus. Voysus alleges that in order to conceal the fraud, Tayyab and Anisha instructed the Family Member Defendants and Alleged Family Defendants not to log into Vocalcom, the software system used to log hours for Voysus employees. 

On May 24, 2019, Myers J. granted an ex parte Mareva injunction restraining the Defendants, Tayyab Shaikh and Anisha Shaikh (together, the “Defendants”), from dissipating the proceeds of the sale of their home, until the return of the motion on notice to them (the “Mareva Order”). In his endorsement, Myers J. found that Voysus had alleged a solid basis to support an inference of dissipation, and that there would be little harm in restraining the proceeds, since the order was narrowly tailored and the motion was to return quickly.

On August 14, 2019, the hearing was adjourned to November 5, 2019 (the “Mareva Motion”). On that date, Voysus also brought a motion to strike documents and records produced by the Defendants that they rely upon in response to the Mareva Motion. The basis for the Plaintiff’s motion to strike is that the disputed evidence constituted confidential information which Tayyab obtained unlawfully, allegedly in violation of either s. 184 (prohibited recordings) or s. 342.1 (theft) of the Criminal Code, R.S.C. 1985, c.C-46 (the “Criminal Code”) or in breach of fiduciary duties owed to Voysus.

The Court held that even if the Defendants obtained the confidential documents illegally, illegally obtained evidence is generally admissible in a civil dispute, if it is relevant. The Court did not address whether the Defendants have violated ss. 184 or 342.1 of the Criminal Code, but did comment that she had serious doubts as to whether Voysus would be able to establish any violation, and that in any event, the allegedly illegally obtained evidence had little relevance on the motion.

The Court held that Voysus demonstrated a strong prima facie case for the purposes of extending the Mareva injunction. The Court, however, held that Voysus had failed to make full and frank disclosure on the original ex parte motion, and on that basis, refused to continue the Mareva injunction. The Court also held that there was insufficient risk of dissipation of assets to support the continuation of the injunction.

Of note, the original Mareva injunction restrained the Defendants use of $142,367.13. This sum represented the proceeds of the sale of the property, which were held in trust by the Defendants’ real estate lawyer. Mareva injunctions result in significant legal costs. This is the lowest quantum we have seen in a Mareva injunction motion in the cases we have reviewed. The cost decision, in this case, has not yet been published.

A copy of the decision can be found below:

 

D.S.B. Systems Ltd. v. Kastem Security Solutions Ltd., 2019 ONSC 6576

Judgment: November 14, 2019
Counsel: David Seed for Plaintiffs

Issue: Mareva Set-Aside Motion; no risk of dissipation

On August 16, 2019, the Court granted the plaintiffs’ ex parte motion for a Mareva injunction to prevent the defendant, Dino Bauco, from disposing of his assets in the face of litigation brought by the plaintiffs. At a return date on August 22, 2019, the defendants requested a set-aside motion. The set-aside motion was scheduled for November 4, 2019. Upon hearing submissions by counsel, the Court set aside the Mareva injunction.

The plaintiffs, Mr. Beltrame and his company D.S.B. Systems Ltd., commenced this action on February 26, 2019, seeking damages for breach of contract of employment, breach of confidence, misuse of confidential information, breach of fiduciary duty and misuse of corporate resources. The Statement of Claim alleges that Mr. Bauco incorporated the company Kastem Security Solutions Ltd. to compete with the plaintiffs, downloaded the plaintiffs’ customer lists and corporate information, and was actively competing with the plaintiffs while still employed by them. It is also alleged that Mr. Bauco erased thousands of emails from the plaintiffs’ computer in order to hide evidence that he was actively competing before May 2018.

The defendant was served with the Statement of Claim in March 2019. The plaintiffs discovered that Mr. Bauco and his wife (who is also Mr. Beltrame’s daughter) listed their residence at 12 Mary Agar Court in Nobleton, Ontario for sale on March 20, 2019. The real estate agents are Mr. Bauco’s cousins. Mr. Beltrame was concerned that the house was being sold by Mr. and Mrs. Bauco in order to liquidate their assets as a first step to hiding or dissipating them in order to judgment-proof themselves. The plaintiffs, therefore, brought an ex parte motion for a Mareva injunction.

At the ex parte motion to obtain the Mareva injunction, the Court was persuaded that the plaintiffs had proven a prima facie case of fraud. Upon hearing submissions from the defendants at the set-aside motion, the Court was not persuaded that a prima facie case of fraud was proven. At the ex parte motion to obtain the Mareva injunction, the Court was persuaded there was a genuine risk of dissipation of the defendants’ assets. Upon hearing submissions from the defendants at the set-aside motion, the Court was not persuaded the plaintiffs had proven such a risk. Rather, the Court held that it is exceedingly unlikely that Mr. Bauco will dissipate his assets so that he, his wife and their three children will be left without any place to live.

Costs were not adjudicated in this endorsement. This case demonstrates the high risk nature of a plaintiff bringing a Mareva motion and why a cost-benefit analysis should be made before moving forward with such a motion. In this case, the Court held that “[a]s is often the case, the Mareva injunction was vacated because counsel for Mr. Bauco persuaded the court to view the facts relied on by the plaintiffs from a different perspective, and put before the court facts that would not have been known to the plaintiffs when the motion was originally brought in August.”

A copy of the decision can be found below:

 

Re Kitts, 2019 ABASC 173

Judgment: November 12, 2019

After a seven-day hearing, the Alberta Securities Commission found that Brian Arthur Kitts (“Kitts”) and Vesta Capcorp Inc. (“Vesta”, and together with Kitts, the “Respondents”) contravened s. 93(b) (now s. 93(1)(b)) of the Securities Act (Alberta) (the “Act”) by engaging in a course of conduct consistent with an investment fraud Ponzi scheme: Re Kitts, 2019 ABASC 91 (the “Merits Decision”). Vesta raised approximately $4.3 million and US$850,000 from identifiable investors during the relevant time period. These investors were repaid approximately $2.8 million and US$450,102. The Respondents obtained $1,960,457 from the securities fraud scheme.

In its reasons for sentence, the Alberta Securities Commission held that sanctions orders are not meant to directly punish respondents for their misconduct but are instead aimed at prospectively protecting individual investors and fostering confidence in the integrity of the capital market. Specific deterrence (preventing a particular respondent from engaging in future misconduct) and general deterrence (discouraging others from engaging in similar misconduct) are proper considerations in formulating a sanctions order, provided it is proportionate and reasonable for each respondent.

While fraud is among the most serious of contraventions of Alberta securities laws, Ponzi schemes are a particularly sinister type of fraud because those lucky enough to get in at the beginning do in fact earn the promised returns, and lend the credibility to the scheme that it needs in order to lure investors.

The Alberta Securities Commission held that the Respondents’ misconduct was egregious. The repayments of principal and purported returns that were made to Vesta’s initial investors lent an air of legitimacy to the Respondents’ scheme and enabled them to lure new investors and assuage existing investors. This predatory conduct prolonged the fraud and allowed Kitts to misappropriate investor funds for unauthorized purposes, a substantial portion of which went directly to his and his spouse’s personal use.

Kitts had pled no contest to criminal charges relating to securities fraud and theft in the State of Utah and he had been sanctioned by the Utah Securities Commission for securities-related infractions. He has since been sentenced to imprisonment on four counts of securities fraud and theft. Such misconduct apparently involved the making of misrepresentations to investors in the course of offering securities to raise funds for two companies, proceeds of which he used, in part, for his personal benefit. Rather than accept responsibility for his conduct, Kitts absconded and embarked on a new fraud in Canada and elsewhere in the United States.

Kitts has developed a pattern of securities misconduct and is seemingly an unrepentant recidivist. Although the Utah proceedings did not involve a Ponzi scheme, Kitts’ misconduct there was similar to that here inasmuch that he deceived investors and misappropriated their money. He continued his fraudulent capital-market activity in Alberta in the face of regulatory sanction and criminal proceedings elsewhere, thus flouting our securities laws. The heightened risk posed by his conduct mandates stiff sanctions that will convey to Kitts, and others with a history of securities-related misconduct, that recidivist behaviour will not be tolerated.

The Alberta Securities Commission stated the public interest requires nothing less than the complete and permanent removal of the Respondents from the capital market. While market-access bans are an important component to an overall sanctions order, it is not sufficient to achieve the necessary specific and general deterrence required. Effective deterrence also requires a disgorgement order that prevents the Respondents from retaining the significant financial benefits they obtained from their misconduct, along with an administrative penalty to ensure that they bear a direct and proportionate cost for their contravention of Alberta securities laws.

The Alberta Securities Commission held that the Respondents were required to disgorge $1,960,457 to the Commission for repayment to the investors, pay an administrative penalty of $600,000 and pay costs of the investigation and the hearing of $150,000 on a joint and several basis. There is no record of a criminal proceeding or payment by Brian Arthur Kitts. Without incarceration or recovery, this judgment is of little practical value.

A copy of the decision can be found below:

 

R. v. Richard Chandroo, 2019 QCCQ 6845

Judgment: November 7, 2019, Docket: C.Q. Qué. Montréal 500-01-071480-120 

Issue: Criminal fraud sentence $43,000 of ‘moderate’ importance

The accused, Richard Chandroo (“Accused”), forged documents and absconded with a portion of an estate left by his late grandparent for the benefit of him and his family members. The Accused reimbursed part of the loss suffered: $25,000 out of $43,600. On a guilty plea, the Court imposed a period of imprisonment of 15 months on the count of fraud and 10 months on the count of using a forged document, both sentences to be served concurrently. The Court rejected a conditional sentence (house arrest) request, and ordered the Accused into custody.

The Court held that the offence of fraud is objectively serious. The circumstances of the offence were also subjectively serious: the evidence demonstrated lengthy and minute planning and premeditation by the Accused over a period of more than a year, using a number of fraudulent means, the whole solely motivated by greed and cupidity on the part of the Accused. The evidence shows no other motive, only greed, and cupidity.

Various factors enable the Court to assess the intrinsic responsibility of the Accused in cases of fraud. These facts can be summarized as follows: (1) the nature and extent of the loss, (2) the degree of premeditation found, notably, in the planning and application of a system of fraud, (3) the accused’s actions after the commission of the offence, (4) the accused’s previous convictions, (5) the personal benefits generated by the commission of the offenses, (6) the authority and trust existing in the relationship between the accused and the victim, as well as (7) the motivation underlying the commission of the offenses.

Where these factors point to fraudulent wrongdoing with no indication of mitigating circumstances, the Courts prefer incarceration as the means of protecting society and of general deterrence, and expressly rejected consideration of rehabilitation. Of note, the Court held that the nature and extent of the loss ($43,600) – the “original” loss before reimbursement by the Accused, can be qualified as a “fraude d’importance modérée” – a fraud of moderate importance.

A copy of the decision can be found below:

R. v. Tran, 2019 ONCA 919

Judgment: November 22, 2019, Docket: CA C62622
Counsel: Kevin Rawluk, for the Crown

Issue: False invoices for services not performed

After a trial that spanned more than 70 days, the appellant was convicted of two counts of fraud over $5000 (Criminal Code, R.S.C. 1985, c. C-46, s. 380(1)(a)), two counts of fraud under $5000 (s. 380(1)(b)), one count of attempting to obstruct justice (s. 139(2)), one count of forgery (s. 366(1)(a)), and one count of causing someone to use a forged document (s. 368(1)(b)). She was sentenced to 14 months in jail. She appeals her convictions. 

The appellant held herself out as a qualified health care provider. She performed and billed for services that she was not qualified to perform (i.e., massage and acupuncture). The appellant billed her clients’ insurance companies for services that she never performed. She submitted false claims for some of her clients’ spouses and children who had never attended the clinic. If an insurance claim was denied, the appellant would often report the client’s unpaid bills to a collection agency. She sued two of her clients for refusing to pay.

The appeal from conviction was dismissed. The appellant originally appealed her sentence. However, she made no submissions on the issue and the sentence has long since been served. The appeal from sentence was dismissed as moot. The quantum of the loss and the length of sentence were not reported.

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.