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:

  1. The actual event (what happened)
  2. The perception of the event (how participants perceived what happened)
  3. The recapitulation of the event (how the event is recounted)
  4. 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: 

  1. relevant, 
  2. necessary, 
  3. not barred by any other exclusionary rule, and 
  4. 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:  

  1. Be direct, frank and candid with your retaining lawyer about any limitations on your expertise and any “bad news” about the case.  
  2. Provide, in your report, all of the reasons for which you came to the opinion you did.  Leave nothing implied or unspoken.
  3. 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.
  4. Ensure you are providing your true opinion, not arguments to help your retaining lawyer.  
  5. Assume the trier knows nothing about your area of expertise.  Use simple direct language in your report and when testifying.
  6. Remove all pejorative, inflammatory or overly definitive language.  Removing adverbs and adjectives is a good place to start.
  7. 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.
  8. 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.
  9. Would your opinion would be the same if the opposing party had retained you?  
  10. 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

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:

  1. the statement of plaintiff counsel that the witnesses were “neutral” was false, 
  2. plaintiff counsel knew the statement was false or was reckless in making the statement, 
  3. the purpose of making the false statement was to have the defendant believe the plaintiff’s case was stronger than it was, 
  4. the defendant did rely on the false statements of plaintiff counsel, and 
  5. 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)

Governing the Ungovernable: Cryptocurrencies in Insolvency Proceedings

Presented at the 2019 Annual Review of Insolvency Law – Montreal, QC
by Gregory Azeff, Stephanie De Caria and Matthew McGuire

“…despite the enthusiastic proclamations of tech geeks, anarchists and other cryptocurrency early adopters, cryptocurrencies are not a panacea. There is a dark side to the technology; the anonymity of certain blockchain structures, combined with their borderless nature and the stringent privacy policies adopted by some cryptocurrency providers, make them ideal for exploitation by unscrupulous individuals as a means of hiding assets and transactions…..”

Azeff-De-Caria-McGuire

What Fraud Victims Should Know About the Tax Consequences on Settlements in Fraud Actions

Norm Groot, Investigation Counsel PC

At Investigation Counsel PC, we are often asked by victims of fraud for advice with respect to negotiating settlements in fraud actions. To state the obvious, fraud victims often have a well-founded skepticism that the defendant they settled with cannot be trusted to fulfill their settlement obligations honourably. 

In 2018 we acted as counsel for Kuwait investors who lost $1.8M to a British Columbia based business associate. At the eve of trial, a $2.7M settlement was reached. Thereafter the defendant attempted to renegotiate the settlement, alleging the victims owed tax to the Canadian Revenue Agency, so that he could obtain a tax credit. This is their story.

Al-Thamer v. Bakhtiyari, 2018 BCSC 1526

On August 16, 2018, the Supreme Court of British Columbia released its decision in Al-Thamer v. Bakhtiyari, 2018 BCSC 1526, on the issue of whether a defendant may be permitted to withhold part of a settlement payment to pay potential tax liabilities to the Canada Revenue Agency (“CRA”), as opposed to making full payment to his victims. The Court held that an alleged rogue cannot withhold part of a settlement to obtain a tax credit from the CRA if he fails to provide an accounting for the allegedly defrauded funds. 

The Investment and Resulting Litigation

On May 6, 2015, the Plaintiffs, investors from Kuwait, filed a claim against the defendants Shirvan Elyassi Bakhtiyari (“Bakhtiyari”) and his company 415185 B.C. Ltd. (415 BC Ltd.”) seeking general and punitive damages for fraud, breach of trust, breach of fiduciary duty, unjust enrichment, conversion and conspiracy. In addition, the Plaintiffs sought an accounting of their funds from the Defendants. 

In their Statement of Claim, the Plaintiffs alleged that in the 1990s they transferred $1.8M to Bakhtiyari and his company in exchange for a beneficial interest in some land that 415 BC Ltd. owned in Delta, British Columbia. The Plaintiffs alleged that the property increased in value well in excess of the $1.8M they paid, that Bakhtiyari refused and failed to provide them an accounting of what he used their money for, despite their repeated requests, and that he had dishonestly converted their funds for his own use or that he had pocketed the increase in value of the property.

On July 24, 2015, the Plaintiffs filed a certificate of pending litigation (“CPL”) against the Delta property. Thereafter, discoveries of the Plaintiffs were held in England and discoveries of the Defendants were held in Vancouver. Throughout the discovery process, Bakhtiyari continued to refuse to provide the Plaintiffs with an accounting of what he did with their money. No evidence was ever provided that any of the Plaintiffs’ money was invested in the Delta Property or any other land.

The Settlement

 On January 22, 2018, on the first day of a trial scheduled for four weeks, the parties participated in a day-long mediation and settled the Plaintiffs’ claims. The Minutes of Settlement included the following terms:

1. the defendant Bakhtiyari (personally) to pay $2,750,000 Cdn for general damages, costs, disbursements and prejudgment interest on behalf of all Defendants on an all-inclusive basis;

3. the $2,750,000 was to be paid on the following schedule:

a. $1,000,000.00 payable by February 1, 2018. and

b. $1,750,000.00 payable by June 30, 2018;

7. upon payment of the $2,750,000 …, the Plaintiffs would file the required documents to lift the CPL;

8. upon payment of the $2,750,000, the Plaintiffs… would instruct their counsel to prepare, endorse and deliver to counsel for the Defendants a consent dismissal order which shall provide for dismissal of proceedings… as if there had been a trial of the action on the merits; and

12. the Plaintiffs were solely responsible for any and all tax liability or obligations that may accrue to them in relation to the receipt of the $2,750,000.

On January 25, 2018, Bakhtiyari delivered, by personal cheque, the first instalment of $1M to counsel for the Plaintiffs. 

On June 27, 2018, just prior to the payment deadline for the second instalment, Bakhtiyari refused to pay the second installment of $1,750,000, but rather proposed to pay the amount of $1,062,500 and remit $687,000 to the Receiver General on the basis that the Plaintiffs owed $687,000 pursuant to s. 116(5) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). 

The essence of Bakhtiyari’s reasoning was that if a CPL had been issued, this implied the Plaintiffs had made a capital gain of $900,000 (the settlement of $2.7M was $900,000 more than the Plaintiffs’ original $1.8M investment). The alleged rogue Bakhtiyari suggested, post settlement, that as the Plaintiffs were not Canadian citizens, it was his civic duty to ensure the Plaintiffs paid tax to the Canadian government.

Bakhtiyari advised the Plaintiffs that his proposed withholding could be avoided if:

1. the Plaintiffs obtained a clearance certificate from the CRA with respect to the transaction and provided it to him;

2. an undertaking from Plaintiffs’ counsel to withhold from the second and final instalment an amount sufficient to satisfy the Plaintiffs’ potential tax obligations until the CRA issued a tax clearance certificate in order to satisfy s. 116 of the Income Tax Act; or 

3. Plaintiffs’ counsel provide an opinion from a Canadian tax lawyer confirming that no withholding is required which could be relied upon by the Defendants.

It appeared to the Plaintiffs that Bakhtiyari was seeking to obtain a tax credit on the Plaintiffs’ money that he never provided an accounting for. In response to Bakhtiyari’s demands, the Plaintiffs brought an application seeking an order requiring Bakhtiyari to pay the sum of $1,750,000 in accordance with the terms of the Minutes of Settlement.

Bakhtiyari in turn filed a cross-application seeking an order that he pay to the Plaintiffs only $1,062,500 and remit the balance owing, being $687,000, to the Receiver General. Bakhtiyari also sought an order releasing the CPL against his Delta Property.

The Submissions of the Parties

The Plaintiffs relied upon the principles of contract interpretation. In other words, they argued that the words of the Minutes of Settlement do not leave any doubt as to their meaning: Mountain v. TD Canada Trust, 2015 ONSC 4929 (CanLII) at para. 12; Olivieri v. Sherman (2007), 2007 ONCA 491 (CanLII), 86 O.R. (3d) 778 at para. 48 (C.A.); and Brentwood Enterprises Limited Partnership v. Revelstoke Mountain Resort Limited Partnership, 2014 BCSC 773 (CanLII) at para. 27. 

The Plaintiffs submitted that per Term 12 of the Minutes of Settlement, the Plaintiffs assumed full responsibility for any tax liability. The Plaintiffs further submitted that they are at liberty to adopt a tax plan of their choosing, and if that tax plan is high-risk, then it is their own cross to bear. The Plaintiffs submitted that unlike Mountain v. TD Canada Trust, the Defendants did not require an indemnification clause with respect to a tax risk.

Bakhtiyari submitted that s. 116(5) of the Income Tax Act required him to withhold 25% of the funds and remit these funds to the CRA because the property was purchased with funds from a non-resident. Bakhtiyari further submitted that the CRA should ultimately determine if any tax was owing, and that pursuant to s. 227(1) of the Income Tax Act, he was not in breach the Minutes of Settlement due to his obligation to withhold funds from a non-resident and remit to the CRA. 

Bakhtiyari referenced a number of cases including Fieguth v. Acklands Ltd. (1989), 1989 CanLII 2744 (BC CA), 37 B.C.L.R. (2d) 62 (C.A.) which concluded that where there had been a binding settlement agreement, deductions in accordance with the Income Tax Act were required by law. Notwithstanding that Fieguth v. Acklands Ltd. was a wrongful dismissal case which dealt with tax principles germane to employment scenarios, Bakhtiyari submitted that these principles were applicable and were utilized in a contract case: Geraghty v. Halcyon Waterspring Inc. (1999), 32 C.P.C. (4th) 152 (Ont. Gen. Div.).

The Court’s Decision

The Court held that the terms of the Minutes of Settlement were clear: the Plaintiffs explicitly agreed at Term 12 to be responsible for any tax implications. 

The Court further held that per Term 13 of the Minutes of Settlement, the parties agreed there was no finding that the $1.8M the Plaintiffs’ paid to the Defendants 25 years earlier had actually been invested into the Delta property as was supposed to have occurred.

The Court further held that notwithstanding that the Defendants had not provided any evidence that the Plaintiffs’ money had been invested as represented, Term 10 of the Minutes of Settlement declared that there was no admission of liability by the Defendants, and that the settlement was a compromise of a disputed claim.

The Court rejected Bakhtiyari’s suggestion that the taxes owing would be $687,000, or 25% of $2.7 million that he sought to withhold. The Court found that the Plaintiffs invested $1.8 million; received $400,000 in returned capital prior to the litigation, and paid $450,000 in legal fees. Accordingly, the capital gain, if any, was approximately $500,000, implying the potential taxes would be significantly less than the amount alleged by Bakhtiyari.

With respect to any potential capital gain, the Court found that the settlement amount reflected payments for compounded pre-judgment interest and other legal expenses—not the profit derived from any investment in land. On this basis, the Court held that there was no capital gain at all in the circumstances of this matter. The Court granted the Plaintiffs’ application and dismissed Bakhtiyari’s cross application.

Tax Issues on Settlements in Fraud Cases

While the Court ruled in favour of the Plaintiffs, it also noted that if the Plaintiffs, as non-residents of Canada, had disposed of taxable Canadian property, they would have been liable to pay tax under s. 116 of the Income Tax Act, and that Bakhtiyari, as the “purchaser” of such a disposition, would have been required to withhold it under s. 116(5). 

However, because none of the settlement funds were identified as pertaining to any specific cause of action, and because the parties expressly agreed that there had been “no admission of liability by the Defendants”, and because the settlement was “a compromise of a disputed claim”, the Court looked to the intent of the parties to see if any allocation towards a capital gain was intended. 

The Court cited Schwartz v. Canada, 1996 CanLII 217 (SCC), [1996] 1 S.C.R. 254, where the CRA sought to tax a settlement amount received by a departing lawyer from his firm as a “retiring allowance”. There was no evidence that any part of the settlement was allocated to a “retiring allowance”. The Supreme Court of Canada found that, there being no such evidence, the amount was not taxable. The Court said at para 41:  

Logically, the Minister should not have the burden of presenting, in every case where the apportionment of a general award is at issue, specific evidence amounting to an explicit expression of the concerned parties’ intention with respect to that question. However, there must be some evidence, in whatever form, from which the trial judge will be able to infer, on a balance of probabilities, which part of that general award was intended to compensate for specific types of damages. [Emphasis in original.]

Similarly, in this case the Court found that the parties’ settlement was a calculated business decision which was intended to free the Defendants from the consequences of litigation and not strongly related to the value of the Plaintiffs’ claims. Bakhtiyari agreed to pay the settlement amount without admitting liability and without agreeing that the Plaintiffs had any interest in the land. 

What this case essentially stands for is the importance of drafting Minutes of Settlement that considers the tax consequences of the deal. Here, the intent of the parties was that the funds were compensation for general damages, legal fees, disbursements, and pre-judgment interest. There was no evidence that the Defendants invested the Plaintiffs’ monies in the Delta property. The result was that Bakhtiyari could not obtain a tax credit on funds he refused to account for. 

investigationcounsel.com
December 29, 2018

Evidence Based Expert Testimony

David Debenham, McMillan LLP

In  R. v. Millard,  (“Millard”), an Ontario court explained the concept of “evidence based” expert testimony, an emerging nuance on the traditional tests for the admissibility of expert evidence, no matter what the court, and no matter what the subject matter of the testimony.  Put briefly, experts will no longer be able to put on their white laboratory coat and ask courts to accept their methodologies and underlying data on faith:  The process will now be one that requires the expert to disclose the basis of their opinions, the data upon which it relies, and the inherent weaknesses or limitations in their approach.  Transparency is now the watchword.  No longer can the expert show up with an impressive resume and expect the trier of fact to take the expert’s methodology as sound, and data as accurate, because it is too complicated and time consuming to explain their underlying analysis to a judge and jury.  We are going from a world of “trust me” to one of “show me”. 

In Millard, the accused was charged with the first degree murder of his father, who died as the result of a gunshot wound to his left eye. The central issue is whether the gunshot was the result of suicide, or murder.   The Crown sought to introduce expert evidence in the area of “Shooting Scene Reconstruction”.  The court held that only the evidence of the general operation of revolvers and the evidence of the specific design and operation of the revolver in this case was admissible.  The balance of the expert’s opinion with respect to the position, orientation and location of the gun when discharged and the likelihood that the deceased discharged the shot given his body position was ruled inadmissible.  This result is unremarkable.  The analysis to get to that result is.

The court started with the standard analysis:

  1. Opinion evidence is presumptively inadmissible and the party seeking to introduce it bears the onus of establishing its admissibility on the balance of probabilities.
  2. Expert evidence is admissible when it is
    1. relevant,
    2. necessary to assist the trier of fact;
    3. not subject to any other exclusionary rule;
    4. the expert is properly qualified, which includes the requirement that the expert be willing and able to fulfil the expert’s duty to the court to provide evidence that is:
      1. Impartial,
      2. Independent, and
      3. Unbiased.
  3. For opinions based on novel or contested science or science used for a novel purpose, the underlying science must be reliable for that purpose, and
  4. The trial judge, in a gatekeeper role, determines that the benefits of admitting the evidence outweigh its potential risks, considering such factors as:
    1. Legal relevance,
    2. Necessity,
    3. Reliability, and
    4. Absence of bias.

So far, no surprises.  The challenge to the admissibility of the proposed expert in this case did not raise any additional exclusionary rule, nor was the science said to be novel.  That is usually the case.  What is unusual is to go on to acknowledge the dangers of expert testimony, recognizing that there is a temptation to simply defer to an expert and rely on their testimony rather than going to the trouble to understand it, and with that understanding, grasp its limits and weaknesses.  Opposing counsel, lacking the expertise “may be hard-pressed to perform effectively their function of probing and testing and challenging evidence because its subject matter will often pull them beyond their competence, let alone their expertise. This leaves the trier of fact without sufficient information to assess its reliability adequately, increasing the risk that the expert opinion will simply be accepted.  The court then recognizes that the real question in every case becomes: “When should we place the legal system and the truth at such risk by allowing expert evidence?”   The answer is “Only when lay persons are apt to come to a wrong conclusion without expert assistance, or where access to important information will be lost unless we borrow from the learning of experts. …it is not enough that the expert evidence be helpful before we will be prepared to run these risks. That sets too low a standard. It must be necessary.”

The court then goes on to explain the new “show me” , or “evidence based” approach.  The four conditions are:  

  1. the theory or technique used by the expert must be reliable, and so too must the use of that theory or technique by the expert;
  2. the expert must not be biased;
  3. the expert must be objective and complete in collecting evidence, must reject all information that is not germane to the theory or technique being used, and must be transparent about all information and influences they have been exposed to; and
  4. the expert must clearly express not only the opinion, but also the complete reasoning process that led to it, and must be candid about the shortcomings of the theory or technique employed and the opinion reached, offering fair guidance on the level of confidence that can be placed in the opinion expressed.

An expert must now demonstrate an ‘open mind to a broad range of possibilities’.  Several forms of bias can often be unconscious: 

  1. Lack of independence bias (because of a connection to the party calling the expert);
  2. ‘adversarial’ or ‘selection’ bias (where the witness has been selected to fit the needs of the litigant); 
  3. ‘association bias’ (the natural bias to do something serviceable for those who employ or remunerate you); 
  4. professional credibility bias (where an expert has a professional interest in maintaining their own credibility after having taken a position);
  5. ‘noble cause distortion’ (the belief that a particular outcome is the right one to achieve); and, a related form of bias, ‘confirmation bias’ (the phenomenon that when a person is attracted to a particular outcome, there is a tendency to search for evidence that supports the desired conclusion or to interpret the evidence in a way that supports it). 

In this case, the expert’s opinion was premised on there being no intermediary surface to block the deposit of gunshot residue on the deceased, proving it must have been murder.    In this case, the expert was aware of a photograph showing a blanket that must have been moved from the area of the head of the deceased.  This blanket could have been an intermediary surface.  The expert did not disclose the possibility of the blanket as an intermediary surface. The expert failed entirely to disclose the evidence of the blanket or his reasoning process in relation to it, in his notes, report or testimony-in-chief.  Indeed the expert testified that, based on the photographs, there had been no movement of items at the scene and therefore no presence of an intermediary surface.    Once confronted with the photograph, the expert then explained in detail why the movement of the blanket made no difference to his ultimate conclusion.  The court found that the photograph was a significant piece of evidence that could impact adversely on the conclusions he reached, and the expert’s explanation demonstrated confirmation bias.  The court ruled that: “He was unwilling or unable to interpret this evidence in a way that was inconsistent with his theory.”  The court also noted that: “Confirmation bias is closely related to tunnel vision which has been defined as ‘the single-minded and overly narrow focus on a particular investigative or prosecutorial theory, so as to unreasonably colour the evaluation of information received and one’s conduct in relation to that information.’”  Even more damning, the judge found that “the failure of a proposed expert to disclose information that would undermine his opinion goes beyond confirmation bias.  … the expert witness’s “failure to disclose demonstrates a misapprehension of his role as an independent, neutral scientist.  A scientist is not entitled to discount a potential defence position (or indeed a Crown position) and then fail to disclose evidence which might bear upon that position… He was not entitled to discount the theory that an intermediary surface was implicated without disclosing evidence that might bear upon that theory.”

What does this all mean?  

First, an expert report should cite authorities demonstrating that:

  1. the approach or methodology used is “textbook”, meaning that it is widely accepted in the profession, and
  2. it is being applied in a traditional way. 

If this cannot be done, the report must disclose the novelty of the method, or the novelty of its application to the evidence at hand. 

Second, the expert’s report must disclose all of the relevant evidence, whether its was relied upon, discounted, or dismissed, and why.  Relevance in this context must be given a broad definition, as the court is the ultimate arbiter of relevance.

Third, the expert’s report must set forth how the methodology was applied to sift through the evidence to come to the conclusion reached, and the importance of the various constituent elements to the foundation of the opinion itself.  For example, if fact X is found to be untrue, then conclusion Y must change. 

Finally, the expert’s testimony must follow from his or her report, and both must be predicated on the accepted wisdom of their profession, and not the personal opinions of the expert dressed in the technical language of the profession.  This includes the scope of the opinion, as well as its contents.

Howard Levitt

Individuals, charged with investigating employee improprieties and those who deal with related decisions must be kept current of the latest edicts related to Labour and Employment Law. This is Mr. Levitt’s area of expertise.

Howard Levitt LL.B., B.A., is no stranger to Certified Forensic Investigators. His a well recognized authority on Labour and Employment Law and is a founding partner in the firm of Levitt & Grosman LLP. He has appeared on many television shows and radio broadcasts, including The Journal, Business World, W5 and CFRB 1010, discussing the issues involved in wrongful dismissal. He also has conducted numerous seminars across Canada. Continue reading Howard Levitt