Articles of Interest – Page 3

Useful Quotes to Use on Motions for Mareva Injunctions

Our firm is engaged in motions to trace and freeze assets on a daily basis. Over 90% of our cases involve fraud recovery issues, and in most cases we consider or bring motions for what are referred to as Norwich (asset tracing) and Mareva (asset freezing) orders. As a result, we monitor the Court’s decisions continuously on developments in the law as it applies to these issues.

As a result of our monitoring the evolving law on tracing and freezing motions, our firm has published various blogs on this critical aspect of fraud recovery litigation in Ontario and Canada including:

A Fraud Victim’s Motions to Freeze Their Money (2013)^[1]
A Fraud Victim’s Response to a Fraudster’s Motion to Access their Money (2013)^[2]
What Fraud Victims Should Know About Freezing Orders (2014)^[3]
Stand and Deliver Norwich Orders (2017)^[4]
Criminal Funding Rights Override Victim Mareva Recovery Rights (2019)^[5]
Mareva (Asset Freezing) Injunctions in the COVID-19 Era (2020).^[6]

In days of old, the Courts referred to Norwich orders and Mareva injunctions as “extraordinary” orders. The modern reality is that these orders are quite common place in fraud recovery cases – and so they should be. To the extent that Mareva injunctions are “extraordinary”, this comment applies to other forms of civil litigation.

This blog is published as a result of some new 2020 decisions on Mareva injunctions. But before getting to those, we provide fraud victims with our favorite decision that elevated the use of Mareva injunctions in Ontario. It was the 2018 Divisional Court case of 2092280 Ontario Inc. v. Voralto Group Inc., 2018 ONSC 2305, where the Court held:

Fraud is a serious crime which threatens unwitting victims with substantial and often devastating financial losses. The Mareva injunction is an important tool for Plaintiffs to try and recover their losses due to fraud or theft. A requirement to notify the perpetrators of a fraud in advance of an impending Mareva injunction would significantly water-down an important remedy for protecting innocent victims.

Judgments for damages cannot reasonably be expected to be affordable or collectable against fraudsters. If funds cannot be frozen in advance, a vital arrow in the civil law’s quiver to address serious fraud will be lost.

In July 2020, in the case of Ndrive v. Zhou, 2020 ONSC 4568, a judge from the Superior Court of Justice in Barrie held:

It is difficult to overstate the importance of a Mareva injunction in civil proceedings. While not all civil actions involve the recovery of money from an opposing party, a great many do. And while many defendants in civil proceedings are entities for which payment of a judgment is, if not routine, then certainly common place (to wit insurance companies, municipalities, banks and large corporations), there are just as many or more entities for which the payment of a judgment might prove ruinous, or at the very least, quite devastating financially.

For that reason, making oneself “judgment proof” by putting personal or corporate assets beyond the reach of potential judgment creditors has been a feature of the civil litigation landscape for as long as civil judgments have been rendered. The Mareva injunction is a tool designed to address the problem posed when a defendant utilizes the time lag between a claim being prosecuted and a plaintiff’s attainment and execution upon a judgment to divest itself of assets which would otherwise be available to satisfy that judgment in whole or in part.

A preservation of assets order, also known in commercial parlance as a “freezing order”, is thus of great utility. It is often the only means by which to preserve exigible assets where other forms of security for payment of a judgment such as liens, charges, cautions or guarantees are unavailable.

In this case, it is clear from the evidence to date that [the defendant] was able to transfer funds quickly and fluidly to and from a number of accounts. Some of these accounts were in his name; some were in the name of the corporate entity which he controlled; some were located outside of this jurisdiction. This landscape was complicated by the fact that both the source and the destination of many of these transfers remained undisclosed.

The ability and propensity on the part of the defendant to transfer funds was central to the court’s ultimate decision to grant the Mareva order.

In a January 2020 decision in Crawford v. Standard Building Contractors Limited., 2020 ONSC 687, the Superior Court of Justice in Kingston held:

The Courts must provide an enforceable [Mareva] remedy in situations [where fraud is proven] until a determination on the merits has been made.

Context is important in all cases involving Mareva injunctions. Mareva injunctions are granted more readily when the victim appears vulnerable and has come to the Court with clean hands. Where the plaintiff in a fraud action has also engaged in seedy conduct, the Courts may not grant the discretionary and equitable remedies of freezing an asset to recover against after judgment is issued. If they are initially granted, the Courts may not continue a Mareva injunction if a defendant exposes material facts that a plaintiff should have known would have been relevant to a rogue’s defence and raised if they were at the original ex parte motion. A summary of the three cases cited above makes this point:

2092280 Ontario Inc. v. Voralto Group Inc., 2018 ONSC 2305 (April 17, 2018)

In or around January 2016, the defendants, Andy Patruno and Steven Sardinha, the operating minds of the defendant Voralto Group Inc., approached Ahmad Kheir, a director and shareholder of the plaintiff 2092280 Ontario Inc. (“280 Ontario”). During the course of those discussions, Patruno and Sardinha represented that Voralto was a landscaping company and that they wanted to lease a portion of the plaintiff’s property to park Voralto’s landscaping trucks and temporarily store clean landscaping topsoil for use in landscaping projects.

Sardinha had a public record of fraud convictions and therefore executed the lease agreement on behalf of Voralto using the false name “Steve Silva” so that the plaintiffs would not become aware of his criminal past. Following signing of the lease, the defendants illegally dumped 1,500 truckloads of industrial waste on 280 Ontario’s property. Voralto never paid rent to 280 Ontario. Although the lease of the property in Grimsby, Ontario required Voralto to insure the property against environmental contamination, one day after delivering the certificate of insurance to the plaintiffs, Voralto cancelled the policy without telling them.

On August 2, 2017, some 18 months after the lease was signed, the plaintiffs issued their notice of action. On September 1, 2017, a Statement of Claim was filed but not served. On November 6, 2017, the plaintiffs brought an ex parte motion for the Mareva injunction to freeze assets of Voralto, Patruno, Sardinha and Patruno’s spouse.^[7]

The original motion judge opposed the plaintiff’s motion. The judge held that Mareva injunctions have to be brought immediately upon a fraud victim learning of their loss, and that in cases where so much time, any motion to freeze assets should be brought on notice to the rogues.

The plaintiffs argued that the timing of the motion did not matter, and a motion for a Mareva injunction ought to proceed without notice to the defendants because unless assets are frozen before a Statement of Claim is served, “there is very little point in proceeding with an action against alleged fraudsters as victims cannot reasonably expect there to be any assets remaining if the perpetrators are given notice of such a motion.”

The Divisional Court agreed that the timing of when a Mareva injunction was brought is not a factor in determining whether the injunction should be granted. It held that the purpose of proceeding without notice is to “obtain an order before those responsible for a fraud become aware of the action so that if the assets are then dissipated, the dissipation can be remedied through the contempt powers available to a court.”

The Court further held that because of the recognized need to grant Mareva orders on a without notice basis, Mareva orders have their own internal protections including a requirement that if granted, the motion must be returnable within 10 days on notice to the defendants affected so that any objections they raise can be considered by the Court.

To balance the perceived unfairness of tying up a defendant’s assets before a Court has rendered judgment, plaintiffs are required to give an undertaking relating to any damages suffered by any defendant affected in circumstances where an improper freezing order has been issued. Plaintiffs must also meet the very high burden of proof in the test for a Mareva injunction. Plaintiffs also bear the extraordinary burden of full and frank disclosure of their own case, as well as disclosing any evidence they have that would support the other sides likely case.

The Divisional Court in Voralto found that the defendant Steven Sardinha had a history of engaging in and being convicted for illegal dumping and other fraudulent or illegal activity. The plaintiff had also made a criminal complaint and the police had charged both Patruno and Sardinha with numerous counts of criminal fraud arising out of their activities in this matter. The Court therefore found that the plaintiff had met the high burden of proof of fraud.

Ndrive v. Zhou, 2020 ONSC 4568 (July 27, 2020)

The Ndrive case, heard in July 2020, is another helpful case in describing the necessity to freeze assets pending judgment where fraud can be proven to an irrefutable level when an action is first issued. This decision issued reflected the cost phase rendered after a Mareva motion was brought and then was later contested by the defendant.

Prior to May 2020, the plaintiff Ndrive Navigation Systems Inc. (“Ndrive”) and the defendants Si Zhou (“Zhou”) and his company Aguazion Inc. (“Aguazion”) were litigating a dispute by way of private arbitration. Funds were placed in an account to be held pending the resolution of the arbitration. At some point, the defendant Zhou transferred funds out of that account, and the plaintiff resorted to the Court system to trace and preserve the funds that were to be held pending the outcome of the arbitration.

On May 6, 2020, the Court in Barrie granted a Mareva injunction after an ex parte hearing. On May 22, 2020, the Mareva injunction was renewed and extended on consent. Based on the record before the Court, it held that the ability and propensity on the part of Zhou to transfer funds was central to the Court’s ultimate decision to grant the Mareva order.

On June 19, 2020, a motion was heard to extend the Mareva. The defendant Zhou opposed this motion. The Court held that in his quest to end the Mareva injunction, the defendant Zhou gave false evidence which unnecessarily lengthened and complicated the proceedings. It appears from the decision that the Court extended the Marevasubject to some variations of the original order.

As a result of Zhou’s deceitful conduct during his motion to set aside the Mareva, the plaintiff sought costs of $108,445.75 on a substantial indemnity basis against Zhou his company, Aguazion Inc., for the plaintiff’s initial Mareva motion and Zhou’s subsequent motion to set it aside.

The plaintiff submitted that the defendants must have reasonably expected to face costs of the magnitude sought considering the defendants’ own claim for substantial indemnity costs in their counterclaim; the time, effort and expense spent by the Defendants in opposing the two motions; the suggestion that Zhou had incurred $75,000 in responding to the two motions; and Zhou’s statement that he was incurring legal costs of $2,500 per day.

The Court held that the plaintiff was successful in achieving most of the relief it was seeking on the motions, and accordingly it was presumptively entitled to costs of both motions. It is against the backdrop that the Court made the following important quote for use by victims of fraud generally:

The Court held that the first Mareva order was issued on consent and included a clause that costs would be payable in the cause. For this reason, the Court held costs should be assessed on a partial indemnity scale. The Court issued a cost order of $31,000 inclusive of taxes and disbursements payable in the cause (when the action resolved).

The Court held that the second Mareva order was contested and lengthened as a result of Zhou submitting highly misleading evidence for the purpose of deceiving the plaintiff and the Court in respect of important issues. The Court held that substantial indemnity costs were appropriate in these circumstances. The Court fixed costs of the second motion inclusive of HST plus disbursements at $52,415.07 payable within 30 days. The Court gave Zhou the option of paying these costs from the funds that were supposed to be held for the arbitration.

Crawford v. Standard Building Contractors Limited., 2020 ONSC 687 (January 31, 2020)

In July of 2019, a fire destroyed the home of the plaintiffs, the Crawford family. The plaintiffs were forced to move into a trailer on the property together with their infant child. Their insurance company responded to their claim and allowed them to rebuild their home with approved total rebuild funds in the amount of $411,000.00 plus HST.

The plaintiffs entered into arrangements with the defendant contractor to rebuild their home for them. The plaintiffs initially forwarded $139,000.00 to the defendants from proceeds they received from their insurance company for the demolition and construction of their replacement home.

The plaintiffs provided a second payment of $113,000.00 to the defendants with the understanding that it was to be used for labour and materials necessary to secure the building permits and approvals of construction drawings and plans to allow construction of the home to begin.

In other words, the plaintiffs provided the defendants with about $252,000 to be used for construction purposes. The defendant contractors provided the plaintiffs with permits and construction drawings, but failed to proceed with construction of the new home.

After much delay, the plaintiffs contacted the local building inspector and were advised that no building plans or requests for permits had ever been received. The building inspector reviewed the documents that the defendant contractors had given the plaintiffs and discovered that the engineering approval and certification stamp signature had been forged.

On December 17, 2019, the plaintiff homeowners moved for a Mareva injunction (asset freezing order) on three days notice to the defendant contractors. On December 20, 2019, the Court issued a Mareva injunction in favour of the plaintiffs. The order indicated that if $139,000 was paid into Court, the general asset freezing order would be lifted and the defendants would be permitted to deal with other funds in their possession.

The contractors did not pay the $139,000 of the plaintiffs’ funds into Court. Rather, on January 31, 2020, the contractors moved to set aside the Mareva injunction alleging that the plaintiffs had not met the test for the Court to issue an asset freezing order before judgment. The plaintiffs moved to have the contractors declared in contempt of court for failing to account for their money.

The Court treated the Mareva extension motion on a de novo basis, meaning the plaintiffs had to prove again why an asset freezing order was appropriate before judgment. The Court held that the forgery had again been proven by the plaintiffs on a prima facie basis (proven unless new evidence shows otherwise) and the defendants had not rebutted this allegation. This, coupled with the defendants’ failure to account, was sufficient to meet the first part of the Mareva test.

The Court found that the second part of the Mareva test, the risk of dissipation of assets, was proven as the defendant contractors refused to return the plaintiffs’ funds or account for what they did with them. The Court held that the failure to account, coupled with the demonstrated dishonesty reflected by the forgery, was sufficient evidence of the risk to dissipate assets.

As to the balance of convenience part of the test, the Court found that the plaintiffs and their infant child had been left homeless and without the means to rebuild their home. Conversely, the inconvenience to the defendants was limited to paying the $139,000 they received from the plaintiffs into Court. It was based on these facts that the Court held:

The Courts must provide an enforceable remedy in such situations of alleged misconduct until a determination on the merits has been made.

The Court varied the Mareva injunction to allow the defendants’ banks to accept deposits into any of the defendants’ bank accounts and to require the bank to provide the defendants with paper copies of any banking information requested by the defendants in relation to the defendants’ bank accounts. The Court also allowed for the defendants to post other forms of security if it wished to have the Mareva discontinued.

The Court adjourned the plaintiffs’ contempt of court motion to allow the defendants another opportunity to account for their money. It is the risk of being declared in contempt and possibly being incarcerated, and the inconvenience of having their assets frozen at least until a judgment is heard, that hopefully motivates the defendants to do the right thing and return the plaintiffs’ funds.

Inquiries

At Investigation Counsel PC, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.

Norman Groot, Director
Investigation Counsel PC
Fraud Recovery Lawyers
August 31, 2020

^[1] https://investigationcounsel.com/2013/09/30/fraud-victims-motions-freeze-money/

^[2] https://investigationcounsel.com/2013/10/07/fraud-victims-response-fraudsters-motion-access-money/

^[3] https://investigationcounsel.com/2014/11/20/what-fraud-victims-should-know-about-freezing-orders-mareva-injunctions/

^[4] https://investigationcounsel.com/2017/08/22/fraud-victims-know-using-evidence-obtained-hacking/

^[5] https://investigationcounsel.com/2019/07/16/why-the-criminal-process-is-secondary-in-fraud-recovery-part-ii-criminal-funding-rights-override-victim-mareva-recovery-rights/

^[6] https://investigationcounsel.com/Services/practical-information-for-fraud-victims-about-fraud-recovery/

^[7] On October 6, 2017, the Niagara Police laid criminal fraud charges against Steven Silva Sardinha and Anselmo A. Patruno – see www.havanafraud.com (link broken).

Mareva (Asset Freezing) Injunctions in Toronto in the COVID-19 Era

At the commencement of the COVID-19 era, the Courts in Ontario (and elsewhere) declared that they were shutting down other than for the hearing of urgent cases. What constitutes an urgent case with respect to fraud cases was not precisely defined. The Ontario Courts published a policy on how to submit a case for consideration. This blog tells the story of a submission for a Mareva injunction to freeze assets in a fraud case, the process by which the Courts handled it, and the unique resolution of the motion.

The endorsement this story is based on was issued yesterday (March 31, 2020). It was not published by the Court through CanLII – so for the purposes of this blog we will refer to the decision as “Start-Up Corp. v. Doe”. We can be contacted privately if our readers wish to request a copy of the decision. The fraud allegations at issue are the typical employee breach of trust scenario to which many companies fall victim. The reason this case is interesting is that it demonstrates that pre-action motions for freezing assets pending judgment remains an option for companies in the COVID-19 era.

The Facts

In October 2018, Start-Up Corp hired Ms. Doe to manage its business. As often happens with start-up businesses, Start-Up Corp did not formalize its relationship with its staff with written employment contacts. As it applied to Ms. Doe, Start-Up had a hand-shake / oral agreement that Ms. Doe would manage the company and not take a salary in exchange for 40% of its shares to be issued after Start-Up Corp paid off the loan in took out to purchase the company from previous shareholders.

Start-Up Corp’s operating loan to purchase the company was $1M – and with revenues of $1M at the time that Ms. Doe came on board, the horizon when Ms. Doe would receive her shares was projected to be short term. Ms. Doe allegedly favoured this “sweat equity” relationship as she had taxable income from other sources as well, and did not wish to incur further personal tax liability. At the beginning of the relationship, as is the often the case, both Start-Up Corp and Ms. Doe envisioned a win-win scenario.

From October 2018 to September 2019, Ms. Doe managed Start-Up Corp with very little supervision by its director, officer and shareholders. Through phone calls, Ms. Doe provided positive updates to the shareholders. In September 2019, however, Start-Up Corp missed an interest payment on its $1M operating loan. Ms. Doe provided an explanation for the missed payment, which resulted in the shareholders not acting forthwith to investigate the status of Start-Up Corp’s finances.

By January 2020, the shareholders of Start-Up Corp had reviewed its bank statements, and they noticed transfers that did not appear to be related to Start-Up Corp’s operations. Inquiries were made with the corporate accountants for the status of CRA filings. The accountants advised that Ms. Doe had not responded to their requests for financial documentation. As a result, forensic accountants were retained. By mid-February 2020, it was ascertained that several hundred thousand dollars had been transferred out of Start-Up Corp’s bank accounts for purposes that the shareholders of Start-Up Corp alleged had nothing to do with its operations.

In late February 2020, Start-Up Corp, through their forensic accountants, contacted our firm to bring an action and ascertain if Ms. Doe had assets that could be secured pending a judgment. Our investigations revealed Ms. Doe had sold real estate in Ontario which was scheduled to close on April 1, 2020 and, given other dissipation risk indicators, suggested an asset freezing motion was necessary prior the sale closing. We worked with the forensic accountants to create an interim loss report. Affidavits were taken from Start-Up Corp’s shareholders and staff and the forensic accountant. An action was issued but not served. A date with Civil Practice Court (“CPC”) was scheduled for the purposes of seeking an urgent hearing date for an ex parte motion. On the day before the CPC attendance was to take place, the Courts closed due to the COVID-19 issue.

The Mareva Motion Process in the COVID-19 Era

Like many lawyers in Ontario, we were quite skeptical of how Ontario’s new COVID-19 urgent motion process would actually work. We were pleasantly surprised. On March 23, 2020, we emailed the Courts our motion record, factum and book of authorities. We requested an ex parte motion. On March 24, 2020, a judge from the modified CPC responded and advised us that our motion qualified for an urgent hearing. The CPC judge further advised us of the judge assigned hear the motion, and advised us to call the Court the next morning for a hearing.

On March 25, 2020, we phoned in to the number provided by the Court. In the course of our submissions, we advised the judge that given that Ms. Doe may have an explanation for the irregular transactions, and given that charting a path for an injunction to come back before the Court within 10 days as required in ex parte injunction proceedings was unknown, that we were open to serving Ms. Doe with the motion record if the motion could be held forthwith. The hearing judge agreed this was process was preferable, and assigned a hearing date on short notice for March 30, 2020, with a phone number to call for the hearing of the formal motion.

Later on March 25, 2020, our office had the motion documents served on Ms. Doe. On March 26, 2020, Ms. Doe had her own counsel contact us. As bad luck would have it, Ms. Doe’s daughter (who lived with Ms. Doe) had been diagnosed with the coronavirus. We agreed with Ms. Doe’s counsel that we could hold the hearing based on unsworn affidavits that he produced (so that he did not need to meet with his witnesses in person). On Sunday, March 29, 2020, Ms. Doe’s counsel served four unsworn affidavits in her defence, along with a factum.

On Monday, March 30, 2020, the contested Mareva injunction motion was heard by way of conference call. We emailed the Court an oral submission outline to simplify the Court’s notetaking. Submissions by way of conference call went on for an hour and a half. The hearing judge reserved. On Tuesday, March 31, 2020 (yesterday), the hearing judgment released his endorsement. The endorsement, which is a public record, was not published on CanLII. As the Courts are now closed, it is questionable whether the endorsement is a truly a public record at this time – hence our use of pseudonyms.

The Decision – A Modified and Balanced Mareva Injunction Motion Outcome

Surprisingly, Ms. Doe conceded in her affidavit that she was in a fiduciary position with Start-Up Corp. Not surprisingly, Ms. Doe contested the allegations of breach of trust by way of unauthorized transactions made for her personal benefit and the detriment of Start-Up Corp.

The Court noted that Start-Up Corp. took serious issue with the lack of credibility to Ms. Doe’s explanations. Given the various contested facts, the Court held that the prima facie part of the Mareva injunction test was not met at this time, but was sufficient for the Court to permit Start-Up Corp. to file additional evidence to re-but Ms. Doe’s explanations and continue the hearing on this issue.

The Court also took note of Ms. Doe’s submission that there was no evidence of her dissipation risk, based on her affidavit that she had no assets to dissipate. Quite strategically, Ms. Doe offered to transfer $100,000 that was coming due and payable to her on the sale closing on April 1, 2020, on a secondary home that she was on title for. In the course of her dealing with the shareholders of Start-Up Corp, she had given them a promissory note that came due and payable on the sale of this secondary residence. One reason for the Mareva motion was because we were aware of the closing date of the sale of the secondary residence, but we did not know who the closing lawyer was – so a preservation order was not an option that was open to us at the time.

In response to Ms. Doe’s submission that the dissipation test had not be met, the Court formalized the payout of the $100,000 to the shareholder of Start-up Corp with a direction to the real estate lawyer involved (the identity of the real estate lawyer was disclosed in the responding record). The Court further ordered that Ms. Doe provide us an affidavit of her world-wide assets within 14 days, and make herself available for examination by video link or otherwise within 30 days. We view this ruling as a balanced and modified Mareva decision appropriate for the COVID-19 era.

As the focus of our firm is fraud recovery investigations and litigation, as a matter of practice our firm monitors all Mareva injunction decisions as they are published by the Courts. We have not seen a Mareva decision wherein the Court has issued what are often referred to as “ancillary orders” (asset reporting affidavits and pre-pleading examinations) without issuing an actual interim Mareva freezing order itself. This ruling is unique in the realm of Mareva decisions both because it was made in the COVID-19 era and because ancillary orders were made without the Mareva injunction being issued.

We can speculate as to the reason for this outcome. It may be because we took the unusual step of proceeding by way of short notice. This was done to prevent allegations later that there was a failure to disclose all material facts – especially when it may be difficult for Ms. Doe to respond and the effect of a freezing order on her assets could have dramatic negative effects on her ability to fund her family in the COVID-19 era. The short notice may have resulted in the Court not feeling comfortable with declaring a prima facie case, but comfortable that a bona fide case (the Norwich standard) had been presented.

As the Court adjourned its decision on the prima facie case issue, another reason for issuing ancillary orders may have been because the motion would be moot if Ms. Doe’s impecuniosity defence was valid. The reason for the focus on the impecuniosity defence came from an Ontario Divisional Court ruling in January 2020, which we provided the Court to supplement our submissions. In Amphenol Canada Corp v. Sundaram, 2020, ONSC 328, Justice Myers held:

[A] defendant’s ability to pay is very much part of the interlocutory injunction calculus. In the seminal case of American Cyanimid Co. (No. 1) v Ethicon Ltd, at p.4 of his speech, Lord Diplock wrote:

If damages in the measure recoverable at common law would be an adequate remedy, and the defendant would be in a position to pay them [at the time of judgment], no interlocutory injunction should normally be granted however strong the plaintiff’s claim appeared to be at that stage.

Similarly, in 2092280 Ontario Inc. v. Voralto Group Inc., 2018 ONSC 2305, at para 28, this Court wrote:

Judgments for damages cannot reasonably be expected to be affordable or collectable against fraudsters.

In 663309 Ontario Inc. v. Bauman, 2000 CarswellOnt 2479, at para 41, Akbarali J. found that the defendants presented a risk of dissipation of their assets before judgment. In the face of that finding, flowing from the nature of the fraud and the efforts by the defendants to conceal their scheme, further expensive steps in the proceeding do create a significant risk of prejudice and irreparable harm to the plaintiff in unrecoverable costs. It is always open to the defendants to dispel this concern by offering to post cash or cash equivalents for security in place of the assets frozen by the Mareva injunction.

The Bottom Line

In our case, we moved for a Mareva injunction in a quantum commensurate with the forensic accounting findings. In other words, Ms. Doe refused to offer cash or cash equivalent as security in place of an all-encompassing asset freezing Mareva injunction. In response, the Court held that it needed further evidence, and ordered Ms. Doe to produce a sworn statement setting out the nature, value and location of all her assets worldwide, and to make herself available for examination on her sworn declaration within 30 days. The Court remained seized of the motion and provided an email address to schedule the continuation of the motion by conference call.

This decision is useful to fraud victims, whether businesses or individuals. Many individuals and business are cash strapped in the COVID-19 era, and their interests have to put ahead of the interests of rogues where the evidence establishes a bona fide case. In other words, since the Ontario Divisional Court decision in 2092280 Ontario Inc. v. Voralto Group Inc., we are of the view that Mareva injunctions are no a “nuclear weapon”, or even an “exceptional remedy”, but rather reflect the reality that “judgments for damages cannot reasonably be expected to be affordable or collectable against fraudsters” unless the Courts grant pre-action asset tracing and freezing remedies.

Inquiries

Norman Groot
Investigation Counsel PC
www.investigationcounsel.com
March 1, 2020

Why The Criminal Process is Secondary in Fraud Recovery – Part III

Lenient Sentencing where No Restitution or Cooperation

In our prior blog post, Why the Criminal Process is Secondary in Fraud Recovery – Part I – Criminal Search Rights Override Victim Recovery Rights, we summarized the recently released case of R. v. Tashanna Mullings, 2019 ONSC 2408, published by the Ontario Courts. The bottom line of that case is that fraud victims need to understand that the Canadian criminal justice system, in its application of the Canadian Charter of Rights and Freedoms, does not put the interests of victims ahead of the rogues who do them wrong. Rather, the interests of victims play second fiddle to the Charter rights of rogues, thus making the criminal justice system a secondary system for fraud victims whose priority is to recovery lost funds.

We also discussed that fraud victims also need to understand that the Canadian criminal justice system will prioritize punishing the police for violating some Charter “right” of a rogue before respecting the rights of fraud victims, even though governmental policy encourages the issuance of criminal restitution orders and retribution by way of a conviction and sentence. We reviewed the unfortunate state of Canadian Charter of Rights and Freedoms litigation in Canada as discussed in the 2018 decision of R. v. Villanti, 2018 ONSC 4259.

In the second part to this series, Why the Criminal Process is Secondary in Fraud Recovery – Part II – Criminal Funding Rights Override Victim Mareva Recovery Rights, we summarized Canadian Court decisions since the release of CIBC v. Credit Valley Institute of Business and Technology, 2003 CanLII 12916 (ONSC). In the CIBC v. Credit Valley case, the Court created a four part test which would allow a rogue access to their ill-gotten funds, frozen by a Mareva injunction, to pay for their criminal defence. This sort of decision creates a rationale for fraud victims to consider a criminal complaint only after the civil litigation has run its course, thus making the criminal justice system a secondary justice system with respect to fraud.

In this third part to our blog series, we review the recent sentencing case of R. v. Auckbaraullee, 2019 ONSC 2498, wherein the criminal justice system declined to impose incarceration in the case of a “serious fraud” involving a breach of trust where no restitution was made and where the rogue never disclosed who she conspired with nor who received the benefit of the stolen funds. It is our view that if a recovery is not made from the rogue before sentencing, or if the rogue does not at least cooperate to assist in their victim’s recovery, there should be no claim to mercy on sentencing. This is yet another case where house arrest, with the usual trappings of television and internet use, visitors, and access to the community are somehow equated in the eyes of the Courts to the punishment of incarceration necessary to fulfil a political agenda.

Another Payroll Fraud Story

The story of Anissah Auckbaraullee’s payroll fraud scheme is similar to thousands of such occurrences in this country. In October 2010, the Royal Bank of Canada contacted the Manager of Finance of the Ontario Hospital Association (“OHA”) advising that a “person” was attempting to deposit a cheque from the OHA payable to a “MW Management” into an account that had just been opened that day. The OHA Manager asked RBC to hold the cheque while he made inquiries.

Upon learning that OHA staff had not heard of “MW Management”, the OHA launched an internal investigation and discovered other vendors that cheques had been issued to that had not provided services to the OHA. These vendors were “Sarnia H. Improvement, HG Distributors, Elite Distributors, HUS Services, and JN Distributors”. The bank records indicated that these vendors had opened accounts just days before the OHA cheques had been deposited into them.

Further inquiries revealed that the invoices received by the OHA to support the cheques had spelling errors and were missing key information, and were all tied to a conference ran by the OHA. The companies were not registered, and the banks did not have bona fide client information for the individuals associated with the accounts of the vendors. What was known was that OHA payroll clerk Anissah Auckbaraullee had issued all the cheques.

As a result of these findings, the OHA retained Dave Perry and Ron Wretham of Investigative Solutions Network Inc. (“ISN”) to conduct interviews. ISN interviewed all OHA staff who had access to creating cheques, and then interviewed Ms. Auckbaraullee. She denied issuing the cheques and denied knowledge of the vendors and the persons associated with them. The circumstantial evidence, however, all pointed at Ms. Auckbaraullee. A criminal complaint was filed and Ms. Auckbaraullee was charged.

The judgment in the criminal case against Ms. Auckbaraullee makes reference to the decision in R. v. Villaroman, 2016 SCC 33, which stands for the proposition that in cases based on circumstantial evidence, the Crown must demonstrate that an inference of guilt is the only reasonable inference available on the totality of the evidence. The R. v. Auckbaraullee case then goes on for a whopping 774 paragraphs before it reaches a conclusion that Ms. Auckbaraullee had perpetrated an $80,000 fraud. The findings of fact included, amongst other things, that the signature of the manager of the OHA was forged on new vendor forms and cheques.

Another remarkable aspect to this case is that the trial started in September 2017 and then was heard on 14 different hearing dates until September 2018 before a guilty finding was rendered. The issue of proportionality of this prosecution is raised when one considers the sentencing. The liability phase of this trial can be reviewed at R. v. Auckbaraullee, 2018 ONSC 5545.

The Sentencing

The trial judge, Justice Nola Garton, issued a 103 paragraph sentencing decision. She acknowledged that general deterrence is the most important factor when assessing a sentence for large scale frauds involving a breach of trust. She then went on to find that conditional sentences (house arrest) are not excluded in breach of trust cases, that empirical evidence “suggests” that the deterrent effect of incarceration is “uncertain”, and that house arrest can provide a “significant deterrent if sufficient punitive conditions are imposed.”

Justice Garton held that Auckbaraullee’s scheme involved “a breach of trust on the low end of a large scale fraud” – that “$80,000 is a significant amount of money”. What fraud victims will find perplexing is that Justice Garton then went on to state that Auckbaraullee’s failure to make any restitution payments before sentencing, her failure to disclose where the ill-gotten money went, and her failure to disclose who else was involved in the fraud were “non-mitigating or neutral factors”. In our view, if a rogue does not disclose at least who else was involved, there should be no claim to sentencing leniency. In other words, in the sentencing phase of a criminal fraud proceeding maintaining the right to silence if it obstructs recovery should be an aggravating factor.

Justice Garton sentenced Auckbaraullee to two years less one day of home arrest. The sharp points of the home arrest were further dulled by permitting Auckbaraullee access to society to go shopping, attend medical appointments, employment, and attending her parole supervisor’s office. There are no restrictions on television or internet use, having friends over, or really anything else that ordinary people would miss if they were incarcerated. Whatever “punitive conditions” were imposed, there is no one maintain surveillance to ensure they are obeyed.

To most reasonable persons, “house arrest” and incarceration are two very different concepts. The rationale behind this leniency seems to be that Ms. Auckbaraullee is a victim of sorts of a different type – that she was born into a Muslin African family, shipped to Canada as a child bride, abused by an alcoholic Muslim husband, abandoned by her children, and has lived under the stigma of the criminal fraud charges for 8 ½ years while this case slowly made its way to resolution. She had a criminal record for other offences while awaiting trial.

A restitution order was issued in this case, but there are no terms on repayment, and importantly, there is no consequent to Ms. Auckbaraullee if she does not make a payment. Given the Court’s perspective that Ms. Auckbaraullee’s failure to make a payment was a non-factor in her sentencing, it would be more appropriate to refer to the restitution order as a restitution “suggestion”. Ms. Auckbaraullee is not a Canadian citizen. Under the Immigration and Refugee Protection Act, S.C. 2001, c.27, as a permanent resident she would have been subject to deportation if a six month jail sentence had been imposed.

The Bottom Line

No one seriously will quibble with Ms. Auckbaraullee’s right to silence in a criminal case. The problem with sentences such as this is that it emboldens the rogues who pushed Ms. Auckbaraullee to engage in the fraud and those who benefited financially to continue on with their schemes. If Ms. Auckbaraullee seriously wishes to stay in Canada and obtain lenient sentencing, it should be incumbent on her to disclose who was also involved in the fraud, or be sentenced to jail. In our view, her sentencing should have had an election: cooperate or be deported.

From the victim’s perspective, the punishment was not meaningful, and there was no recovery. From a public interest perspective, one has to question what was gained from such an immense use of judicial resources over an $80,000 fraud if the Court is in the end too reluctant to accomplish its general deterrence objective. We also wonder aloud why Justice Garton takes such a negative view on general deterrence. In the criminal fraud sentencing case of R. v. Pavao, 2018 ONSC 4889, at para 23, Justice Molloy held:

The Criminal Code requires that the principles of denunciation, deterrence and rehabilitation be considered in sentencing. There is considerable legitimate debate as to whether significant sentences imposed on offenders truly have a deterrent effect, either for the individual offender or for others who might be tempted to commit similar crimes. However, it is well recognized that if deterrence is relevant at all, it is particularly so for crimes of this nature, involving individuals who are intelligent and who deliberately set out to plan and execute sophisticated frauds. It is important that such individuals be aware that the significant risk of a long jail term outweighs any benefit or financial reward they may obtain from the fraud. This is relevant to the individual offender, and also to others in the community who are tempted towards such crimes.

Maybe the most productive aspect of this case is that a court declared $80,000, when coupled with a breach of trust, to be a “large scale fraud”. Most fraud recovery lawyers would not have thought $80,000 to be a significant fraud, especially when you compare it to the economics of prosecuting it.

Another benefit of this blog is that it now makes Ms. Auckbaraullee visible on a Google search. We commend Justice Garton for having her decision published by the law reports. Most criminal fraud sentences are not published. It takes the additional step of writing a story like this to have the decision searchable on Google.

Inquiries

Norman Groot

Investigation Counsel PC

www.investigationcounsel.com

August 25, 2019

Why the Criminal Process is Secondary in Fraud Recovery – Part II

Criminal Funding Rights Override Victim Mareva Recovery Rights

In our prior blog, Why the Criminal Process is Secondary in Fraud Recovery – Part I – Criminal Search Rights Override Victim Recovery Rights, we summarized the recently released case of R. v. Tashanna Mullings, 2019 ONSC 2408, published by the Ontario Courts. The bottom line of that case is that fraud victims need to understand that the Canadian criminal justice system, in its application of the Canadian Charter of Rights and Freedoms, does not put the interests of victims ahead of rogues. Rather, the interests of victims are subordinate to the Charter rights of rogues.

In our prior blog, we also discussed that fraud victims also need to understand that the Canadian criminal justice system will prioritize punishing the police for violating some Charter “right” of a rogue before respecting the rights of fraud victims, notwithstanding that the government’s policy encourages the issuance of criminal restitution orders and retribution by way of a conviction and sentence. We reviewed the unfortunate state of Canadian Charter of Rights litigation in Canada as discussed in the 2018 decision of R. v. Villanti, 2018 ONSC 4259.

Our prior blog, published in May 2019, addressing why the criminal justice system is unreliable, was followed up by a Global News article on July 8, 2019, by Sam Cooper entitled Organized Crime Knows Fraud is the Way to Go. The article’s conclusion is that due to the lack of police resources, weak efforts and lack of interest by Crown attorneys in some cases, and lenient sentencing by the Courts compared to those issued in drug trafficking cases, organized criminals are turning to fraud as the preferred means to finance their criminal enterprises.

Another article published by Andrew Russell of Global News on June 10, 2019, entitled It’s a Travesty: Nearly 800 Criminal Cases Thrown Out Over Delays Since the 2016 Jordan Decision supports the position we took in our blog that the Canadian Charter of Rights and Freedoms does not put the interests of victims ahead of rogues. R. v. Jordan followed the staying of over 47,000 charges in Ontario alone subsequent to the R. v. Askov decision. Based on these decisions, it should be obvious to fraud victims that resorting to the criminal justice system for a restitution order is high risk and should be considered when recovery is not otherwise foreseeable.

The problem with Charter litigation is that the remedies the Courts have designed to respond to violations of an accused’s Charter rights are unbalanced and have a lack of meaningful regard to the countervailing interests of the accused’s victim. In the case of Curley v. Taafe, 2019 ONCA 368, the Court stated: “Criminal prosecutions are not brought for the benefit of the prosecutor or the complainant, but for the common welfare of society”. What is beneficial for the “welfare of society” is an undefined term and is often not what is beneficial for the complaint fraud victim.

A Rogue’s Access to Mareva Frozen Funds for Their Criminal Defence Lawyers

In one of our ongoing fraud recovery cases of a bookkeeper that fraudulently obtained approximately $650,000 from her employer, we brought a motion for a Mareva injunction to freeze all of her bank accounts and other assets pending resolution of the civil recovery case. Our client has intentionally not filed a criminal complaint for the time being so as to avoid the rogue bringing a motion to have her criminal defence lawyers funded using the frozen assets. The reason for taking this approach has resulted from the Ontario Court’s decision in CIBC v. Credit Valley Institute of Business and Technology, 2003 CanLII 12916.

The facts as summarized by the Court in CIBC v. Credit Valley tell a story of how a Nigerian-born rogue residing in Canada known as Lawrence Mpamugo, was the operating mind of a private school known as Credit Valley, and defrauded CIBC of allegedly $13M. CIBC further alleged that $6M of its losses and the funds caught by the Mareva were proprietary – meaning the money that CIBC actually transferred to Mpamugo’s company Credit Valley.

Back in 2003, Mpamugo and the other defendants in the CIBC case conceded that CIBC had presented a prima facie case of fraud to the Court. As it turned out, in 2004 Lawrence Mpamugo was criminally convicted of multiple counts of fraud. His sentencing, however, was not published – another common shortcoming of the criminal justice system.

In the CIBC case, Mpamugo served affidavits seeking to use some of the frozen funds to pay for the defendants’ initial legal fees. Mpamugo alleged that he possessed no assets other than those caught by the Mareva injunction, that he had no income on which to live, and that he was otherwise broke and could not pay for his continuing legal fees. In his affidavit, Mpamugo listed the expenses for which he sought payment.

In Mpamugo’s first motion return date, the Court granted some funds for living expenses. The balance of Mpamugo’s motion for funds caught by the Mareva to use for his criminal and civil defence, and for his living expenses, was adjourned for cross examinations on his affidavit. The Court crafted a legal test which Mpamugo had to meet in order to succeed in his request for access to the funds caught by the Mareva injunction.

The test issued by the Court has four steps. First, the defendant must prove, by way of affidavit evidence, that he or she has no other assets available to pay living and legal expenses. Second, the defendant must provide affidavit evidence regarding the source of the funds that were frozen, to prove that some of the funds are not proprietary. The onus of proof at this stage is on the rogue. The third part of the test is an analysis as to what expenses may be paid for using whatever non-proprietary funds there may be (para 37).

To the extent that living expenses may be paid using non-proprietary funds caught by a Mareva injunction, a separate account must be established by the defendant into which said non-proprietary funds will be deposited. In the CIBC case, such an account was referred to as an “Expense Account” (para 38). Monthly statement of the Expense Account are required to be forwarded by the bank to the office of the victim’s lawyers. To remove funds from the Expense Account, a defendant is required to send the victim a list of expenses for their approval for payment. If there is a disagreement on the expenses to be paid from the Expense Account, a motion is required.

Payment of Criminal Defence Costs from A Victim’s Funds Held in a Constructive Trust

The fourth part of the legal test is whether the defendant should be granted access to use frozen funds that are identified as proprietary in nature. In the CIBC case, the funds characterized as proprietary form part of a constructive trust. As such, it would seem to be unconscionable to transfer a victim’s funds to a rogue to pay for the rogue’s legal fees in attempting to defeat or delay the plaintiff from obtaining judgment. The Court held:

It is one thing to permit payment of ordinary expenses out of money belonging to the defendant but which is frozen by a Mareva injunction. It is another thing altogether to permit the defendant to use the plaintiff’s money for the purpose of attempting to defeat the plaintiff’s claim, or to delay the plaintiff from obtaining judgment. (para 20)

That said, the Court did grant Mpamugo access to the frozen funds to pay for his criminal defence lawyers. The following quote demonstrates how the interests of the rogue are placed ahead of the victim in the criminal context. The Court held:

Mr. Mpamugo seeks the release of sufficient funds to cover his legal fees for the defence of the criminal charges against him. I have already authorized payment of $20,000.00 for the transcripts of the preliminary hearing and a $50,000.00 retainer to Mr. Gold. The criminal charges are serious in nature and if Mr. Mpamugo is convicted he could be looking at a period of incarceration that is not inconsequential. It would be difficult for Mr. Mpamugo to represent himself at trial. The documentation is voluminous and the issues relatively complex. I consider the ongoing cost of criminal counsel to be a high priority.

Counsel for the plaintiff argues that Mr. Mpamugo should not be entitled to retain counsel of the highest calibre, but rather should be restricted to counsel with a more modest hourly rate than Mr. Gold. I disagree. … [I]nsofar as funds subject only to the Mareva injunction are concerned, there should be no fetter on how expensive a defence Mr. Mpamugo chooses to mount. To the extent the amount of the legal costs is an issue at all, it is only because the non-proprietary claim assets are limited and insufficient to cover everything requested by the defendant.

It is understood that the full cost of the defence on the criminal charges will far exceed the amount of the retainer. Mr. Gold shall render accounts from time to time. Any account should be sent first to Mr. Mpamugo. If he approves the amount of the account, it should then be sent to counsel for the plaintiff. If the plaintiff consents, through its counsel, Mr. Gold’s account can be paid out of Expense Account. Counsel for the plaintiff may request back-up documentation from Mr. Gold, and such shall be provided as long it can be done without compromising the defence or breaching solicitor and client privilege.

I have a discretion in respect of whether payments should be made out of the assets frozen by the proprietary injunction in the event there are insufficient funds in the Expense Account to cover them. In exercising that discretion I must be mindful that the plaintiff has not yet proven its entitlement to the assets in question and there is an underlying unfairness to the defendant in tying up his assets prior to the plaintiff proving its case at trial. On the other hand, there is unfairness to the plaintiff if I permit the defendant to use the funds for his own purposes, including funding his defence of this case, only to discover at the end of the action that the money belonged to the plaintiff all along.

There is a fundamental unfairness in requiring the plaintiff to fund the civil defence of its own case against the defendant and to provide the defendant and his family with all of their living expenses for the time it takes to get this case to trial, if the defendant did in fact defraud the plaintiff of the amounts claimed. The situation is somewhat different with respect to the defence of the criminal charges. … [T]here is more at stake in respect of the criminal charges given the criminal record that would follow if convicted and the risk of a lengthy period of incarceration. These factors, in my view, tip the balance slightly in favour of the defendant.

Therefore, if there are no funds available from the Expense Account to pay Mr. Gold’s accounts when due, payment may be made from other assets, [including the victim’s own funds] subject to the same review process to ensure the accounts are reasonable.

In this context, the Court rejected Mpamugo’s claim for payment of civil litigation defence costs from proprietary funds (para 53). To the extent that civil litigation costs should be paid from funds caught by the Mareva injunction, this funding should only be taken from funds deposited in the Expense Account derived from non-proprietary funds.

Other Cases That Have Followed CIBC v. Credit Valley

Since the CIBC decision was issued in 2003, other cases have followed it and made findings on related issues.

In Waxman v. Waxman, 2007 ONCA 326, the Ontario Court of Appeal approved the analysis of the Court in CIBC v. Credit Valley. The Court summarized that the analysis included a determination of whether the injustice to the plaintiff in permitting the use of their proprietary funds by a defendant outweighs the possible injustice to the defendant if he or she were denied access to those funds (para 18). The Court of Appeal held that an adverse inference can be drawn from the refusal of a defendant to answer questions about the ability of the defendant to finance their living and legal funds from sources other than the funds deemed to be proprietary and caught by a Mareva (para 43).

In Trade Capital v. Peter Cook, 2015 ONSC 7776, the defendants brought a motion to vary a Mareva injunction to permit further legal and living expenses. The Court made reference to the CIBC v. Credit Valley legal test (para 19). The Court held that the burden of proof is on the moving party (para 21a). The Court also held that as the injunction is an equitable remedy, the Court has discretion to vary the order, and any motion to vary requires full disclosure of the defendant’s assets and liabilities (para 21b). It is the current assets and liabilities of the defendant that are under scrutiny at such a motion (para 21c). In Trade Capital, the defendant attempted to improperly restrict the examination of his assets and liabilities, and for this reason alone his claim for living and legal expenses was dismissed.

International Offtake Corporation v. Incryptex Ltd., 2017 ONSC 7537, involved a fraud where the plaintiff alleged that the defendant did not disclose a criminal record or OSC litigation in the context of a fiduciary relationship, and that this conduct was what allowed the defendant to obtain a fiduciary position and defraud the plaintiff. The defendant moving for legal and living expenses suggested that he could not earn income to pay his legal and living expenses. An issue was whether the living expenses of a spouse, who was a co-defendant, should be paid from funds caught by a Mareva injunction. The Court held that the defendant had not adequately explained or accounted for what he did with all of the plaintiff’s funds (para 40), and that “the Courts expect parties to be candid about their ability to obtain funds from various sources, and that a failure to do so can lead to a finding that the onus has not been met” (para 45). The Court ultimately held that the moving defendant had not proved that he couldn’t obtain funds from other sources, and therefore dismissed the motion (paras 46 to 49). The Court further noted that even if it had found that the moving defendant met this onus, the amounts sought would not be ordered as they would effectively wipe out what is left of the frozen assets (para 52).

Mining Technologies International, Inc. v. Krako Inc., 2013 ONSC 7280, is one of our firm’s cases. The defendants brought a motion to vary a Mareva injunction. The Court held that the onus is on a defendant seeking to vary a Mareva injunction to prove proprietary versus non-proprietary funds when funds are commingled in an account (paras 217 to 218).

Do the Police Care if Fraud is Not Reported?

If any of our readers are alarmed that we proactively educate fraud victims on the unreliable nature of Canada’s criminal justice system, the police are unlikely to be offended. As commented by the Toronto Police in the July 10, 2019, National Post article Toronto Hospital Fires Around 150 Employees after Uncovering Multi-Million Dollar Fraud,

The hospital administration undertook to investigate this on their own. Police meetings with hospital administration were advisory. Baycrest has not formally engaged the police to investigate. If it involved public safety, we would take that decision out of their hands. But as it stands, there is nothing that demands police intervention, so the ball was left in their court.

This positon of police sums reflects “welfare of society” as stated by the Courts to criminal justice. Property offences such as fraud are deemed secondary to violent crime in the scarce use of police and court resources. The resolution of frauds amongst victims and rogues is not an issue that has such a societal interest that it demands police intervention if a complaint is not filed.

The Bottom Line

This blog and its predecessor is not intended to be read as a condemnation of the criminal justice system. These blogs are published to underline to fraud victims that the criminal justice system is not a reliable justice system to seek recovery of their losses. If fraud victims prioritize recovery of their lost funds over seeking punishment of the rogue, they should be at a minimum be filing a claim within two years of discovering their loss as required by the Limitations Act, SO 2002, c.24.

In our view, fraud victims are well advised to not file criminal fraud complaints until after judgment and recovery is obtained through the civil courts if the priority of the victim is recovery over that of seeking retribution being punishment through the criminal system. There is no limitation period on the filing of criminal complaints. The filing of criminal complaints is best left until after everything that can be recovered from a rogue and his or her co-defendants is obtained.

To state otherwise, it is when recovery has been completed that it is worthwhile for fraud victims to consider punishment by way of filing a criminal complaint. If recovery is complete and the rogue still has assets, consideration should be given to seeking civil punitive damages, as fraud victims will find that the criminal justice system puts the “welfare of society” (which includes the welfare of rogues and punishing police through Charter cases) ahead of them.

In our view, criminal complaints should be relegated to “lost cause frauds” – that is frauds which either cannot be funded by a victim or frauds for which there is no reasonable prospect of recovery. If rehabilitation of offenders and the safety of the public is secondary to Charter rights and other social welfare objectives of the criminal law, why should fraud victims support it other than for the purpose of retribution?

Inquiries

Norman Groot
Investigation Counsel PC
www.investigationcounsel.com
July 15, 2019

Why the Criminal Process is Secondary in Fraud Recovery – Part I

Criminal Search Rights Override Victim Recovery Rights

This blog summarizes a recently published decision from the Ontario Superior Court of Justice, R. v. TM, 2019 ONSC 2408,which once again demonstrates why fraud victims are, in most cases, well advised to withhold making a criminal case in fraud cases at least until such time as there is no reasonable prospect of recovery.

Fraud victims need to understand that the Canadian criminal justice system, in its application of the Canadian Charter of Rights and Freedoms, does not put the interests of victims ahead of rogues. The interests of victims are subordinate to the Charter rights of rogues, such as a right to unreasonable searches by police and others involved in the criminal justice system, and right to a trial in the criminal system in a reasonable time. What is “reasonable” and “unreasonable” is the subject of endless litigation, such as depicted in the TM case as described below.

Fraud victims also need to understand that the Canadian criminal justice system will prioritize punishing the police bringing fraud cases for violating some Charter “right” of some alleged rogue over respecting the rights of fraud victims notwithstanding the government policy promoting criminal restitution order or retribution by way of a conviction and sentence. We review the unfortunate state of Canadian Charter of Rights litigation in Canada in the TM case as discussed below, as well as the 2018 decision of R. v. Villanti, 2018 ONSC 4259.

R. v. Tashanna Mullings, 2019 ONSC 2408

In a decision dated April 16, 2019, the Ontario Superior Court of Justice (criminal courts) dismissed a criminal fraud prosecution against TM on the basis that, at the time of her arrest and detention for 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 to even have their loss considered for restitution or retribution through a conviction and sentencing.

TM was an employee of a major bank working as a credit card specialist at the bank’s call centre. In the course of her employment, TM took calls and received sensitive personal credit card information from customers. The Crown alleged that she fell in league with fraudsters resident in Canada but originating in Ghana, and provided them with credit card information from over 100 of the bank’s customers. This credit card information was then used by the Ghana rogues to purchase significant quantities of lumber from American lumber companies. The lumber was shipped into Ontario and then “fenced” to local construction companies.

According to the criminal Court’s reported decision, most of the transactions were charged back to the American lumber companies, meaning the victimized lumber companies suffered over $1M in losses. The loss incurred by the bank was therefore a fraction of what the lumber companies incurred. The police conducted a significant and expensive investigation at the taxpayer’s expense resulting in the arrest of the two operating minds of the scheme, VD and EH, both of whom originated from Ghana, and their trucker/fencer, SA.

Without providing any meaningful analysis on the merits of the charges against TM, the criminal Court stayed the criminal case after hearing from the Crown’s witnesses. The Court justified the stay of proceeding on the basis that the police conducted a strip search of TMat the time she was arrested which the Court deemed was “unreasonable”.

Because TM was being held for a bail hearing along with the general population at a detention facility, the police justified the strip search as necessary to prevent harm to prevent weapons from entering the facility and ensure the safety of other detainees. Additionally, as the police’s investigations indicated that TM was part of a well-organized criminal operation, the police also justified the search as necessary to detect small electronic communication devices that could be used to communicate with other conspirators. The Crown argued the police position was entirely reasonable.

As stated, the Court provided no analysis on the merits of the fraud case against TM. This needs to be repeated. When the merits of the case are not given a proper analysis, it is difficult, if not impossible, to determine whether to stay proceedings as declared by the criminal Court is actually “reasonable”. It is only with a proper analysis of the merits of the case against TM that victims of fraud and the public at large can evaluate whether the “capital punishment” of ending a criminal proceedings with a stay of proceedings is “reasonable” in the circumstances. In other words, a concern of fraud victims is that a Charter ruling that does not factor in an analysis of the merits of the criminal case seems “unreasonable” on its face.

A Charter ruling by the criminal Courts that does not factor in an analysis of the merits of the criminal case seems “unreasonable” on its face. This needs to be repeated. Instead, the criminal Court fixated upon trauma experienced about strip searches in general. The criminal Court remarked that strip searches are humiliating, traumatic, and degrading experiences for women, minorities and abuse victims. The criminal Court compared strip searches for weapons and contraband to as “akin to sexual assault”. Shockingly, the criminal court infers that police searches are akin to sexual assaults. The criminal Court noted that TM was a black pregnant woman, and gave the impression that she had been traumatized by her arrest.

We stop here to underscore that this sort of analysis is conducted in the criminal court system, not in the civil court system, where the Charter rights are only considered if a claim is made. In other words, if TM truly was so traumatized by the search incident to her arrest for the recovery of evidence and the safety of police, prison guards and other inmates, one would have expected her to make such a claim against the police. TM never made such a claim, and accordingly the alleged traumatization from the search is viewed with skepticism.

The criminal Court also went on to state “the mere possibility that a detainee may be concealing evidence or weapons is not sufficient to justify a strip search.” The criminal Court concluded that the strip search violated TM’ Charter rights. By way of remedy, the criminal 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 concern of fraud victims reading this decision is that other remedies were not adequately analyzed. It is also worth noting that civil cases, where we suggest fraud victims seek recovery, would not engage in this debate.

As stated, the criminal Court provided no analysis on the merits of the fraud case against TM. This is worth repeating. For the public and for victims of fraud, it is difficult to understand why this occurs. Rather, the criminal Court’s decision appears dismissive of the interests of the victims. The criminal 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.” Really? If someone engages in an alleged $1M fraud, is it not foreseeable that they may be arrested and searched incident to arrest? Is there not greater harm to the criminal system of ending a criminal case worth over $1M where there no analysis of the merits of the case?

We note that the criminal Court did not mention that this case would have engaged the aggravated sentencing provisions of the Criminal Code had TM been convicted. The criminal Court further did not mention that governmental policy objectives emphasize that restitution orders and fines in lieu of forfeiture should be issued in circumstances such as this as a way to give victims of fraud access to justice. The criminal Court rather focused almost solely on the police strip search, and determined that the value of a strip search—which may have a value of a few thousand dollars as a civil claim—is greater than the value of an alleged +$1M fraud. There are no reported decisions of damages awards for Charter violations being worth more than a fraction of the value of the fraud that TM was involved in.

Even if an excessive value to the strip search of $100,000 was awarded to TM, that would be less than 1/10^th of the value of her alleged fraudulent conduct, assuming the search fell into the spectrum of searches that really were unreasonable. Lesser remedies to TM’s alleged search traumatization but were not analyzed.

R. v. Villanti et al, 2018 ONSC 4259

In a decision dated June 22, 2018, the criminal Courts stayed fraud charges against Vincent Villanti, Ravendra Chaudhary, Shane Smith, David Prentice and Andrew Lloyd. The allegation was that the accused, in various roles, conducted and developed an investment program through a firm called the Integrated Business Consultants Association (IBCA) and a related company, Synergy, that raised over $13,000,000 from investors on the promise that their investment would be used to provide small businesses with start-up capital.

The investors were told they would be able to claim any business losses against their personal income taxes. It was alleged that little to no such investments were made. Rather the $13M was used to pay commissions, salaries and expenses of the accused and companies. Investors were informed of inflated losses which, when claimed by them on their personal taxes, were subsequently disallowed by CRA, which in turn subjected the investors to ongoing assessments.

The criminal Court stayed the charges against all of the accused persons on the basis of not providing them with a trial in what the Court deemed to be a “reasonable” time. Unlike the TM case, there was no allegation that the police did anything wrong. Similar to the TM case, there was no allegation was victim complainants did anything wrong. Rather, the Court stayed the case, leaving the victims with no access to seek restitution orders, on the basis that the criminal Courts did not have a judge available to hear the case.

A quote from the decision to end the case is somewhat astonishing. In explaining, and indeed, apologizing, to counsel for the unavailability of a judge to hear this case, the criminal Court gave the following explanation:

On January 25, 2018: Okay, so the one thing I will give people the heads up on in relation to it is with the number of judges they’ve given me for the criminal matters scheduled. Right now, that was why I was hoping that other case might turn into a resolution.

Quite practically speaking with the number of homicides, attempt murders and gun cases I have going, right now I do not have a trial judge to do this case. This will be the first case right now. That may very well change between now and then, but I thought in fairness to counsel, this is the first time I’ve had to say this post Jordan, but in relation to this indictment right now, unless they somehow give another judge or a new appointment or one of the long trials resolves in the next few weeks, that’s where we’re at……

….So, I’ll do the best we can…..And if we could just free up four or five murder cases to help out we would, but I can’t……

On February 26, 2018: …..So I’ve lost two criminal judges in a couple of days and right now because of those medical challenges they’re facing I had to pull a judge off this case to deal with a person who is in custody on a six- week trial and I don’t have anybody to replace that judge. So it is frustrating because everybody should get to trial in a timely fashion.….

On March 1, 2018: It’s just the frustration of this Court with not having sufficient resources to do the job, despite everybody’s best effort.

So despite my efforts of getting an additional resource from another region, quite frankly, unless, as we talked about yesterday – I just added up, we have 44 homicides scheduled this year in Toronto to be tried. And we’ve been resolving some of them and what we’ve been doing it, but I can only do what I can do and Mr. Lockner, I’m out of, I’m out of options.

The first time I have trial time for this is January of 2019 and the reason for the delay would be the unavailability of this court to be able to provide a judge to do the case. So it’s not something we’ve had to do before in a long trial, but that’s where we are. We’re hoping to get additional judges to complement. We’ve asked the Federal government for that. We don’t have those. It is frustrating, but we can only do with what we got. So….

….And I understand all the accused are ready, able and go to trial as is the Crown, and the fault lies with myself and the Court for not providing a judge.

So in effect the criminal Courts blamed the government for the dysfunction of the criminal justice process as it applies to criminal fraud cases.

Consider Criminal Complaints with Civil Recovery is a Lost Cause

As a result of the risks to fraud victims in not having their complaint adjudicated on the merits in the criminal justice system, and for other reasons as will be explained in subsequent blogs, we recommend to fraud victims that they initially seek recovery through the civil court process, and consider whether a criminal complaint is worthwhile after the civil court process runs its course.

When most fraud victims are put to an election as to whether they would rather recover their loss or see a criminal sanction of incarceration imposed on those who have violated their trust, they want both. When asked a second time, and it is underscored that they have to choose one or the other, they seek recovery over retribution. This is especially the case when they learn that their funds, in the hands of a rogue or frozen in the courts, are at risk of being used by the rogue to fund their criminal defence.

One of the victim lumber companies in the criminal case obtained a civil judgment prior to the hearing of the criminal case. Other victims, who did not sue before the expiry of a two year limitation period and relied on the criminal courts to obtain justice, are now out of time to seek recovery. We underscore that this is the risk fraud victims who rely on the criminal justice system should be aware of.

Judgment for fraud in the civil courts has also been issued against the primary rogues Vincent Dogbatse and Eric Hodgi. The trucker responsible for delivering the fraudulently obtained lumber products, Samuel Aremu, was found liable in the civil courts for civil conspiracy. The criminal case against Hodgi was stayed on request of the Crown due to lack of witnesses, and a warrant for the arrest of Dogbatse remains outstanding. Aremu was given a conditional discharge by the criminal courts for possession of stolen property, but was punished in the civil courts with a $100,000 punitive order (in addition to the loss of the fraud to Gennett Lumber being $168,000): see Gennett Lumber v. Aremu, 2019 ONSC 1345.

Notwithstanding that civil judgments have been obtained against Hodgi, Dogbatse and Aremu, nothing has been recovered as against them. If there is to be a recovery, it will likely be a long term project. Not every recovery effort is worth the investment. Not every criminal complaint results in a hearing on the merits or a settlement. Fraud recovery is a high risk business.

Inquiries

Norman Groot
Investigation Counsel PC
www.investigationcounsel.com
May 1, 2019

Fraud Psychology and the Forensic Process

David Debenham, C.P.A., C.M.A. (Co-Chair of the Fraud Law Group, McMillan LLP)

It is important to parse the forensic process to understand how it works, and where problems can occur. Consider any fact situation. There is:

The actual event (what happened)
The perception of the event (how participants perceived what happened)
The recapitulation of the event (how the event is recounted)
The consensus view of the event (how the event is recorded for posterity).

The actual event is easy enough. This is what actually happened without any observation or analysis being required.

However, we only know what happened through human perception in a variety of forms. First, there may be eyewitnesses. Second, there may be circumstantial evidence that allows us to make inferences as to what happened. Sometimes we need expert witnesses to tell us the meaning, or inferences to make, of what otherwise appear to be innocuous facts.

Then we have to make sense of the evidence into a coherent “story”. Events have to make sense to us. That means we have to put a weight on DNA, fingerprint and other evidence, and attempt to wed it to eyewitness testimony and confessions, and create a story that accords with our everyday experiences and understanding. This is an inherently “human”, and therefore fallible, process. Consider, for example, “The Wells effect” where a jury’s determination of someone’s guilt in a trial setting, is not necessarily connected rationally to evidence that makes a defendant’s guilt more or less probable. Intuitive decision making is in play as unconsciously we order facts in a way that seems “right” to arrive at a “correct” or “comfortable” result that aligns with our worldview. While we may buy toothpaste rationally by objectively comparing limited data, important, complex decisions we typically make more complex decisions in a less rational way. Intuition can play an important role in making decisions such as: Choosing your life partner, selecting the right car to buy, evaluation of a career or job, decision about an education, selecting a meal when eating out, selecting the next book to read, decide how to dress for today, and so on. Our pre-existing beliefs and opinions guide our ordering of evidence into a coherent story. Once we have arrived at the story we believe, we then it as a means to weigh evidence that supports that story (confirmation bias) and react with hostility to evidence that contradicts that story and “stick to our guns” even more (the backfire effect).

The coherent story often is a social process, because “truth” as it is perceived, is usually a social construct. Many participate in this process. The role of the barrister is to tell a compelling story that fits the evidence into a compelling narrative in a forensic setting. However, the advocacy process begins well before trial, with investigators, prosecutors, witnesses, and on-lookers all trying to piece together what happened into a compelling narrative. As their stories are re-told there is an editing process where “inconvenient” facts are changed, “unimportant” facts are lost, and “important” facts are highlighted: The resilient facts build the narrative, and then the narrative molds the facts. Every time a story is repeated, it changes. Tales evolve over time as various facets of the story are exaggerated, diminished, idealized, or vilified. Eyewitnesses who are subject to this phenomenon often “witness” more than they actually saw, as the memory of what they saw, and what they were told, becomes fused in their memory. The controlling narrative, or the molding power of their own worldview, can cause memories to change over time, sometimes radically. Where what they saw does not “make sense” in the context of their own life paradigm or the controlling social narrative, it changes. The amount of change depends on susceptibility to peer pressure, lack of self-confidence, respect for authority, and other factors. In such circumstances, witnesses will often later renounce their own signed witness statements given shortly after the event.

There is a growing body of research in fields such as psychology, cognitive science, political science and sociology showing that people do not make decisions through a purely rational process, and that emotion and a range of cognitive biases play a important role. We think unconsciously, we think socially (by consensus) and we think using established models or stereotypes based on education and experience. The educational process helps professionals establish common perspectives, beliefs and professional experience helps create mental shortcuts that help us make sense of the world around us. These are all brought to bear in creating a narrative surrounding a particular event.

Fraudsters have no boundaries preventing them from controlling the narrative. Credible narratives require stories to be probable, coherent and to correspond to our experience. Following the first rule of salesmanship, the fraudster sells himself before he sells his idea— thus making himself a credible source of information and thus the underlying data more credible. Then, the underlying story is coherent— the underlying logic of inevitable success is sold by a simplistic but coherent concept. Finally, the idea is sold as ultimately “common sense”, although the details of the “black box” have to be kept confidential lest they lose their competitive advantage in the marketplace. The fraudster builds a persona and a narrative that often convinces himself and others to believe almost anything with a mix of charm, charisma, bravado, pressure, persuasion and persistence. The fraudster originates and is then becomes captive to his own reality distortion field in which he and his victims adopt a narrative that distort the underlying facts to make a desired result not only possible but seemingly inevitable. In this world the ruling paradigm screens out bad facts and emphasized good ones, as cognitive dissonance blinds those who are too heavily invested (both literally and figuratively). Having accepted a false reality, investors/follower feel they have no choice but to go on, and go “all in” to make what appears increasingly hopeless to the outside observer, a reality. Facts challenging the accepted narrative are challenged by the fraudster, his shills (knowing accomplices), and dupes (unwitting accomplices) who attempt to maintain control of the narrative by both denigrating their critics, and denying the data upon which they rely. They “accuse the accusers”.

Each profession has its ethical and legal boundaries that limit how far the professional can go to control the narrative by lying to witnesses or suspects, pressuring witnesses to change their testimony, exaggerating or suppressing evidence and the like. When the professional goes too far to aid “their side”, fraud in the form of “cheating” may have taken place, whether it be by investigators (bad faith investigation), (hired gun) experts, prosecutors or defence attorneys. For example, a lawyer shall not do anything that the lawyer considers to be dishonest or dishonorable; knowingly attempt to deceive a tribunal or influence the course of justice by offering false evidence; misstating facts or law; presenting or relying upon a false or deceptive affidavit; suppressing what ought to be disclosed, or otherwise assisting in any fraud, crime, or illegal conduct; knowingly misstate the contents of a document, the testimony of a witness, the substance of an argument, or the provisions of a statute or like authority; knowingly assert as true a fact when its truth cannot reasonably be supported by the evidence or as a matter of which notice may be taken by the tribunal, make suggestions to a witness recklessly or knowing them to be false; dissuade a witness from giving evidence or advise a witness to be absent. [1]

Competing narratives can be a motive for fraud. The fraudster has a narrative that has to be overcome by law enforcement. Law enforcement has a narrative that has to ben overcome by the defence attorney. In each a predecessor has established a narrative that explains events in one way, that they believe is wrong. Because of anchor bias, the successor has extraordinary difficulty in “revealing” the “truth” because the narrative means that few will admit any facts that challenged that narrative, which is “feels” cogent, coherent, and true. The narrative has helped understand the events in question in a satisfactory way, and we do not wish our state of contentment to be upset. What is someone with a competing narrative to do? Remember that narratives are not anchored in, or wedded to, logic and therefore not readily susceptible to logical discourse. Sometimes those with a competing narrative choose to “fight fire with fire” by employing the same underhanded techniques as those who established the original narrative. Such situational fraudsters often feel impelled to their misdeeds to correct or avoid an injustice.

It is important to understand that most people have an internal, personal narrative. A person normally does not see one’ life as a chronological collection of neutral events. A person integrates one’s life as a series of facts and events that are weaved together with self-perception of one’s character to produce a revelatory story. This narrative becomes a form of identity, in which the things someone chooses to include in the story, and the way he tells it, can both reflect and shape who she is. A life story doesn’t just say what happened, it says why it was important, what it means for who the person is, for who they’ll become, and for what happens next.

So, for the grifter, or professional fraudster, they adopt a “persona” to sell themselves much as an actor plays a part— they do what they do out of professional necessity. Police who accept graft often do so because it is an unavoidable part of the job in their view. Movies like “Serpico” show how those who demonstrate that graft is, indeed, avoidable, are harassed for interfering with the worldview that tacitly accepts corruption.

For the opportunist or circumstantial fraudster, they are the hero of their own life story who is forced to by circumstance to become an anti-hero (a good person doing bad things for the right reasons). For law enforcement officials, this is called “noble cause corruption”, with “Dirty Harry” Callaghan the fictional archetype. Once it becomes part of the persona, it is difficult to revert to one’s previously lawful conduct even where the rationalization that led to the bad behavior disappears. Think of the “Godfather”, whose circumstances impelled him into a life of crime, and who rationalized that he simply ran out of time to regain a lawful lifestyle.

In investigating fraud, it is important to understand the personal narrative of the participants to identify, fraudsters, shills, and dupes. If the fraudster is a professional, then a long history of previous frauds is likely. If the fraudster is a situational opportunist, it is important to identify when the situation arose, and track a history of the frauds thereafter along a sloping curve from small isolated frauds in the distant past to frequent, larger frauds during the period immediately prior to discovery.

In investigating investigator/expert witness/lawyer fraud, once again one has to identify the internal narrative as well as the narrative of their fraud (their modus operandi), and identify their shills and unwitting dupes who facilitated their fraud. For the professional fraudster investigator/expert/lawyer, one has to do an extensive audit of their past cases to determine the extent of their fraud. For the situational fraudster, one has to identify the situation that caused or causes the fraud, and identify any past situations that might have led to similar misconduct.

[1] Law Society of Ontario Rules of Professional Conduct, Chapter 5.

What Do Judges Want from Experts?

Justice Markus Koehnen[1]
Ontario Superior Court of Justice

Presented at the 20th Annual ACFI Fraud Conference – April 29, 2019

The title of this paper demands an immediate qualification. I do not purport to speak on behalf of judges generally but can offer only my personal views supplemented by limited anecdotal discussions I have had with judicial colleagues. That said, the question the title poses is capable of a relatively direct answer. My impression of what judges want from experts is: impartiality, independence and education.

My discussion will focus on the concept of impartiality because it has emerged as a more contentious issue in recent years.[2] By impartiality I mean freedom from bias in favour of or against any party to the litigation. Put another way, an expert should be indifferent to the result in the case. The expert is there to help the court, not to help either party.

While impartiality is capable of a simple definition, it is substantially more difficult to put into practice. The fundamental challenge, as others have observed, is that although the litigation process demands impartiality from experts, the process has inherent structural barriers to the very impartiality it demands[3].

I will examine this challenge in four parts. I will explore, first, why courts demand impartiality; second, the structural problems that make impartiality difficult to achieve; third, specific problems that arise out of expert evidence; and fourth I will review a short “To Do” list that may help avoid some of the challenges impartiality poses.

I. Why Do Courts Demand Impartiality?

Experts are usually called on to provide opinion evidence. Opinion evidence is, as a rule, excluded from the court process. As a general rule, however, witnesses are not allowed to give opinion evidence. As the Supreme Court of Canada explained the rule in White Burgess Langille Inman v. Abbott & Haliburton:

Witnesses are to testify as to the facts which they perceived, not as to the inferences — that is, the opinions — that they drew from them. ... While various rationales have been offered for this exclusionary rule, the most convincing is probably that these ready-formed inferences are not helpful to the trier of fact and might even be misleading…[4]

Experts who give opinion evidence are therefore an exception to the general rule. Courts allow that exception to arise only when a judge or jury is unable to form an opinion about an issue because of its complexity or technical nature.[5] So strong is the aversion to opinion evidence that some cases speak of expert evidence being “tolerated”.[6] Since the mid-1990s there has been an unmistakable trend in the case law to tighten requirements surrounding the admissibility of expert evidence.[7] Judges have been specifically instructed to act as gatekeepers to keep out improper expert evidence.

The legal test to determine whether an expert’s evidence is admissible now takes place in two stages.

In a first stage, the party that seeks to introduce the evidence must persuade the trial judge that the proposed expert opinion is:

relevant,
necessary,
not barred by any other exclusionary rule, and
given by a properly qualified expert.[8]

Evidence is relevant if it touches on an issue in the case. Evidence is necessary if it deals with information that is likely to be outside of the knowledge and experience of a layperson. Exclusionary rules refer to other rules of evidence like the hearsay rule which prohibits the introduction of second or third hand information as opposed to a witness testifying to what he or she personally saw or experienced.

In the second, gatekeeping stage, the party seeking to introduce the evidence must establish that the evidence is “sufficiently beneficial to the trial process to warrant its admission despite the potential harm to the trial process that might flow from the admission of expert evidence.”[9] As Justice Doherty of the Ontario Court of Appeal described it at para. 79 of R. v Abbey[10]:

“The "gatekeeper" inquiry does not involve the application of bright line rules, but instead requires an exercise of judicial discretion.  The trial judge must identify and weigh competing considerations to decide whether on balance those considerations favour the admissibility of the evidence.  This cost-benefit analysis is case-specific and, unlike the first phase of the admissibility inquiry, often does not admit of a straightforward "yes" or "no" answer.  Different trial judges, properly applying the relevant principles in the exercise of their discretion, could in some situations come to different conclusions on admissibility.”

The dangers of admitting expert evidence have been described as including time, prejudice, confusion, the danger a jury will be unable to make an effective and critical assessment of the evidence, the complexity of the material underlying the opinion, the expert’s impressive credentials, the impenetrable jargon in which the opinion is wrapped and the cross examiner’s inability to expose the opinion’s shortcomings.[11] There is a risk that a jury faced with a well presented opinion may abdicate its fact-finding role on the assumption that a person labelled as an expert knows more about his or her area of practice than members of the jury do.

Evidence of bias can be used at either one of these stages to exclude expert evidence.

I referred earlier to the tests for expert evidence having become more stringent since the mid 1990’s. This is attributable to a series of notorious cases in Canada and elsewhere. Two of the most infamous Canadian examples involved Dr. Charles Smith and the Motherisk program at Toronto’s Hospital for Sick Children. Dr. Smith was a forensic pathologist. A number of parents were wrongfully convicted of killing their children based on his expert evidence. A subsequent judicial inquiry revealed that Dr. Smith believed it was his job to help the Crown secure a conviction as opposed to helping the court in an impartial manner. A closer review of his evidence revealed that he regularly testified beyond the scope of his true expertise. While the Motherisk program did not result in any convictions, it resulted in a string of parents losing custody of their children to social service agencies based on expert scientific evidence which purported to demonstrate that the parents were drug users. A subsequent judicial inquiry established that the tests were unreliable; the parents were not drug users; and the parents should never have been deprived of their children. As a result of these and other cases, courts have taken a considerably more muscular approach to excluding expert evidence, limiting its use and critically assessing its reliability if admitted.

Although the consequences of opinion evidence by financial experts rarely leads to jail time and even more rarely, if ever, leads to social service agencies taking children from parents, the greater skepticism with which judges view experts has also been applied to financial experts. This greater skepticism towards financial experts has led to adverse judicial comments about individuals who do not demonstrate impartiality. A few examples from recent cases make the point:

“It is shocking to me that two reputable appraisers, taking their duties as experts seriously, namely to be independent and uninfluenced by the party who retained them, could come to such different conclusions, using essentially the same approach and methodology for each of these two comparables.  I find it suspect when each appraiser’s opinion so clearly aligns with the interests of the party who hired him.  While I recognize that valuation is an art, not a science, I would have expected the ultimate opinions to have been much closer to one another.”[12]

“[Names of plaintiffs’ experts] describe themselves as forensic accountants.  They have experience and qualifications in matters of financial reporting and disclosure, GAAP and accountants’ negligence.  In the course of their reports, however, they repeatedly purport to give opinions on matters outside their proven expertise, including matters of corporate governance and securities law. … [Name of expert] has no proven qualifications to opine on governance principles or securities law, even if evidence of the latter was admissible, which it is not.”[13]

“The willingness of an expert to step outside his or her area of proven expertise raises real questions about his or her independence and impartiality.  It suggests that the witness may not be fully aware of, or faithful to, his or her responsibilities and necessarily causes the court to question the reliability of the evidence that is within the expert’s knowledge.”[14]

[Expert’s name] engaged in blatant advocacy, making exaggerated, inflammatory and pejorative comments and innuendos, which were argument rather than evidence[15].

[Name of defence expert] acknowledges that an expert’s approach to the issue of auditors’ negligence should not vary depending on the side for which he is called to testify; but I was disappointed to learn that he did not adopt that even – handed approach in the instant action.  …[This] negatively impacted his credibility and usefulness as an “independent” expert[16].

Your credibility is all you have as an expert witness. A judge or jury has difficulty making decisions about technical areas in which they have no expertise. That is why you are there. No matter how solid your technical arguments, if they are tainted by lack of impartiality, your evidence will be rejected as unreliable even if it passes the formal test of admissibility. Getting your evidence admitted simply means that the trial judge or jury will hear it. It does not mean they will believe it.

Bias in your evidence is fatal for two reasons. First, it can lead you to lose the case for the party that retained you. In Gould v. Western Coal Corporation, the plaintiffs needed leave of the court to bring a claim for secondary market misrepresentation under the Securities Act. That application turned on expert evidence. The judge rejected the plaintiffs’ application for leave in large part because he rejected the evidence of their expert:

[The plaintiffs’ expert] is severely compromised by his failure to stick to matters within his expertise, by engaging in impermissible fact-finding and by becoming an advocate on behalf of his client, rather than an impartial expert seeking to assist the court. [His] exaggerated and speculative assertions only serve to undermine his credibility and independence. In light of these infirmities, I have no confidence whatsoever in his evidence and there is no reasonable possibility that his evidence will be accepted at trial.[17]

Second, a finding of bias discourages future retainers. Almost all Canadian reasons for judgment on any material issue are available on CanLII, a free, fully searchable website to which anyone with a web browser has access. It takes only seconds to find what a judge has said about you in an earlier case. Rest assured that the party on the opposite side of you in any lawsuit will take those few seconds. If a judge has made adverse comments about your evidence, the party opposite will find some way of getting that in front of the judge or jury in any future case in which you testify. Anyone considering hiring you will do a similar search. You need not be a financial expert to connect the dots.

II. What Makes Independence and Impartiality so Difficult to Achieve?

Now if bias loses the case and impedes future retainers, the solution seems simple: just be impartial. Yet people continue to fall afoul of the requirement for impartiality. Are they simply “bad people”? Probably not.

The difficulty is that there are fundamental structural issues with the way experts are retained and used in an adversarial litigation system that makes impartiality difficult to maintain even for those operating on the highest ethical plane.

These issues were canvassed by Justice David Paciocco, in “Unplugging Jukebox Testimony in an Adversarial System: Strategies for Changing the Tune on Partial Experts”[18] Justice Paciocco now sits on the Ontario Court of Appeal and is one of Canada’s leading evidence scholars. He identifies five psychological biases that can inadvertently taint an expert’s impartiality.

The first is selection bias. Selection bias arises the first time you even speak with someone about a retainer. The unspoken understanding from the first phone call is that the lawyer looking for an expert will only hire someone who supports the position the lawyer is advancing. In some sorts of cases experts are clearly divided as ones who testify only for the plaintiff or only for the defence. Even if you do not fall under that category or are being hired for a case that does not fall into the basket of litigation characterized by this problem, you know from the get-go that your retainer depends on providing an opinion that supports the position of the party contacting you.

Second is association bias. Association bias arises from the natural human tendency to be helpful. We all want to help those who ask for our assistance let alone to those who employ and remunerate us.

Third is confirmation bias; the tendency to “process information by looking for, or interpreting information that is consistent with one’s existing beliefs.”[19] It often leads us to ignore inconsistent information. The more the area is subject to interpretation, the greater the danger of interpreting to find what we are looking for.

Fourth is professional bias. An expert who regularly testifies for one type of litigant has a vested financial and personal self-interest in continuing down that path. The financial self-interest is obvious: no one wants to see a steady stream of revenue dry up. The personal self-interest is slightly less obvious: there is a natural human reluctance to turn one’s back on views and opinions one has held for years.

Fifth and finally, is noble cause distortion. This is the bias that arises from believing that you are “on the side of good.”[20] While accountants in civil litigation will rarely view themselves as being in the same position as pathologists convicting “child killers” or scientists protecting children from “abusive parents,” they are nevertheless subject to their own forms of noble cause distortion. The lawyer who retains you has a mandate to pursue zealously the interests of his or her client. The lawyer is not meant to be impartial. As a result, the adversarial system leads many lawyers to “believe,” at least to a degree, in the right of their client’s cause. The lawyer’s communication with you risks being influenced by his or her mandate. There is a substantial risk that the lawyer will not be communicating with you in a truly unbiased manner. I would venture to say that the opposite is far more likely the case. In addition, financial experts are intelligent people with an interest in their field. That inevitably leads them to have policy views about a variety of issues. Some may espouse particular social, economic or professional views about the degree of disclosure required in financial statements, the manner in which to apply particular accounting principles, the prevalence of fraud and so on. Such views inevitably affect the opinions you advance and may impact your impartiality.

Anyone or more of these biases creates a risk of allowing partiality to creep into one’s approach to an issue without becoming aware of it.

III. Specific Problems Arising out of Expert Evidence

Let me turn now to some of the common issues that raise concerns about an expert’s impartiality.

(i) Testifying Outside of Area of Expertise

By far the most common issue is the expert who testifies outside of his or her scope of expertise. The first stage of your evidence in court will be one that qualifies you to testify as an expert in a particular area. The lawyer calling you asks you questions about your education and experience to build up your credibility and then “tenders” or presents you as an expert with respect to particularly defined issues or in a particularly defined field.

Given that the role of an expert is to assist the court, experts who testify to issues outside of their area of expertise are, by definition, not assisting the court because they are speaking to matters in respect of which they are not qualified to evidence. An expert who does so is immediately viewed with scepticism.

This issue of scope of expertise arises at various junctures in your relationship with the lawyer who retains you.

First, the initial contact. Everyone called about a potential retainer would obviously like to get the retainer. That may lead some to characterize their expertise as being suitable for the assignment. There can be a tendency to reframe the issue as the lawyer describes it into an issue that falls more closely within the expert’s area of specialization. That will likely lead to an unsatisfactory outcome. In a best case scenario the lawyer will notice the issue when he receives your report. In a worst case scenario the characterization will appear for the first time when you are cross-examined at trial. You will certainly have an unhappy client and potentially an unhappy judge. Be honest about your area of expertise and remain squarely within it, even if it means declining potential retainers.

It is, however, much easier than you might think to drift into evidence outside of your area of expertise, especially if you have more broadly-based policy interests. Recall the earlier example of the accountant with expertise in GAAP, financial reporting and disclosure. He was criticized for, among other things, testifying about issue of corporate governance. Accountants or auditors may have strongly held views about corporate governance that arise from their exposure to governance issues that arise out of interactions between auditors and clients. They might in fact have fairly deep experience with governance as it relates to audit issues. Those experiences can lead an auditor to stray off of pure audit issues and into governance issues.

This risk underscores the importance of focussing carefully on the definition of your expertise. Counsel often leave as an afterthought, the precise definition of your expertise rather than bringing laser sharp focus to it. Returning to our accountant with views on governance, if the accountant had been properly qualified as an expert on corporate governance issues affecting audits there would be no difficulty with the auditor testifying about corporate governance. This speaks to the need to think carefully about exactly what the report says and exactly what the expert will testify about during examination in chief to ensure that the expert is qualified in each of those areas. Keep in mind that expertise can be established through research or experience. Thus, an auditor who may have no formal credentials with respect to corporate governance but who has spent decades experiencing corporate governance as it affects audits may well be qualified to testify about it. It is the failure to anticipate that potential extension of expertise that can cause the problem.

(ii) Partisan Language

The language contained in your report and the language you use when testifying may also tend to suggest bias. Not only does inflammatory language deprive you of a sense of impartiality but so does language that tends towards absolutism or that expresses a view about an opposing party’s motivation. Motivation is unlikely to be within an accountant’s area of expertise. Specific examples of language that might tend to suggest bias on the part of the writer include expressions like:

No reasonable person would (followed by what the opposing party did);
particular conduct is consistent with…
… is suspected or I suspect…
… appears to be unusual
… Could be (followed by a statement of negative conclusion)
… Speaking about the state of mind of someone other than yourself (for example a concern of the reader of a financial statement)

While there are circumstances in which these sorts of expressions may be appropriate, they should cause you to pause and ask yourself:

Is it true in the strictest sense of the term that no reasonable person would ever do a particular thing?
Is the conduct also consistent with something other than the negative conclusion you are suggesting?
Are you truly giving an opinion based on knowledge and experience or are you speculating about what someone else might think or speculating about why someone else might do something?

It may well be that you do have knowledge and experience that qualifies you to speak about someone else’s motivations or thoughts. If such is the case, it is important to explain why you do in fact have insight into the motivations or state of mind of others so as to remove such statements from the realm of speculation and elevate them to the realm of informed opinion.

(iii) Cherry Picking

Cherry Pickingis the selective choice of information, or approaches to an issue that lead an expert to favour the party that retained him or her.[21] While no one single instance of cherry picking may sway the opinion, a series of choices can easily do so. The danger cherry picking is that it is often unconscious. It can be the product of confirmation bias; the tendency to absorb and focus only on information that confirms our own views. It is ripe fodder for cross-examination and imposes serious challenges to the expert’s reliability and credibility.

Cherry picking can lead an expert to ignore contradictory facts or approaches. It can also lead an expert to sugar coat problems when communicating with their retaining counsel. It is important to be direct, frank and candid with the lawyer retaining you about any difficulties in the case. If there are limitations on the sort of opinion you can give or if you are equivocal about the sort of opinion you can provide, you retaining lawyer must know about them. This is not the time for sugar coating or indirect language. Implications of what you are saying may be obvious to you as someone schooled in the field. They will not necessarily be obvious to the lawyer retaining you. Leave nothing unsaid or to be implied when giving your retaining lawyer any “bad news” make sure he/she understands it fully. The lawyer will be making strategic decisions going forward based on your views. If he or she does not fully understand the limitations on those views, you are preventing them from making the appropriate strategic decisions.

(iv) Critique Reports

Critique reports are reports that do not offer an opinion themselves but simply critique an opposing expert. Courts are inherently suspicious of such reports. It is easy to critique the work of another without having to take a position on the issue yourself. It is easy to critique someone else’s work even if you fundamentally agree with it. Courts have recognized these frailties and tend to give little weight to such reports.[22] There have however been limited carve outs for critique reports that critique the methodology of another expert.[23] As a general rule, experts should treat such retainers with caution and ensure that there is a specific reason for which they cannot provide their own opinion on the merits.

(v) Intellectual rigidity

Judges tend to work in nuances. It is rare that a judge faces an issue that is either black or white or that is capable of a bright line delineation. More often than not, a judge is faced with the question of where, on a spectrum of various shades of grey, a particular case should be placed. Experts who take a rigid right versus wrong view of an issue tend to be viewed with scepticism. Such views are all the more suspicious in experts because they have only limited information. Experts’ reports are based on assumptions, even minor changes in which can lead to different analytical outcomes. An expert who refuses to appreciate this is likely to be found to be unreliable. Characteristics of such experts include: asserting bald, conclusory positions without explaining why that position is the correct one; using overly definitive or pejorative language such as ridiculous, impossible, no reasonable person and so on; and refusing to modify or moderate their opinions when faced with competing views or changed factual assumptions.

(vi) Ghost Writing

An issue of emerging concern is that of ghost written expert reports.[24] Ghost written reports are those written, not by the testifying expert but by a member of his or her staff. While the issue has emerged most acutely in reports stemming from medical examinations, it also has relevance to financial experts.

The process of drafting a report influences your views. As you work directly with the evidence, you develop and refine your views; you bring nuance to the analysis. A report written solely by another person, about which you then testify as the “senior expert,” runs the potential of losing that nuance. This is not to say that you cannot delegate certain tasks to more junior members of your staff or be assisted by others, but it does mean that the testifying expert should continue to hold the ultimate pen. Put another way you can delegate tasks but not judgement.

(vii) Contradicting Previously Expressed Views

An expert who, in his opinion, contradicts positions he or she has taken in the past without having an easily comprehensible reason for the difference of view, is bound to be seen as biased. You should assume that the opposing party will have poured over anything you have published or presented to look for the expression of views that contradict those you are voicing in the case at hand. Even more dangerous is the opponent who pours over court files to search for opinions you have given in other cases. If in another case, you have taken a view that contradicts the approach you are taking in the case at hand, you face a serious challenge to your credibility.

(iv) Impartiality To Do List

To decrease the risk of being singled out for criticism in a judge’s reasons, I offer the following modest To Do list:

Be direct, frank and candid with your retaining lawyer about any limitations on your expertise and any “bad news” about the case.
Provide, in your report, all of the reasons for which you came to the opinion you did. Leave nothing implied or unspoken.
Ensure you are qualified as an expert in a way that allows you to speak about all of the reasons on which your report is based.
Ensure you are providing your true opinion, not arguments to help your retaining lawyer.
Assume the trier knows nothing about your area of expertise. Use simple direct language in your report and when testifying.
Remove all pejorative, inflammatory or overly definitive language. Removing adverbs and adjectives is a good place to start.
Ensure your approach and methodology is consistent with past publications, presentations and reports. If it is not, ensure you have an easily comprehensible reason for the difference.
Review your factual assumptions and approaches for cherry picking. If there are different approaches, address them and explain why they are not appropriate. Be candid about how they would affect your view.
Would your opinion would be the same if the opposing party had retained you?
Don’t argue the case as a witness. Concede points when appropriate if given changed assumptions.

Conclusion

By far the greatest attribute of an expert witness is that of impartiality. Judges and juries are genuinely looking for help to deal with complex, technical issues. They are not looking for advocates. An expert who offers help, not advocacy, will have and retain authority in the court room.

Although I cited earlier several examples of courts that criticized experts for lack of impartiality, the good news is that courts also recognize and appreciate experts who are impartial. Just as courts openly criticize experts who are biased, they also praise experts who demonstrate impartiality:

Mr. Carlucci was an excellent witness.  His analysis was methodical and logical.  He did not hold on to positions if he was successfully challenged on them.  Mr Carlucci’s demeanor suggested he had no personal interest in the outcome of the case; rather, his role was to analyse where the trust funds had gone, and advise the court.  He did.  I accept his analysis and opinion.[25]

I hope some of the foregoing suggestions will help you avoid being criticized for your approach and instead have you singled out for excellence.

Footnotes

[1] I am greatly indebted to Patrick Harris, a law clerk at the Ontario Superior Court of Justice for his research assistance.

[2] That said, I will explain briefly the concepts of independence and education. By independence I mean the ability to be free of financial or psychological pressure from the party retaining you. Simply receiving a fee from the party that retains you will not compromise independence. An ongoing relationship with the party that retains you may. Similarly, compensation that depends on the result in the case compromises independence. In a similar vein, a family connection with a party to the case or the lawyer retaining you would also compromise independence. By education I mean the ability to educate a judge or jury about matters that can appear complex and technical to the layperson.

[3] 2015 SCC 23 at para. 14.

[4] R. v. Mohan, [1994] 2 S.C.R. 9

[5] R. v. D.D, 2000 SCC 43 at paras. 51, 56.

[6] 2015 SCC 23 at para. 14.

[7] R. v. Mohan, [1994] 2 S.C.R. 9

[8] R. v. D.D, 2000 SCC 43 at paras. 51, 56.

[9] R. v. Abbey, 2009 ONCA 624 at para. 76

[10] 2009 ONCA 624

[11] Abbey at para. 90.

[12] Plese v. Herjavec, 2018 ONSC 7749 at para. 108

[13] Gould v. Western Coal Corporation, 2012 ONSC 5184 at para 82

[14] Gould v. Western Coal Corporation, 2012 ONSC 5184 at para 85

[15] Gould v. Western Coal Corporation, 2012 ONSC 5184 at para 89

[16] Livent Inc. v. Deloitte & Touche, 2014 ONSC 2176 (Ont. S.C.J.)

[17] 2012 ONSC 5184 at para 261

[18] 34 Queen’s L.J. 565 (2008-09)

[19] Encyclopedia Britannica: confirmation bias

[20] Paciocco at p. 582.

[21] James McAuley: The Expert Accountant in Civil Litigation 2d ed. , LEXISNEXIS at page 368

[22] M v. F, 2015 ONCA 277; Christoforou v. John Grant Haulage Ltd., 2016 CHRT 14

[23] Halton Children’s Aid Society v. A.W., 2016 ONCJ 358

[24] Jennifer Hunter, Expert Evidence for Litigators, Law Society of Ontario October 29, 2018 at page 2-4

[25] Plese v. Herjavec 2018 ONSC 7749 at para 60.

The Door That’s Opening

David Debenham (Co-Chair- Fraud Law Group, McMillan LLP)

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”

Alexander Graham Bell

In Canada, it is common for high net worth individuals to maintain their privacy by using nominees, agents, shell companies and the like to protect others from learning of their involvement in a variety of business transactions. That did not seem so offensive when ordinary Canadians were anonymous in their own business transactions simply because there were too many transactions and too little technology to monitor them. Now, however, that has changed. Our digital dossiers now extend well beyond our viewing patterns on Google, or buying patterns, on Amazon, to information that predicts our patterns of behaviour based on various stimuli. Seemingly mundane activity, such as who, and what, I “like” on Facebook — can be leveraged to reliably predict, among other things, intelligence, personality traits and politics. The company Cambridge Analytica, advertised that it used data analysis techniques commonly used in jury selection to instrumental in identifying supporters, persuading undecided voters, and driving turnout to the polls, on Donald Trump’s behalf. All these little actions we think of as our “private” business have become public actually data points that are aggregated and wielded to manipulate our behavior in ways we don’t recognize, let alone understand. When a data firm cracks open our smart phone or laptop, we may never find out what it has learned or inferred from the data obtained. We also have no opportunity to correct incorrect inferences.

Many businesses today find themselves locked in an “information race” with competitors to see who can convert customer secrets into the most pennies. To try to win, they are building digital dossiersof facts about every member of our society in an effort to capture market share. One Harvard Professor has argued that these databases will grow to connect every individual to at least one closely guarded secret. This might be a secret about a medical condition, family history, or personal preference. “It is a secret that, if revealed, would cause more than embarrassment or shame; it could lead to serious, concrete, devastating harm. All these secrets will be placed “a database of ruin“[1]. Consider the most famous recent example of big data’s utility in invading personal privacy: Target’s analytics team can determine which shoppers are pregnant, and even predict their delivery dates, by detecting subtle shifts in the purchasing habits of their customer. This is the exciting possibility of Big Data, but for privacy, it is a recipe for disaster.

Now recall George Orwell’s “1984,” where the working class “proles” are spared a life of constant surveillance, while higher-ranking members of society are exposed to Big Brother’s watchful eye. In our society do we really want to expose higher ranking members of society to more, rather than less surveillance? Will gated communities and phalanxes of security guards be enough to protect them in a data-centric world where the highest value is “transparency”, and databases of ruin become prevalent to manipulate the behavior of those who are so wealthy that money no longer can be used as a lever of controlling conduct? In an 1890 paper called “The Right to Privacy”, Samuel Warren and Louis Brandeis cited “recent inventions and business methods” — including instant photography and tabloid gossip — that they claimed had “invaded the sacred precincts of private and domestic life.” They argued for what they called the right “to be let alone,” but also what they called “the right to one’s personality”[2]. The authors noted:

“The press is overstepping in every direction the obvious hounds of propriety and of decency. Gossip is no longer the resource of the idle and of the vicious, but has become a trade, which is pursued with industry as well as effrontery. To satisfy a prurient taste the details of sexual relations are spread broadcast in the columns of the daily papers. To occupy the indolent, column upon column is filled with idle gossip, which can only be procured by intrusion upon the domestic circle?”

With the press being “democratized” into blogs, and business methods morphing into big data analytics, whither our right to privacy? Now that every sip I take, every breath I take, every move I make, every bond I break, is being watched and analyzed, and monetized, privacy is not seen as a right but as a luxury good. WE now have to buy premium products to protect our browsing habits from sale. We are essentially paying a data tax for using the technology of every day life.

The surveillance economy works on such information asymmetry: Data-mining companies know everything about us, but we know very little about what they know. We have lost our “privacy” so we don’t know why the rich and anonymous should not lose theirs. “We’ve arrived at a place where public institutions and figures can be precious about their privacy in ways we’re continually deciding individual people can’t”[3].

In such a world it is a democratic value for there to be universal transparency. The “data base of ruin” must include the dirty secrets over everyone, especially the titillating gossip fodder of the rich and anonymous. What is the ideological justification for this? Law and Order, the typical foil to the right to privacy. “If you have done nothing wrong, you have nothing to hide”. Today law and order is fighting terrorism, and its weapon of choice, money laundering. Tax authorities have joined in to fight tax evasion. Any attempt to hide the true participant in a transaction must be seen as aiding terrorism, money laundering, and/or tax evasion.

Laws in Canada that allow one person to conduct business on another person’s behalf without disclosing their relationship, including agents, trustees, nominee directors and nominee shareholders are suspect, as effective anti-money-laundering (AML) and terrorism financing (TF) regimes would legally require all trustees, agents and nominees to disclose their status to government officials, financial institutions and designated non-financial businesses and professions (DNFBPs). Powers of attorney are, it is said, frequently used to perpetrate real estate fraud, and may be abused to obscure the true ownership or control of the holder of the power of attorney. Trust laws in Canada easily allow for the abuse of trusts to obscure true ownership or control for criminal purposes, it is argued. Currently, provincial land title registration systems collect only registered owners’ information – not beneficial ownership information. Indeed trust information typically cannot be registered on title. This, it is argued, can provide a cover of legitimacy for properties paid for through proceeds of crime, including proceeds of corruption, and it is impossible for authorities to ascertain the true owners of property.

In this world, privacy laws may close some doors, while transparency “law and order” policies, open others. Governments are ending anonymous company ownership by creating open, public registers of the true “beneficial” owners of companies – the individuals who ultimately control or profit from a company. Open registers of beneficial owners make it harder for corrupt individuals to hide their connection to illicit flows of capital and help authorities recover stolen assets, prosecute criminals and collect taxes. Query whether exemptions should be provided in cases where access would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable.

In Canada, amendments to the Canada Business Corporations Act will require private companies to register “individuals with significant control”. Those individuals with either a 25-per-cent interest in the corporation or who have a “significant influence over the corpororation” will need to register a document including their name, birth date, address, tax jurisdiction, the date they acquired significant ownership or control and for which they ceased to have such control and a description of why they meet this criteria. The register is not a public document but must be held with the corporation and made available to shareholders of the corporation and its creditors, as well as, if requested, Corporations Canada. This very private personal information of individuals is going to be in this register, potentially available to shareholders, creditors, and investigative bodies of the corporation for a significant period of time. According to the federal Department of Finance, provincial and territorial finance ministers from across the country have agreed in principle an intention to produce legislative amendments “to ensure corporations hold accurate and up to date information on beneficial owners that will be available to law enforcement, and tax and other authorities”[4]. British Columbia and Manitoba are leading the provinces in promulgating their version of transparency for beneficial ownership of “private” companies.

Implications for Investigators

Will beneficial ownership registries be open to those who sue civilly? Will allegations of fraud and piercing the corporate veil become more prevalent in order to get at that information? Will DAGG orders be used to get at public investigators’ files that contain that information? Will “whistleblowers” with access to those registries use them as a “data base of ruin”?

[1] https://hbr.org/2012/08/dont-build-a-database-of-ruin

[2] https://www.cs.cornell.edu/~shmat/courses/cs5436/warren-brandeis.pdf

[3] https://www.nytimes.com/2017/05/09/magazine/how-privacy-became-a-commodity-for-the-rich-and-powerful.html

[4] https://www.fin.gc.ca/n17/data/17-122_4-eng.asp updated to https://www.canada.ca/en/department-finance/programs/agreements/strengthen-beneficial-ownership-transparency.html

When Lawyer Misstatements Amounts to Civil Fraud

Norman Groot, Investigation Counsel PC

This article summarizes a recently published decision from the Ontario Court of Appeal which somewhat clarifies the where the line is drawn between a lawyer’s fair and zealous advocacy for their client and their liability for civil fraud for deceiving the Court and opposing counsel with false statements.

In our fraud recovery litigation, from time to time, we encounter lawyers for alleged fraudsters who make positive statements on behalf of their clients with the intention of having the court and opposing counsel rely the statements as if they are honest. In other words, we deal with lawyers who seek to give the impression that, by virtue of their profession, their statements not supported by evidence are honest and they not being used as a tool by the client to dupe the Court.

As an example, we recently dealt with a rogue’s lawyer who advised the Court, in the context of a civil contempt proceeding against the rogue, that an adjournment was necessary because the rogue was in police custody and therefore attend court. In fact, this lawyer’s statement to the Court was not true. This false statement was made after the lawyer was aware of his client’s long criminal record for fraud and breached orders to attend court, and after the lawyer was aware that his client had lied to the Court on numerous occasions in prior civil contempt proceedings.

In the example discussed above, the issue became whether the rogue’s lawyer should be personally liable for costs. The lawyer made similar false statements at the subsequent contempt hearing based on his rogue client’s unverified information, and then filed an affidavit with false information sworn by the rogue in yet a third adjournment attempt in the same contempt proceeding. This behaviour, in the absence of due diligence, raises the issue of how far will a Court let a lawyer go with making false statements before a sanction will be imposed.

The Court of Appeal in Paulus v. Fleury, 2018 ONCA 1072 provides some insight into this issue.

The Superior Court Decision: Paulus v. Fleury, 2018 ONSC 1188

On February 20, 2018, the motions judge in Paulus v. Fleury ruled that statements made by the plaintiff lawyer to defence counsel at a pre-trial to induce a settlement in a personal injury action amounted to civil fraud, and based on this finding the Court set aside a settlement for $850,000 agreed to at the pre-trial. The Plaintiffs appealed the decision that their lawyer engaged in civil fraud, and sought an order to enforce the settlement.

On December 21, 2018, the Ontario Court of Appeal overturned the finding that the plaintiff lawyer’s statements to defence counsel amounted to civil fraud, and held the settlement reached at the pre-trial was enforceable. The Ontario Court of Appeal relied on the recently released Supreme Court of Canada decision in Groia v. Law Society of Upper Canada, 2018 SCC 27, to conclude that a lawyer does not engage in misconduct if he or she acts on his or her client’s information in good faith.

The facts in Paulus v. Fleury pertain to a garden variety motor vehicle accident. At the pre-trial conference, plaintiff counsel advised the Court, defence counsel, and the defendant adjuster that the plaintiff would call third party witnesses who were “independent” and “good, solid witnesses.”

In reliance on the character of the third party witnesses, and for other reasons, the defendant agreed to settle. Subsequent to settlement, the defendant learned that the witnesses the plaintiff lawyer had referred to were not independent, and were not likely to be credible. The defendant asked the Court to set aside the settlement based on “false representations of counsel [that] would create a real risk of clear injustice to the defendant” (para 34).

The motions judge relied on the test for civil fraud as set out by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, at para. 87, and held that:

the statement of plaintiff counsel that the witnesses were “neutral” was false,
plaintiff counsel knew the statement was false or was reckless in making the statement,
the purpose of making the false statement was to have the defendant believe the plaintiff’s case was stronger than it was,
the defendant did rely on the false statements of plaintiff counsel, and
as a result the defendant incurred a loss in the sense that they agreed to pay more than the case was worth (para 51).

The motions judge further held that the plaintiff lawyer was bound by the doctrine of honesty and good faith in contractual dealings as declared by the Supreme Court in Bhasin v. Hrynew, 2014 SCC 71. In other words, if one choses to make a statement, it must be an honest statement in the context of contractual dealings.

The motions judge stated “it is obvious that counsel have a duty not to lie or make knowingly misleading factual statements” and that this duty is owed to both the Court and to opposing counsel (paras 58 to 59). The motions judge acknowledged that an opposing lawyer is not obligated to disclose weaknesses in his client’s case, but if a lawyer raises an issue, then the statements he or she makes must be honest (para 62).

The Court of Appeal Decision: Paulus v. Fleury, 2018 ONCA 1072

The Court of Appeal noted that the motions judge did not have the benefit of Groia v. Law Society of Upper Canada, 2018 SCC 27, at the time he heard the motion. Groia is relevant because of its discussion regarding a lawyer’s duty of resolute advocacy on behalf of a client. That duty is relevant to an assessment of whether submissions by counsel amount to civil fraud.

In Groia, the Supreme Court held that the fact that a lawyer is mistaken is not a basis in itself for a finding of misconduct. Where counsel challenges opposing counsel’s integrity, that challenge does not amount to professional misconduct if the allegations are reasonably based and made in good faith, even if counsel is mistaken (para 12).

In Groia, the Supreme Court further held that the impact of an accusation of professional misconduct could so severely affect the reputation of the recipient lawyer that it is appropriate to require both good faith and a reasonable basis for the allegation. The Court stated:

[For a lawyer], maintaining a reputation for practicing with integrity is a lifelong challenge. Once sullied, a lawyer’s reputation may never be fully restored. As such, allegations of prosecutorial misconduct must have a reasonable foundation. …The consequences for the opposing lawyer’s reputation are simply too severe to require anything less than a reasonable basis for allegations impugning his or her integrity.

The Court of Appeal noted that a lawyer’s duty of resolute advocacy has limits. As Rule 5.1-2(e) of the Law Society of Ontario’s Rules of Professional Conduct indicates, when a lawyer is acting as an advocate, he or she shall not “knowingly attempt to deceive a tribunal by offering false evidence, misstating facts, presenting or relying upon a false or deceptive affidavit, suppressing what ought to be disclosed, or otherwise assisting in any fraud, crime, or illegal conduct.”

The Court of Appeal held that the statements of the plaintiffs’ lawyer were not statements of fact, but rather statements of opinion for which there was a reasonable basis at the time the statements were made. The Court of Appeal noted that “there was no indication of a criminal record that might undermine the witnesses’ credibility or any other history of dishonesty” (para 23).

The Court of Appeal characterized plaintiff counsel’s statements as a “legitimate exercise of advocacy. No complaint could have been made if counsel had provided a jury with the same observations concerning the quality of the witnesses in issue. Opinions as to whether someone is a good or independent witness are as open to debate and disagreement as opinions as to whether someone is a good lawyer” (para 24).

When do False Statements by Lawyers Amount to Civil Fraud?

In Paulus v. Fleury, the Court of Appeal held that a factual misrepresentation by counsel in judicial proceedings could amount to deceit or civil fraud when, for example, counsel tender a forged cheque as evidence of payment of a debt knowing the cheque was a false document. “In those circumstances there would be no reasonable basis for the factual assertion; nor could it be said that the statement was made in good faith” (para 30).

In applying this logic to the fraudulent adjournment that we were dealing with, it suggests that a lawyer should not make statements to the Court if the lawyer is basing statements solely on unsworn information from a rogue. If the lawyer takes the risk of making statements based solely on information from a rogue, then the lawyer has a duty to disclose his or her false statements once the dishonest nature of the statements is known to him or her.

The bottom line in the Paulus v. Fleury decision was the Court of Appeal’s observation that mistakes by lawyers are a “frequent occurrence”. Counsel may lose credibility with the Court and their colleagues if they are not scrupulously careful about factual assertions, or if they advance arguments with no reasonable foundation, but these should not amount to civil fraud in this context unless there is neither a reasonable basis for the statements nor a good faith belief in their accuracy (para 29).

Non-Prosecution Agreements, Deferred Prosecution Agreements, and Remediation Agreements

David Debenham, McMillan LLP

A Non-prosecution agreement (“NPA”) , a Deferred prosecution agreement (“DPA”) and a Remediation Agreement (“RA”) are voluntary arrangements between a criminal prosecutor and usually a corporate accused facing white collar criminal charges, in which the accused receives a conditional amnesty on certain terms and conditions instead of going to trial on charges of criminal misconduct. Fulfillment of the conditions results in dismissal of the charges, whereas breach of the conditions results in an automatic guilty plea. Under the NPA, charges are threatened, but not filed, under the DPA charges are filed, but do not proceed. Since there is no court filing, there is no need for an NPA to become public, although it is common practice to publish them on government websites. Common terms in such agreements include full disclosure of the particulars of the offence, payment of a fine, paying restitution to any victims of the criminal activity, waiver of any limitation periods, and the implementation of a remediation and ongoing compliance program to ensure no repetition of criminal behavior in the future.

While such agreements are common in the United Kingdom and the United States, Canada was not receptive to such agreements because of the strict compartmentalization of law enforcement officials and Crown prosecutors, that made negotiations untenable. For example, full disclosure to the police provided no assurance of an agreement being entered into, as the Crown prosecutors had to take a fresh, independent look at the matter, at which time they might decide to prosecute with all of the accused admissions in hand. Also problematic, was the fact that there was no mechanism to bind the police and the prosecution to any arrangement other than a “gentlemen’s agreement” that could be undone at any time for any reason, as there is no statute of limitations in Canada, and Charter protections only come into effect once charges are laid. Once charges are laid, control of the prosecution is out of the hands of the police, and under the control of the Crown Prosecutors, who are far more comfortable with suspended sentences than stays of proceeding and dismissal of charges involving complex compliance monitoring.

With the attitude toward white collar crime moving away from trials and punishment to one of creating a culture of ongoing corporate compliance, Canada chose to implement its own form of DPA, called a “remediation agreement”. As a result, PART XXII.I of the Criminal Code was enacted to provide for “an agreement between an organization accused of having committed an offense and a prosecutor, to stay any proceedings related to that offense if the organization complies with the terns of the agreement. Under s. 715.32 a prosecutor may enter into a remediation agreement if there is (a) a reasonable prospect of conviction, (b) the offense was not committed by a criminal or terrorist organization and did not result in serious bodily harm or injure the national security, (c) the prosecutor believes that such an agreement is in the public interest, and (d) the Attorney General has consented to the negotiation of a remediation agreement. In considering the public interest, the prosecutor must consider (a) the circumstances under which the offence was brought to the attention of the investigative authorities (e.g. was there voluntary disclosure by the offender?), (b) the nature and gravity of the offence, including its effects on any victims, (c)whether the offender has made reparations and taken steps to avoid further occurrences (d) whether the organization has disciplined those involved in the offence, (e) the degree of involvement of senior officers of the organization, (f) whether the organization has fully disclosed those involved, and their degree of involvement, (g) the organization’s previous criminal and regulatory record, and any previous remediation agreements, any other factor the prosecutor deems relevant.

Notwithstanding the above, s. 715.32(3) of the Criminal Code confirms that in charges involving bribery of foreign government officials, the prosecutor shall not consider the the national economic interest or the reputation of the organization and individuals involved. This specific provision was required by Canada’s obligations under Article 5 of the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions, which states that “Investigation and prosecution of the bribery of a foreign public official shall … not be influenced by considerations of national economic interest…or the identity of the natural or legal persons involved”. The treaty and the Criminal Code provision therefore prevents a “beggar thy neighbor” approach where organizations corrupt foreign government officials in order to secure and enhance domestic employment.

Where a remediation agreement has been entered into, it must be approved by the court that would otherwise have been the venue for the criminal trial. If approved, the terms of the agreement are published, unless the court orders otherwise.

The prosecutor’s decision as to whether or not to enter into negotiations for a remediation agreement is purely an act of prosecutorial discretion and is not reviewable by any court.[1]

The Director of Public Prosecutions (“DPP”) is the Deputy Attorney General of Canada. (DPPA is the enabling statute. The Public Prosecution Service of Canada is the relevant government department. The Attorney-General has the power to assume control over a prosecution under s. 15 of the DPPA. Under the Shawcross doctrine the Attorney General can never take into account personal or partisan political considerations, but may consider matters of public policy. In considering public policy, the Attorney General may, but is not obliged to, consult with cabinet colleagues to ensure a knowledge of all relevant facts, and those colleagues must not put pressure on the Attorney General in the matter. The Attorney – General must apply “his judicial mind” as to considerations of “public morale and order,”[2] and is to be the sole judge of whether to intervene under s. 15 of the DPPA based on whether there is a reasonable prospect of success and matters of public morale and order (“the Shawcross Doctrine”). Given the provision in s.715.32(3) of the Criminal Code about the irrelevance of the national economic interest in cases involving the alleged bribery of foreign public officials, the Attorney General’s “judicial mind” should exclude such considerations in these particular class of cases.[3]

———————————–

[1] SNC-Lavalin Group Inc. v. Canada [2019] FC 282: Krieger v. Law Society of Alberta [2002] SCC 65Miazga v. Kvello [2009] SCC 51, at para 46-47

[2] S.O. 2006, c.9,s121

[3] Gravel c. Epiciers Unis Metro Richelieu Inc. [1999] CanLii 7046 (QCCS)