It Even Happens at Work…

By Dave Oswald

Did you know that email isn’t – and was never designed to be – a secure way to communicate? Fake emails can be created quickly and doctored to look genuine and perfectly legitimate.

We’ve done many investigations that illustrate how easily email can be manipulated. Unfortunately, too often people don’t challenge or question the authenticity of  emails.

One of our investigations dealt with a female employee, “Joan”, who presented dozens of emails to the HR department, which a male colleague, “Bob”, had sent her. They started relatively innocently, with compliments on her looks, but soon made 50 Shades of Grey look mild as they became more lewd and suggestive. 

The HR Manager called Bob in to discuss the emails. Bob denied having sent the emails and was insistent that he never had, nor would ever write emails to Joan in this light.

The company called Forensic Restitution in to prove Bob sent the emails. It was the company’s intent to fire him, based on their policies and the nature of the emails, but with Bob’s rebuttal of the emails, they wanted to be sure. The only proof the company had was the hardcopies of Joan’s emails when lodging her claim as Joan had stated that she had deleted the electronic version. 

The company did not have an email archiving system, so Forensic Restitution imaged Bob’s computer to investigate if the emails were on Bob’s computer.  No trace of the offensive emails were found.  Forensic Restitution then used word patterning to determine if the same type of wording was used in other emails. Again nothing was found.  Joans computer was then imaged, and we discovered that the author of the offensive emails was non other than Joan

Joan had sent the emails to herself. She’d figured out how to change email addresses from her email to Bob’s email address and had then sent the emails purporting to be from Bob to herself.  

When we questioned her, she stated she did not like Bob and wanted to get him fired. The two employees sat next to each other and she admitted that she did not like his actions. Since she liked her job, she figured the best solution was to set him up. In the end, she was forced to leave.

In another case, a man , Kevin, lied on his CV to get a job, claiming that he had an accounting degree. Kevin started by forging an email from a University confirming that he had his degree. The employment agency accepted the email, and did not follow up on its validity.  Kevin was put forward for an accounting position that he obtained.

After working at the company for three months, Kevin sent an email to the Payroll Department pretending to be from his boss, indicating that Kevin’s pay was due to be increased as he had completed his probation period.  As Kevin’s boss was a hard person, no one questioned her decisions.  Everyone just accepted that the boss had spoken and his salary was updated.

Once his three-month probation passed, he sent another email and got a $30,000 bonus. Nothing was ever questioned, so he rewarded himself with more money, almost doubling his salary, even adding on a year-end bonus. After 18 months, he was finally caught.

The fake emails weren’t what actually tripped him up: he used the company credit card while on vacation. The credit card company contacted the employer to alert them of the card’s use. This “well-paid” employee stole about $400,000 in total.

Forensic Restitution investigated an employee “Karen” at an insurance company.  We found Karen had faked emails to receive money for false claims she’d made on behalf of a large client. Karen submitted eight claims over a year. None of them were flagged or checked because they were within her signing authority.

At the end of the year, the department manager met the client for lunch and the topic of the claims came up. The manager mentioned that it must have been a hard year for the company because of the number of claims they submitted. 

Dismayed, the client said they hadn’t submitted anything that year, and an investigation was launched. We were able to prove the amount of money the employee had stolen.

Other details uncovered in the investigation revealed that she’d had affairs with two of her bosses. They agreed not to tell on her if she didn’t tell on them, and she was allowed to resign rather than be fired. 

In all these instances, the emails had been tampered with.  If an email appears odd in any way, it’s better to pick up the phone and call the person to confirm.

The Categories of Fraud Are Not Closed

By David Debenham

Frauds often have a fraudster, a shill assisting the fraudster, and a “mark” who is being deceived.  The role of the shill is to persuade the mark that the scam is real, that there really is money to be won if only if the mark is talented or lucky enough.   Now the shill may be in on the scam, or the shill may also have been deceived by the fraudster and allowed to win nominal amounts by the fraudster, so that the shill can lure friends and family into investing (and losing) to the fraudster far more than the shill has gained.   The innocent shill (“a dupe”) is horrified to learn that they have induced lifelong friends into losing their life savings.  When the fraud unravels, the fraudster pleads sweet innocence—- they did not tell the marks anything false—- all the misrepresentations were made by the dupe, often to his friends, and passed on to others.  Now what?

  Is a mark, who has entered into an agreement with an alleged fraudster’s  corporation, otherwise pre-empted from bringing a claim in  fraud for allegedly fraudulent representations because those allegedly fraudulent misrepresentations were made to a third party?  In such a circumstance, is the only available claim to a plaintiff one of breach of contract against the fraudster’s shell company?  

In Vitacea Company Ltd et al v The Winning Combination Inc. et al[1]  the plaintiffs, TSI Group Ltd. (TSI) and Vitacea Company Ltd. (Vitacea), are the manufacturer and distributor of a product known as “Vitamints” which are vitamin-enriched mints.  They entered into a licensing agreement with the defendant, The Winning Combination Inc. (TWC), a Winnipeg-based company, whereby TWC would distribute Vitamints in Canada.  The defendant, Bukhari, is the CEO of TWC. The motion in question dealt with allegations in the Statement of Claim that Mr. Bukhari and TWC acquired and registered trademarks and domain names in the United States on behalf of Vitacea with respect to Vitamints and then, contrary to the terms of the licensing agreement, sold those rights to a third party, knowing full well that they belonged to the plaintiffs.

“TWC” argued the because the tort of deceit or fraudulent misrepresentation) committed by a defendant against a third party does not create a cause of action in civil fraud for a plaintiff against TWC.   Accordingly, TWC argues that the allegation that it committed a civil fraud against Vitacea based on alleged misrepresentations made to third parties (“Wyeth”) is not supportable at law.  The Supreme Court of Canada has confirmed[2] that in order for a plaintiff to make out the tort of civil fraud, the following four‑part test must be satisfied:

  1. a false representation must be made by the defendant;
  2. some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness);
  3. the false representation caused the plaintiff to act; and
  4. the plaintiff’s actions resulted in a loss.

Some of those cases have struck out claims in fraudulent misrepresentation on the basis that the plaintiff was not the representee of the fraudulent statement made by the defendant.[3] 

The court relied on the case of Destiny Enterprises Canada Ltd. v. Kim,[4]  In Destiny Enterprises, the primary parties were “A-Mart” and E-Mart Food Centre Ltd. (“E-Mart”).  The plaintiffs and defendants in Destiny Enterprises were arm’s length commercial parties whose affairs were governed by contracts between them.  The court found that A-Mart had converted E-Mart’s property when A-Mart purported to sell the grocery store belonging to E-Mart to another party in November 2003.  The court determined that the relevant parties were guilty of equitable fraud in participating in a fraudulent venture and were jointly and severally liable in equitable fraud.  There was no evidence of a fraudulent misrepresentation flowing directly between A-Mart and E-Mart:  The fraudulent conduct that the court addressed as a “matter of conscience” was simply A-Mart’s sale of assets to a third party, with the knowledge that E-Mart was the rightful owner.  The court in that case found that such conduct amounted to “equitable fraud”.  This case makes it abundantly clear that equitable fraud may exist as between commercial parties whose relationship is governed by contract, and does not require a fiduciary duty between the parties.  

In Vitaeca, the court court held that “a court of equity may intervene ‘in circumstances where the retention of an advantage gained by one over another would be unconscionable.”  Where required, it is equity that may address a remedy if, as a result of one party obtaining advantage or gain through conduct, such conduct could be characterized as unconscionable.  In the present case, on facts which are presumed to be true, the conduct alleged in the amended statement of claim on the part of both TWC and Bukhari can be characterized as unconscionable.  It is not clear and obvious that those facts would not sustain a claim in equitable fraud.

We therefore must conclude that fraud must not be looked at through a technical lens. There is fraud, and conduct “equivalent to fraud” or “constructive fraud” or “equitable fraud”.  “Fraud in this wider sense refers to transactions falling short of deceit but where the Court is of the opinion that it is unconscientious for a person to avail himself of the advantage obtained”. Fraud in the “wider sense” is a ground for equitable relief which “is so infinite in its varieties that the Courts have not attempted to define it”, but “all kinds of unfair dealing and unconscionable conduct in matters of contract come within its ken”.[5]  When faced with a technical impediment to a claim in fraud, plead “equitable fraud”, when the categories of misconduct are many, varied, and unbounded by strict lines of demarcation.  Cases in which the dupe acts as the unknowing accomplice of the fraudster fall into this category of fraud.



[1] 2016 MBQB 180 aff’d 2016 MBCA 126

[2] Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8 at para. 21, [2014] 1 S.C.R. 126

[3] See, for example, Bernard v. Godfrey, 2010 ONSC 10 at para. 18, 199 A.C.W.S. (3d) 605Balanyk v. University of Toronto (1999), 1999 CanLII 14918 (ON SC), 1 C.P.R. (4th) 300 at paras. 65-66 (Ont. S.C.J.), and Andersen v. St. Jude Medical Inc., [2002] O.T.C. 53, at paras. 45, 47 (Ont. S.C.J.)

[4] 2014 BCSC 299, 30 B.L.R. (5th) 12. 

[5] Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, at para 39 (CanLII)

The “Nicest Guy in the Room”: A CFO Who Stole Millions

As a leader in forensic accounting and auditing, Dave Oswald was hired to look into suspected financial malfeasance when a privately owned company in North America was being considered for purchase by a private equity firm.  Dave’s unique approach, years of experience and swift investigation ultimately led to the prosecution, sentencing and the payment of restitution with the judge indicating that without Dave’s testimony and findings this would not have occurred. Whilst this is not an unusual scenario this case provides a perfect study in how easily corporate fraud can take place in the workplace, and very often the culprit is the very last person you’d expect.  

The CFO of the company, let’s call him ‘Kelly’, was often referred to as “the nicest guy in the room”.  He had grown up in a home with an alcoholic gambling mother and a work-obsessed father, but had excelled in school.  He had completed his CPA gaining outstanding marks and moved from company to company consistently climbing up the corporate ladder until he achieved this position as CFO.  Under his stewardship, the companies financials were sound, receiving unqualified reports from the auditors, and achieving substantial growth.  Kelly’s only blemish in an otherwise successful track record was a brush with the law when he was treasurer for a fraternity house, and some funds went missing.

 Kelly became a person of interest when two weeks before closing the deal between the PE firm and the company, he was fired. The PE firm, worried about material misstatement of the financials tasked us to see if there were any errors in the financial statements that may affect the purchase decision.

We immediately attended the site where Kelly had his office and imaged the available computers. We also obtained a copy of his company credit card statements, emails, general ledger entries, and other relevant documentation. Unfortunately, Kelly’s personal computer was not on site, so the company contacted Kelly to let him know that someone would be sent to collect it. He informed them that he would leave the computer outside his front door for the company to collect, as he would not be home at the time

We earnestly began our investigation, and started by imaging the computers using EnCase software. The laptop used by Kelly contained a surprising lack of information. It appeared that he had removed the hard drive and inserted a new one in the computer. We checked the original purchase invoice for the computer, but the invoice was silent as to the serial number of the hard drive.  As the hard drive was blank, apart from some random data, we concluded that he had not used commercialwiping software to erase the hard drive.

This was obviously a major cause for alert and as we suspected when the case went to trial, the defence used the argument that there was no chain of custody documents and that anyone could have replaced the hard drive.  This argument placed doubt on the validity of the evidence.  Fortunately, the replacement of the hard drive was not a critical part of our investigation as by this stage we had uncovered further damning evidence.

 The trial judge concluded that it would have been unlikely for anyone to have replaced the hard drive on the porch, as he or she would have been more likely to remove the whole computer, but it could well have affected the admission of the evidence. This close shave to having evidence ruled inadmissible shows the critical importance of maintaining a chain of custody from the time the equipment is received from a suspect through to the court case. 

When we began reviewing the evidence, we found numerous discrepancies:

  1. Duplicate fuel fills – up to three fuel purchases in a single day
  2. Multiple purchases of food outside of company policy
  3. The booking of hotels in the same city as Kelly lived
  4. The purchase of non work-related furniture
  5. The purchase of a Cadillac golf cart
  6. The purchase of multiple cars that were not in use by the company
  7. The purchase of regular home groceries
  8. Payment of personal medical expenses

We also interviewed a number of the staff working for the company.  Unfortunately, Kelly refused to comply with a request for an interview. 

In addition to the above, Kelly had made some further interesting choices. He had altered a cheque after the signing of the cheque.  The cheque was originally cut for four thousand dollars, and signed by both signatories. Kelly then altered the cheque to read fourteen thousand by adding a ‘1’ to the number area, and informed the accounts payable clerk of the change, but never informed the other cheque signatory (Cheques above $10,000 would have required a different, higher second signatory at the firm).  In the subsequent year, emboldened by his previous success he asked for another cheque of four thousand dollars, but this time changed the cheque to fourty (SIC)  thousand dollars.     

Kelly also paid himself a bonus.  The company operated a share buyback scheme aimed at junior employees of the company.  Kelly utilised the scheme to cash in some of his shares. It became apparent during the trial that Kelly had never qualified for this share scheme.  In order to cover his tracks, when he presented the schedule at a board meeting, he included his payment ninth from the top of the document and thirteenth from the bottom of the document (just above the middle of the document).   The placement of the amount is precisely the same tactic that is used by Nigerian 419 scammers when presenting documents, as people tend to scrutinise the top and bottom of a schedule but pay less attention to documents in the centre.  

 In order to try and remove himself from blame the defendant testified at trial that he did not know how his name ended up on there, although it was an email from himself.,  He stated  “I don’t know what happened. I kept the money. I didn’t say anything about it.”” The Judge did not accept this argument and stated that “He knew it wasn’t approved”.

Having successfully paid himself his bonus, he decided to pay himself a second bonus.  He managed to convince his assistant that he had been short paid, and should have been paid out at the majority company valuation and not the minority company valuation.  The difference between the two amounts increased his bonus from two hundred to four hundred thousand dollars, a significant increase.  To justify the amount to the payroll department, he sent himself a letter signed by himself stating that he was due that bonus. 

The Judge stated that “we believe that the trial record certainly supports by a preponderance not only the total that was testified to by Dave Oswald, but the November 2012 bonus,”

This “nicest guy in the room” dark side even stretched to his co -workers. Kelly asked the board for a bonus of $50,000 for the head of insurance, Bob, based on the great work he had done in reducing the  insurance costs to the company.   The board approved the bonus but left it up to Kelly to inform him.  Kelly encouraged Bob to share the bonus between his staff but informed him that the bonus was only $40,000.  Bob, being the nice man he is, gave $10,000 of his bonus to his staff.  Kelly then issued an instruction to the payroll department to pay $30,000 to Bob, $10,000 to his staff, and $10,000 to himself.  

Following the success of this bonus skimming scheme,  Kelly decided to apply for the same bonus ($50,000) for Bob, in the following year.  Again the company agreed and Kelly told Bob that he had arranged for him to receive a $30,000 bonus.  Once again Bob chose to split the amount with his staff, and this time Kelly took $20,000 but split $3,000 to give to his staff.  (the trial judge was so incensed by the fact that Kelly had stolen from his coworkers that she ordered that the first amount of restitution be paid directly to Bob).

During the trial, the defence entered various documents and emails into evidence. One of these documents purported to be a conversation between Kelly and his assistant, relating to an email sent by the CEO to Kelly, authorising the second bonus.  We immediately investigated the document and found that it was not in neither Kellys email or the assistant’s.  The company employed Baracuda software as their email archiving system.   As the Baracuda website states “Barracuda uses journal capture to secure an accurate and unmodified copy of each message at the time it is sent or received. These immutable copies are stored securely in a tamper-proof repository for as long as needed, without risk of corruption or deletion. You can automatically import historical email data to the archive, along with instant-message and other non-email data (appointments, contacts, tasks, notes), to provide a comprehensive archive of all data.”

The fact that this document was missing on the emails on the Barracuda backup system and the computer of the assistant led us to believe that Kelly had created the email himself.  Following testimony about the creation of the email, which included an inconsistency with the fonts used, and that the email was not on the archiving system, Kelly was cross examined on the document and eventually admitted to manufacturing the email.  The trial judge was particularly harsh in her summary of this set of events.  She stated “There are also aspects of me that are just furious with what happened here, irritated that you so blatantly sat in this courtroom and lied to a jury, that you produced, it was clear from your lawyer’s face that he did not know until the moment it came out that you had produced, you had created this fake document that he had introduced. Moreover, the look on his face when he realised he had been used that way was a look of horror, and I felt bad.” 

 She went on to say: “I felt bad for your lawyer at that moment because I thought he has this reputation, and it’s a good one, and good lawyers don’t introduce fake evidence, and here he was all of a sudden with this very complicated problem on his hands because it sure looked to the rest of us like, uh-oh, you had dummied up some stuff and given it to your lawyer. And it certainly looked good on the outside, good enough that your lawyer would have believed you and trusted you this is what it was. I felt bad for him in that moment because you put him in a real tight ethics spot.”

At sentencing the trail judge stated “I did find credible the trial testimony of David Oswald, who was the forensic accounting expert” In ordering restitution from Kelly, the judge stated “So we believe that the trial record certainly supports by a preponderance not only the total that was testified to by Dave Oswald in his report” 

The Judge was disappointed in Kelly for not pleading guilty “I wish very much that you had pled guilty because we would have many more options available to us had you made that choice.” She continued “I

mean, you committed fraud, basically, in every way you could commit fraud at this company.”she finally stated “I am going to impose here a sentence of 48 months’ imprisonment on each of Counts 1 through 5, with those sentences to run concurrently.”  He was also ordered to repay $1.4 million in restitution.

So, how did Kelly get away with his fraud for so long?  Firstly he was a nice guy, constantly providing his staff with positive feedback.  He regularly took the staff to long lunches, ball games and other entertainment.   As the firm operated 60 kilometres from the nearest large town, he helped staff with fuel, and even went as far as selling a car to one of the employees for $500, and another lucky employee received a car for the princely sum of $1.   He purchased state of the art gymnasium equipment and created a staff gym at the firm. He also used fear to ensure that no one went against him.  The financial centre was in a different state,  miles away from the head office and there were always rumours that the office would close.. In this respect, Kelly acted as the “saviour of their employment”, constantly reminding staff how he had their backs from the nasty people at head office.  Also, if any discrepancies were picked up by the accounting staff they really had no one else to go to.  The controllers were all seen as close friends of Kelly, and head office had been portrayed as “big bad ogres” that would shut the financial centre at the smallest sign of problems

This case highlights how many avenues there are for internal fraud and how easily they can infiltrate into a company, often via “the nicest guy in the room”.  If you suspect fraud in your organization give us a call, we can help identify, eliminate and litigate possible fraud. 

Can I Learn Anything From Larry King?

By David Debenham

“I remind myself every morning: Nothing I say this day will teach me anything. So, if I’m going to learn, I must do it by listening. I never learned anything while I was talking.”

Larry King

Larry King was the longest running radio and television talk show host in history.  He was also one of the most maligned interviewers. Why?  He did little research about his subjects.  If his subject wrote a book, he would know the title, and he might read the back cover, but nothing else.  He would ask the first question and his natural curiosity would take the first answer into his second question, and so on. He believed he asked the questions his listeners, who hadn’t read the book, would want to ask.

There was an exception to this question-answer-question format.  That was when an answer suggested a pointed question that would make his interviewee uncomfortable or embarrassed.  When that time came, Larry would change tack toward safer waters. Larry never asked the tough follow up questions.  Instead, the interviewee was led back into their comfort zone. 

This drove Larry’s critics crazy.  Interviewees were happy to go on “Larry King Live” knowing that they were in safe hands.  Larry got interviews from those who would not have ordinarily have allowed themselves to be interviewed.  He got scoops that other networks never got because his subject felt comfortable to tell their deepest darkest secrets to Larry.  He was non-judgmental.   

It was a formula that was successful for decades.   But can it work for forensic investigators?

We are trained to do as much research as possible before we do interviews.  This, we believe, allows us to be expeditious (get our investigation done on time), efficient (get to the point), and effective (ask the questions that need to be answered).  But are these worthy goals?   Should we take our time and build a relationship that earns the interviewee’s trust while we get to learn the idiosyncrasies of their style of communication?   Are we in such a rush to get to “the point”, that we don’t let our subject guide us to another area that may ultimately be of greater interest?  Considering the amount of information Larry could elicit in a half hour interview,  is our approach really so expeditious?   Is our approach trying to wear the witness down as opposed to elicit data from them?  Is an interview the place to sort out meaningless data from useful information or does he interviewee’s stream of consciousness response an untapped source of telling, psychological information? 

One benefit of Larry’s conversational approach is that it puts the interviewee at ease.  Because Larry has not done the research he has no fixed idea about whether his subject is good or bad.  His interview is therefore non-judgmental, and therefore rapport building.  Consider the following:

James Cameron asked Larry King who his fantasy guest would be. King replies, “What a list. It would be an endless list. Stalin would be on it. Hitler – you know, evil people make great guests. Because evil people don’t think they’re evil.”

“And you’ve had some of them,” Cameron comments.

“Yes, I know,” King replies. “They don’t get up in the morning, comb their hair, say, ‘I’m evil.’ So I don’t approach them that way.”

Contrast that with Cressey’s fraud triangle where the subject is said to be “rationalizing” their dishonest conduct.  Can you, as interviewer, hide your own verbal and non-verbal cues from your subject once you have concluded your subject is dishonest and evil?  Are you so gifted at hiding your own “tells” that the interviewee won’t pick up on your distaste or disgust of them and  become defensive?

Consider an internal investigation by an employer.   The employees are required by law to cooperate with the investigation.  You can interview the same employee more than once.  The employer has hired you with their own theory of the case before they hire you, and they are only more than happy to share it with you.  Does this create tunnel vision?  What if you simply interviewed the allegedly relevant actors and let them tell you if anything wrong is going on. Maybe it is not what the employer thought.  Maybe it goes higher up in the hierarchy than the employer wants to believe.  With a relatively clean slate, and no need to be efficient or expeditious, perhaps you can be more effective by truly following the evidence leads without prodding or coaching.  With trust being built in place of fear, maybe evidence comes to you instead of you having to extract it.  

Food for thought.   

Last point. Consider the auditor who fears stepping over the line into criminal investigation and offending Charter rights.  If you have very little background information as to who did it, you can focus on what happened without being distracted by the question of who made it happened.

David Debenham

A 2020 Judicial Decision on Relationship Fraud

On November 16, 2020, Justice Eileen Adair of the Superior Court of British Columbia published a 75-page, 548-paragraph judgment in the relationship fraud case Huang v. Li, 2020 BCSC 1727. The trial started in May 2019. It carried on for 47 days intermittently until February 2020. Dr. Huang attempted to recover approximately $1.35M that he transferred to Ms. Li over four short months while he was trying to gain her affection. In the end, he never even received a kiss.

The case demonstrates why old men should be careful when dating young women and be even more careful when suing them. This decision, published by the Court, is highly embarrassing to the plaintiff, Dr. Huang. To add insult to injury, given that the case spanned four years and 47 days of trial, it has likely cost Dr. Huang at least $250,000 to prosecute, likely double this amount. 

The plaintiff, Dr. Dongdong Huang, is a very well-educated man, a lawyer called to the Bar in British Columbia and a published poet. He is now in his early 60s. The defendant, Peipei Li, is now in her mid-30s (30 years his junior). She has a master’s degree from China and operates a business in Vancouver.

Dr. Huang alleged that Ms. Li had, by her words and conduct, led him to believe that she was available for a long-term romantic and spousal relationship with him, and that she intended to be his romantic partner and business partner. He alleged that Ms. Li led him on and deceived him for the purpose of acquiring his financial assets and other benefits.

Dr. Huang alleged that, based on Ms. Li’s false representations that she was single, in love with him, from a wealthy, propertied family and was available for a long-term spousal relationship, he was induced to transfer money amounting to the majority of his life’s savings to Ms. Li (or to others for her benefit), in addition to other assets. The total amount at issue is approximately $1.35M.

Justice Adair held that her findings of the credibility and reliability of Dr. Huang and Ms. Li were critical to the result. In the end, unless the documents demonstrated otherwise, Justice Adair found Ms. Li more credible than Dr. Huang. This was especially the case because at the time that Dr. Huang was providing what Justice Adair characterized as “ridiculous gifts” to Ms. Li, she was married to another man and was conspicuously wearing her wedding and engagement rings.

While a judge’s findings of credibility and reliability are given significant deference at an appellate court, what is lacking in this judgment is a critical analysis of what consequence, if any, flowed from Ms. Li, a married woman, accepting gifts from Dr. Huang. The conduct of Dr. Huang is bizarre. But so is the conduct of Ms. Li. The story is so ridiculous that on first blush it would appear the commonsense result is to put both of these people back where they were before this all began.

Justice Adair’s decision is not easy to follow – the facts could have been marshalled in a more chronological format. We have taken the facts as published by Justice Adair and organized them as a chronological story. We are not suggesting that marshaling the facts chronologically would have changed the result, but it does make the decision easier to read. Our summary follows.

Who is Dr. Huang?

In September 1958, Dr. Huang was born in the People’s Republic of China. From 1978 to 1982, he attended Wuhan University. In 1984, Dr. Huang moved to Ottawa, Ontario. He attended the University of Ottawa, where he was enrolled as a graduate student in the Faculty of Law. In 1986, Dr. Huang received his LL.M. degree from the University of Ottawa. 

In 1986, Dr. Huang began working at the Faskens law firm. In 1988, Dr. Huang worked at the Torys law firm. He was enrolled in both the doctoral program at the University of Ottawa, Faculty of Law and the LL.B. program at Osgoode Hall Law School. In 1991, he received his LL.B and was called to the Bar the following year.

In 1992, Dr. Huang also received his doctorate in law from the University of Ottawa. After being called to the bar, Dr. Huang practiced corporate and commercial law with the Smith Lyons law firm before he started his own practice D.D. Huang & Associates in 1994. In 1998, Dr. Huang rejoined Faskens where he practiced as an associate counsel until 2002.

In 2002, Dr. Huang joined a public company, Spur Ventures, as a director and vice-president, and practiced as a lawyer part-time. In June 2004, Dr. Huang became a partner in the Times Jusers law firm in Beijing. He continued to practice law part-time in Vancouver and in Canada through his own firm, D.D. Huang & Associates. As of 2015, in addition to his professional achievements, Dr. Huang was also a published poet in both Chinese and English. He is a smart person.

There was little said in the judgment about Ms. Li. As will be seen below, during the time she was going on dates with him, she failed to advise Dr. Huang that she was engaged and later married. She also failed to reject any of his alleged gift offerings. Ms. Li’s failure to reject the gift proposals of Dr. Huang while she was married to another man makes it difficult to understand why the Court found her an empathetic defendant. The answer may be that Madam Justice Adair was just very appalled by Dr. Huang’s behavior and seemingly transactional view of relationships.

Meeting

In June 2015, Dr. Huang and Ms. Li first encountered one another at an event held for alumni of Wuhan University in Vancouver. At the time, Dr. Huang had been separated from his second wife for about a year. They were not divorced. After the dinner, the two of them chatted briefly. In July 2015, Dr. Huang contacted Ms. Li through “WeChat,” and they exchanged some communications.

In September 2015, a Mr. Rao proposed marriage to Ms. Li. She accepted. Mr. Rao gave Ms. Li a very expensive engagement ring and provided her millions of dollars to capitalize her business in Vancouver. Dr. Huang was not aware of this development in Ms. Li’s life. 

In October 2015, Dr. Huang and Ms. Li met again. Ms. Li discussed retaining Dr. Huang to do some legal work for her company, the defendant LPP Properties Ltd. (“LPP”). Dr. Huang was not retained to do anything at the time.

In January 2016, Dr. Huang and Ms. Li again ran into one another by chance in Vancouver. At Dr. Huang’s invitation, they had dinner together. They exchanged some messages on WeChat.

Dating

In March 2016, Dr. Huang invited Ms. Li to a dinner for the Chinese Canadian Writers Association, of which Dr. Huang was a member, and to play golf with him. Ms. Li accepted the invitations. This was the start of Dr. Huang’ attempts to date Ms. Li. The two of them had several dinners together. Dr. Huang began to assist Ms. Li with some business matters related to LPP. 

As a result of his encounters with Ms. Li, Dr. Huang became seriously interested in pursuing a romantic relationship with her. By the end of March 2016, Dr. Huang believed that he was in a “long-term romantic and spousal relationship” with Ms. Li. He believed that she intended to be his “romantic and business partner”. Justice Adair found his beliefs to be delusional. 

Justice Adair found that Ms. Li made no attempt to hide her engagement ring from Dr. Huang. Justice Adair found that the lack of any motive on Ms. Li’s part to encourage Dr. Huang’s romantic overtures rendered her evidence concerning interactions between them more likely than not. Ms. Li did not need access to Dr. Huang’s financial assets (about which, at the beginning, she knew nothing) to live well or to finance her business. The question that Justice Adair does not answer is why was Ms. Li dating Dr. Huang when she was engaged to another man?

Ms. Li’s Wedding to Another Man

On April 7, 2016, Ms. Li asked Dr. Huang to help her locate a place with “strip dancing”. According to Justice Adair, this should have demonstrated to Dr. Huang that Ms. Li in a relationship with Mr. Rao at the time, inferring that she was organizing a stag party for him. According to Justice Adair, Ms. Li’s request to find a place with strip dancing ought to have prompted Dr. Huang to ask Ms. Li what was going on between her and Mr. Rao. Dr. Huang, in his own odd way, did not.

On April 10, 2016, Ms. Li and Mr. Rao were married in Las Vegas. Dr. Huang was not aware that this had occurred. According to Justice Adair, Ms. Li did not make any particular efforts to hide her relationship with Mr. Rao from Dr. Huang. She kept wearing her engagement ring – something which Justice Adair found Dr. Huang was oblivious to.

By April 25, 2016, Dr. Huang had written at least four romantic poems about Ms. Li. He included them in his third published book of collected poetry. Dr. Huang explained that he specifically designed the dedication page to Ms. Li, as well as the fourth chapter starting pages. Ms. Li was aware of these poems and Dr. Huang’s efforts. Justice Adair found it necessary to recite some of these poems in her judgment – all of which is likely to be embarrassing to Dr. Huang. 

April 25, 2016, was described by Dr. Huang at trial as “a day of significance for me.” He explained that it was “one of Ms. Li’s birthday dates”. Ms. Li testified that she had had no plans for a birthday celebration on April 25. Her birthday was May 9. Ms. Li did not know why Dr. Huang wanted to celebrate her birthday on that day. It is not explained in the judgment why Ms. Li, now married for two weeks, then showed up for this dinner.

On April 27, 2016, Dr. Huang took Ms. Li to see several securities lawyers in relation to B.C. Securities Commission issues she was dealing with. Thereafter, they had dinner at Ms. Li’s house.

Gift No. 1: The Ferrari

On May 8, 2016 (a Sunday), after two months of “dating”, Dr. Huang asked Ms. Li if he could celebrate Ms. Li’s birthday by going out for dinner. At the dinner, Dr. Huang told Ms. Li a story of giving his parents a home. According to Dr. Huang, Ms. Li said to him “you didn’t give me anything – I would love a Ferrari car – why don’t you buy me a car?” They discussed how much this would cost. They agreed it would be around $450,000 Canadian.

According to Ms. Li, she did not ask for a car. Rather, it was Dr. Huang who offered the car. Ms. Li alleges that she declined the offer, but then Dr. Huang got down on his knees in the middle of the restaurant and plead for her to accept a Ferrari. Ms. Li alleges that Dr. Huang would not stand up and end the spectacle until she accepted it. So, according to Ms. Li, she agreed to accept a Ferrari as a gift. After they left the restaurant, Ms. Li did not decline the gift. 

Justice Adair seemed to accept that it was fine for Ms. Li, a married woman, to be accepting gifts from and attending dates with an obviously love-struck Dr. Huang. Justice Adair accepted as reasonable Ms. Li’s bizarre story that she had to accept a Ferrari. But the story gets stranger – Ms. Li alleged that instead of accepting a Ferrari, Dr. Huang asked her for the information for her mother’s bank account in China, so he could transfer funds for the car. Ms. Li gave Dr. Huang her mother’s banking information. 

There is no explanation provided by Justice Adair for accepting Ms. Li’s evidence that the gift evolved from a Ferrari to cash being transferred to her mother. It would seem that Ms. Li saw Dr. Huang as a sucker, and as she could not explain a brand new Ferrari to her husband, Mr. Rao, she instead directed Dr. Huang to transfer the equivalent value to her mother who did not even know that she was married. This was quite a clever maneuver by Ms. Li, especially considering what happened next.

On May 12, 2016, Dr. Huang, with the assistance of his nephew, Ming Sun in Beijing, transferred 2.6M RMB to Ms. Li’s mother, Guihong Wang. According to Ms. Li, when her mother asked Ms. Li about the money, Ms. Li rebuffed her inquiries. Dr. Huang never bought a Ferrari, and neither did Ms. Li’s mother. 2.6M RMB is now equivalent to $508,506.44 CDN.

Justice Adair found that Dr. Huang’s offer to buy Ms. Li a Ferrari as a birthday gift to be “a ridiculously extravagant and wholly inappropriate gift coming from someone who was performing legal work for both Ms. Li and LPP at the time.” The unusual part of Justice Adair’s decision is that she then goes on to justify receipt of the gift as the “only way to terminate an awkward and embarrassing scene happening in the restaurant.” Really? Why not just walk out? And if Ms. Li’s motivation for accepting the gift was to mitigate embarrassment at the restaurant, why did she direct Dr. Huang to her mother’s banking coordinates to receive 2.6M RMB a few days later?

According to Justice Adair, at “first blush, Ms. Li did not have a particularly good explanation for why she gave Dr. Huang her mother’s bank card information after the dinner.” Justice Adair then attacked Dr. Huang’s fraud claim stating “Dr. Huang has not proved that Ms. Li made the representations he alleges concerning the Ferrari. Ms. Li’s statements at the time were not made with the intention to deceive Dr. Huang about her feelings for him.”

Justice Adair further found that “when Dr. Huang transferred 2.6 million RMB to Ms. Li’s mother on May 12, 2016, he had not been induced to do so by anything that Ms. Li said”. Rather, Justice Adair placed the moral culpability of this transfer on Dr. Huang, stating that his “motive was to further his pursuit of Ms. Li as a love target.”

Another way of looking at this scenario is that Dr. Huang believed Ms. Li had feelings for him because notwithstanding her engagement to another man, she was going out for dinner with him and accepting Ferraris as gifts. If the case is looked at this way, Ms. Li’s engagement ring was nothing more than an expensive ornament on her hand from another man. Ms. Li would not be the first person to telegraph extra-marital romantic interests to rich and generous men.

Gift No. 2: Jewelry

On May 13, 2016, (a day after the first transfer) Dr. Huang and Ms. Li went to a jewelry store. Dr. Huang alleges that Ms. Li said that “her mother would like to have a jade bracelet in the range of $20,000”. Ms. Li acknowledged that later, while in China, she accepted money from Dr. Huang to purchase a jade bracelet for her mother. She explained that she did so because “he repeatedly, repeatedly urged me to accept it, to buy it.”

According to Justice Adair, Ms. Li did not say anything knowingly false or with the intention to deceive Dr. Huang. Nor was Dr. Huang induced by anything Ms. Li said to purchase gifts for Ms. Li’s family members. Rather, she found that “Dr. Huang decided of his own accord to purchase items as gifts, and that he intended to give those gifts to strengthen his case, particularly in the eyes of Ms. Li’s parents, as a suitor for Ms. Li.”

Justice Adair found that Ms. Li’s statement that “her mother would like to have a jade bracelet in the range of $20,000” … “does not amount to a request by Ms. Li that Dr. Huang purchase a jade bracelet for her mother, much less a representation that he should do so as a goodwill gesture to show that he was sincere in pursuing Ms. Li as his romantic partner.” Really? What else could the married Ms. Li mean by that statement? It appears she was soliciting funds for her mother. 

Justice Adair held that if Ms. Li wanted to bring a jade bracelet to her mother in China, Dr. Huang should have declined the request. Justice Adair correctly concluded that Dr. Huang did as he so often did – he interpreted what Ms. Li said based on his own perspective and desires concerning a relationship with her. His intentions were not Ms. Li’s intentions.

Yet Justice Adair does not comment on what else is apparent – that Ms. Li identified Dr. Huang as a love-struck sucker that she could take advantage of. To address this omission, Justice Adair found that “Dr. Huang has failed to prove that Ms. Li made the representations alleged, and she made no representations intending to deceive Dr. Huang. Dr. Huang purchased gifts on his own accord, in pursuit of his own objectives in relation to Ms. Li.”

The focus of this judgment is on what Dr. Huang pleaded and what he could prove – not whether Ms. Li could be faulted for taking advantage of Dr. Huang’s love-blind state.

Gift No. 3: Use of Bank Cards in China

On May 24, 2016 – just two weeks after receiving approximately $528,000 from Dr. Huang – Ms. Li left for Hong Kong. According to Ms. Li, before she left, Dr. Huang pressed her repeatedly to take one of his bank cards. She says that she declined the offer but when she was at the airport waiting for her flight, she found one of his credit cards and one of his bank cards in her purse. What a coincidence.

Dr. Huang’s evidence was Ms. Li informed him that as she had not been back to China for two years so she didn’t have bank cards that worked anymore. Dr. Huang stated that be offered her his bank cards based on this statement. What is not disputed is that Ms. Li used these cards, both before leaving Canada and while she was in China, making purchases and withdrawals of over $36,000 Canadian. In doing so, the total value of “gifts” received by Ms. Li from Dr. Huang had increased to over $564,000 CDN. Some readers may view this case through the lens of what Ms. Li continued to take from lovestruck Dr. Huang – and whether this was appropriate. 

Meanwhile, Ms. Li’s Honeymoon with Mr. Rao

On May 24, 2016, Ms. Li arrived in Hong Kong. Mr. Rao, her husband, had arranged for a car to pick her up on arrival and bring her to him. Mr. Rao and Ms. Li then spent their honeymoon near Shenzhen. Ms. Li then parted company with Mr. Rao and went to Yunmeng to visit with her parents and sister, Qin Li. She did not tell her parents about Mr. Rao or their marriage. This conduct is consistent with Ms. Li’s pattern of omitting to disclose significant events to Dr. Huang.

On May 27 or 28, 2016, Dr. Huang, who was in Vancouver, received a phone call from Ms. Li complaining that he was not doing things properly for her. Later in the call, Ms. Li changed her tone, became much sweeter and invited him to a dinner at her parent’s home in Yunmeng, China. Justice Adair does not comment on the propriety of Ms. Li’s conduct in inviting Dr. Huang to China. The plain reading of this part of the story is consistent with the narrative of Ms. Li manipulating the love-blind Dr. Huang. 

Gift No. 4: Transfers While Dr. Huang was in China

On May 30, 2016, Dr. Huang flew out of Vancouver and arrived in Ghangzhou. There is no dispute that, while Dr. Huang was in China, Ms. Li and her sister, Qin, received 94,000 RMB from him (or about $18,000 CDN). Separately, Dr. Huang transferred 1,987 RMB more to Qin, and another 8,085 RMB to Ms. Li, over WeChat. The Canadian equivalent of this $104,000 RMB is approximately $21,000. Accordingly, by this point in time, Ms. Li had obtained $575,000 Cdn from Dr. Huang – all money she could have refused if she believed that Dr. Huang was lovestruck.

On June 4, 2016, Dr. Huang arrived in Yunmeng, the city where Ms. Li’s parents lived. While there, he stayed at a hotel. He never went to Ms. Li’s parents’ home and never met them. He spent some time with Ms. Li and her sister, Qin. The visit did not go as he had planned or hoped.

Thereafter, Dr. Huang accompanied Ms. Li to the Tongji Hospital in Wuhan. At the hospital, Dr. Huang overheard a nurse conversed with Ms. Li about a pregnancy test. The way the judgment reads is this should have been a red flag to him that she did not have feelings for him because they had not had sexual relations, meaning it must have been obvious to Dr. Huang that Ms. Li had another man in her life, and it was absurd for him to be offering her gifts.

Perhaps the opposite was true – that Ms. Li told Dr. Huang she was seeking a pregnancy test because she did not want to be pregnant with a child from Mr. Rao. This scenario is probable because, as seen below, Ms. Li continued to accept “gifts” from Dr. Huang.

Gift No. 5: Funds before Dr. Huang Returns to Vancouver

On June 9, 2016, Dr. Huang flew back to Canada. On June 19, 2016, Ms. Li received a further $9,900 CDN in cash from Dr. Huang. This brings the total value of Ms. Li’s “gifts” from Dr. Huang to approximately $585,000.

Yet Justice Adair found that “Ms. Li made no representations to Dr. Huang intending that he would act on what she said by giving her bank and credit cards and money. I find that Dr. Huang pressed money and gifts on Ms. Li to further his own desires, with the goal of securing Ms. Li as his romantic and “spousal” partner, and to demonstrate his wealth and generosity.”

Gift No. 6: Ms. Lie Returns to Canada – Investments into Real Estate

On June 21, 2016, Ms. Li flew from China back to Vancouver. Dr. Huang went out to the Vancouver Airport to meet her. When Ms. Li arrived and saw him there, she said to him, “What are you doing here?” At trial, Dr. Huang acknowledged that Ms. Li was not happy to see him. She then left the airport with her brother.

Notwithstanding yet another brush-off by Ms. Li, toward the end of June 2016, Dr. Huang discussed with Ms. Li what should be done with the money he had back in China. Dr. Huang testified that Ms. Li told him to bring all of it to Canada and to invest in real estate. According to Dr. Huang, Ms. Li told him that she would invest his money for him, because he knew nothing about real estate. Ms. Li denied making any such recommendations. 

In any event, true to form, Ms. Li continued to accept money from Dr. Huang notwithstanding that she told the Court she felt harassed by him. The judgment is not clear on the amounts transferred during this phase of the story. The judgment does dwell on whether some of the transfers from China to Canada were legal or not legal due to currency transfer limits out of China. This adds little to the significance to the story. Of greater significant is that Ms. Li continued to accept funds from Dr. Huang despite her knowledge that he was operating with less than a clear head. Ms. Li did not set Dr. Huang straight. According to the judgment, the following transfers were made.

On June 27 and June 28, 2016, Dr. Huang made separate arrangements through his own contacts in China to have 1,002,000 RMB transferred to Ms. Li’s mother and then converted in China to US dollars. The judgment later reads that 2,900,000 RMB was transferred to Ms. Li’s mother, brother and sister in China. The judgment later reads that between June 28 and July 4, 2016, the total amount transferred to Ms. Li’s mother, her brother Daqi and her sister Qin. was about 3.9M RMB. Today, 3.9M RMB is equals approximately $764,00 CDN. 

There is no dispute that Ms. Li’s brother, Daqi Li, used this money to purchase a Mercedes in China. Except for approximately $100,000 USD which was deposited into a CIBC account in Vancouver, none of Dr. Huang’s money was ever repatriated to Canada. During the span of three months from May to July 2016, Ms. Li and relatives she designated had received approximately $1,338,000 CDN from Huang. Ms. Li accepted the gifts allegedly under duress of being harassed.

On July 1, 2016, Dr. Huang took Ms. Li out to dinner. Dr. Huang testified that they discussed investing the money in real estate and also his love and devotion to her. According to Dr. Huang, Ms. Li asked him to become her soulmate and lover. She said “you don’t know anything about investment; leave it — let me invest for you; it will make incredible returns.”

Ms. Li version of events was that all of the money Dr. Huang transferred to her family members at this time were gifts. Ms. Li denied that she had any discussions with Dr. Huang about investing the money for him. She explained that she told Dr. Huang that she did not want the gifts, but “he insisted on giving it to me. And, since the money had been sent, so I just accepted it.” The judgment provided no insight into the contradiction in Ms. Li’s evidence – that she accepted funds from a love-blind paramour while also complaining that these advances were unwanted.

In his claim, Dr. Huang pleaded that Ms. Li’s representations about her intentions to invest Dr. Huang’s money were false, and that they were made with the dishonest intent that Dr. Huang should rely on them and transfer his money to her. Justice Adair held that, despite this pleading, nowhere did Dr. Huang specifically plead that he was materially induced to act based on her representations. Justice Adair held that Dr. Huang failed to plead this fourth element of fraud.

Justice Adair held that Dr. Huang pleaded generally in his claim that he was induced to make all of his transfers to Ms. Li on the basis of her false representations that she was single, in love with him, available for a long-term spousal relationship and from a wealthy, propertied family. Justice Adair held that this approach to the transfers Dr. Huang made “reflects the reality of his complaints.” It seems this reason for inducement should have been plead for each transfer.

Justice Adair found that Ms. Li probably did say to Dr. Huang that he should invest in real estate in the Vancouver market, bring money from China to do that, and that a real estate investment in the Vancouver market in 2016 would be safe and likely yield high returns. Justice Adair held that these are not representations of fact, and accordingly are not actionable. Justice Adair held that “no doubt at the time many people held the opinion that bringing money from China to invest in real estate in the Vancouver market was a good idea, a relatively safe investment and likely to yield high returns” but that such statements did not constitute statements designed to induce Dr. Huang to make the transfers to Ms. Li. 

Justice Adair held that Dr. Huang made the transfers out of some blind infatuation that the transfers would win him the love and affection of Ms. Li. Justice Adair found that Ms. Li never represented that she was single, in love with him, available for a long-term spousal relationship. In other words, Justice Adair found that Ms. Li never overtly lied to Dr. Huang. Justice Adair found that Ms. Li’s omissions were not material, as she “did not need Dr. Huang’s money to invest in real estate in Vancouver or for any other purpose. She (through LPP) had access to Mr. Rao’s money, and real estate investment was the point of LPP’s business. Moreover, funds provided by Mr. Rao to LPP allowed Ms. Li to purchase a Rolls Royce.” 

All of this does not explain how the law treats a person who has lots but want more.

The Gift Note 

On July 17, 2016, in the throes of another fit of blinded passion for Ms. Li, Dr. Huang created a hand-written note that he gave to her that stated “I gave PeiPei Li CNY 6.6. million Yuan. I will never go back on my word and never ask for repayment. This is the proof. Dongdong Huang.” The $6.6M Yuan (RMB) equals approximately the $1,338,000 CDN that Ms. Li had received from Dr. Huang to that point. 

Dr. Huang alleged that he was induced to sign this “Gift Note” as a result of Ms. Li’s fraudulent representations, and that accordingly, it was unenforceable. According to Ms. Li, Dr. Huang said that he had given her his money as a gift, was not expecting anything in return and “was not trying to buy sex from her with money”. Dr. Huang said that he truly wanted her to be happy, he was not expecting anything in return, and just hoped that she would “forgive him”.

Justice Adair held that she preferred Ms. Li’s evidence as more consistent with the preponderance of probabilities that would be reasonable in the circumstances. She held that Dr. Huang wrote out and signed the Gift Note for the same reason that he had made the transfers: to prove to Ms. Li that he was not a “stingy man”, and to persuade her that she should give in to his desires for a long-term “spousal” relationship with her.

The Unraveling of Dreams

In early August 2016, Dr. Huang discovered that Ms. Li and Mr. Rao were going to be sharing a hotel on August 3 or 4. He felt betrayed by Ms. Li, and that she had acted towards him in a way that was dishonest. According to Dr. Huang, once he uncovered Ms. Li’s plans to travel with Mr. Rao, in his mind, there was no prospect of any relationship between him and Ms. Li.

Yet, on August 9, 2016 – the Chinese Valentine’s Day – he and Ms. Li shared a romantic dinner. Dr. Huang paid over $6,000 for a Dior bag for Ms. Li, as well as paying for about $5,000 for clothing purchased at Nordstrom. It seems that married Ms. Li did not evade the dinner with Dr. Huang, neither did she reject his further gifts. The gift tally that Ms. Li scored from the delusional Dr. Huang was now up to approximately $1.35M CDN.

On August 10, 2016, Dr. Huang tried to persuade Ms. Li that Mr. Rao was only using her and was not worthy of her love. Ms. Li was angry at Dr. Huang’s interference in her private life. After a lengthy exchange on the morning of August 12, Ms. Li finally said “Don’t continue your fantasy with me here. The things you talked about are made out of nothing. They came out from your mouth, it’s so obscene.”

On August 16, 2016, Dr. Huang and Ms. Li again met for lunch. Dr. Huang complained to Ms. Li about Mr. Rao. According to Dr. Huang, over that lunch he said to Ms. Li “let’s go back to square one,” and she responded with words to the effect that if money could resolve the problem, then it was a non-issue – that she would return what he had transferred to her.

On August 24, 2016, Dr. Huang and Ms. Li again had dinner. Dr. Huang testified that he said to Ms. Li “it’s over, and I want to go back to square one, and you give me back my money and goods; I have nothing to do with it, and whatever you do is your business.” Ms. Li testified that she became angry with Dr. Huang when he continued to speak to her about Mr. Rao. As she recalled, Dr. Huang, in turn, became very angry that she would trust Mr. Rao and not him.

On August 29, 2016, Ms. Li sent Dr. Huang an e-mail, with the subject line (in English) [all sic] “Requesting for Chinese Bank Account info.” According to Ms. Li, Dr. Huang told her that he wanted money in Canadian dollars. Ms. Li arranged to obtain a bank draft payable to Dr. Huang for $148,000 USD. On August 31, 2016, Dr. Huang picked up the bank draft.

On September 7, 2016, Ms. Li sent a letter to Dr. Huang terminating his services immediately with her company, LPP. Her reaction infers that from her perspective, the gig was up – Dr. Huang was no longer going to “gift” more money to her, so she fired him and severed all ties. This act demonstrates that Ms. Li could have rejected Dr. Huang’s gifts all along; she was not acting under duress as she alleged.

On September 12, 2016, Dr. Huang contacted Mr. Rao. He alleged that he (Mr. Rao), Ms. Li and her company owed him for all of the funds he had transferred to Ms. Li and her family members. Thereafter, both Dr. Huang and Ms. Li had retained legal counsel. Later in 2016, the litigation started, which resulted in 47 days of trial and the decision being rendered in November 2020.

Credibility and Reliability

Justice Adair accepted both Dr. Huang’s and Ms. Li’s evidence where that evidence was consistent with reliable documentary evidence or other reliable evidence, or where they made statements against their own interests. Where there was a conflict in their evidence, Justice Adair preferred Ms. Li’s evidence because “it was both more consistent with contemporaneous documentary evidence and more in harmony with the preponderance of probabilities that a practical and informed person would readily recognize as reasonable in the circumstances.”

Justice Adair found that Dr. Huang was a proud man, with a lifetime of accomplishments. He described himself as the only Chinese-Canadian doubly-qualified lawyer in the world, a poet of Chinese descent brimming with talent, a professor and scholar with profound thinking. That is how he sees himself. She also found that Dr. Huang sees himself as attractive to younger women.

Justice Adair concluded that Dr. Huang had a very strong interest in maintaining his self-image. In that light, the only excuse acceptable to Dr. Huang’s pride was that he was tricked and lied to by Ms. Li about her affections for him. Justice Adair held that his memory about events yielded to his pride, and his recollection of events was modified at trial accordingly. As a result, Justice Adair ruled that Dr. Huang’s memory about disputed facts with Ms. Li was not reliable.

Findings re Fraud

Justice Adair held that there was “no doubt” that Ms. Li never had any romantic feelings for Dr. Huang at any time. The most Ms. Li felt for Dr. Huang, until the end of their relationship, was friendship, gratitude for the help he provided to her, and admiration of his talents and accomplishments. The judgment does not square these findings with Ms. Li’s evidence that Dr. Huang had harassed her and, under duress, gave her no choice but to take his money.

Justice Adair held that Dr. Huang failed to prove that statements Ms. Li made to him about her family were either false or made with the intention to deceive Dr. Huang. Justice Adair concluded that Dr. Huang was not capable of accurately reading or interpreting his social interactions with Ms. Li, and that it was not until he was forced to face reality that Ms. Li had no intention of communicating any romantic interest in him that that he gave up.

Justice Adair held that Dr. Huang’s true complaint was Ms. Li’s failure to tell him about her marriage to Mr. Rao. Dr. Huang alleged that this omission constitutes material non-disclosure. Justice Adair held that Ms. Li made no attempt to hide her engagement ring from Dr. Huang, and because she was wearing an engagement ring it should have been plain and obvious to Dr. Huang that she and Mr. Rao had more than a business relationship.

According to Justice Adair, Dr. Huang’s admission that he never conducted any research on Mr. Rao was not consistent with the behavior of a practical and informed person in his circumstances. While Ms. Li did not expressly tell Dr. Huang about the nature of her relationship with Mr. Rao (being engaged and later married while dating Dr. Huang) it is not the fault of Ms. Li. She kept these secrets even from her parents. Justice Adair held that this omission does not constitute material non-disclosure to support a finding of civil fraud.

Findings re Unjust Enrichment

As we have repeated many times herein, Justice Adair’s judgment does not explain the legal consequence of Ms. Li’s acceptance of significant gratuitous transfers from someone who was obviously blinded by an unreasonable love interest in her. Justice Adair’s judgment does not explain under what legal principle Ms. Li could have been found liable for continuing to accept transfers from an obviously love struck and irrational man. 

In an attempt to get an answer to this question, Dr. Huang alleged that if his fraud claim was not accepted by the Court, he was entitled to a judgment on the basis that Ms. Li was unjustly enriched at his expense. The basic elements of the tort of unjust enrichment are (1) enrichment of a defendant, (2) a corresponding deprivation of a plaintiff, and (3) the absence of any juristic reason for the enrichment. Broadly speaking, the doctrine of unjust enrichment applies when a defendant receives a benefit from a plaintiff in circumstances where it would be “against all conscience” for the defendant to retain that benefit.

The first two elements — enrichment and corresponding deprivation — are closely related. A straight-forward economic approach is taken to both of them, with moral and policy considerations coming into play at the juristic reason stage of the analysis. The third element — absence of a juristic reason — means that there is no reason in law or justice for the defendant to retain the benefit conferred by the plaintiff, making its retention “unjust” in the circumstances of the case.

Ms. Li argued that since most of the money transferred by Dr. Huang went to her mother and siblings in China, that any unjust enrichment claim Dr. Huang might have would be as against the persons to whom he transferred the money. Justice Adair held that a successful claim for unjust enrichment does not require a plaintiff to demonstrate payments — or the “enrichment” — flowed directly from the plaintiff to the defendant. She found that Dr. Huang intended Ms. Li have the benefit of the transfers of funds. He gave her control over where the funds would go.

Justice Adair, however, declined to hold Ms. Li liable based on the absence of juristic reason to unwind the transfers. She held that at the time Dr. Huang made the transfers to Ms. Li and to her family members, he intended them to be gifts. Justice Adair stated that the Gift Note corroborated that Dr. Huang’s transfers were in fact gifts. Justice Adair held that Dr. Huang’s intentions — whether or not he intended to make a gift — are to be interpreted at the time the benefits were transferred. Justice Adair held that given “once a gift, always a gift,” Dr. Huang cannot now change his mind because his relationship with Ms. Li has ended and ended badly.

Findings re Conversion

The tort of conversion involves a wrongful interference with the goods of another, such as taking, using or destroying the goods in a manner inconsistent with the owner’s right of possession. The tort is one of strict liability, and accordingly, it is no defence that the wrongful act was committed in all innocence.

Justice Adair held that since Dr. Huang did not succeed in his unjust enrichment claim, he cannot succeed in his conversion claim. She held that since the “goods” in question (ie. the $1.35M CDN) had been lawfully gifted to Ms. Li, Dr. Huang was no longer entitled to possession of them, and accordingly he is unable to make out one of the essential elements required to establish a conversion claim.

Bottom Line

The basic legal principles that apply to a claim for civil fraud are:

  1. a false representation or statements made by the defendant;
  2. the statements were knowingly false, or were made with reckless disregard for their truth;
  3. the statement was made with the intention that the plaintiff act on it; and
  4. the statement materially induced the plaintiff to act, resulting in damage.

With respect to the fourth element, the test for materiality is subjective. The question is not whether the statement or representation would have caused a reasonable person to act, but rather whether it was a true inducement to the plaintiff to act. If a defendant’s statement was actually relied on, it does not matter if a plaintiff was negligent or foolish in acting on it.

As can be seen in the case of Dr. Huang, allegations of fraud in relationship cases are extremely difficult to prove without documentation such as emails and texts which set out exactly what representations were made, and then rebutted by evidence showing the falsity of the statements. 

Omissions of facts, such as being married while dating, may not be enough in the eyes of the Court. Justice Adair’s ruling infers that dating while wearing an engagement ring may result in the inference that it is not possible that a love interest is being represented. Once transfers are made, there is the risk they will be deemed in law to be gifts.

And unwinding any love story is a very expensive and time-consuming business. It is akin to the saying that the quickest way to poverty is divorce. It can also be very embarrassing. If such a case is going to be taken on, significant preparation should be engaged in so that when the plaintiff gives his or her evidence, he or she can demonstrate:

  1. a false statement was made by the defendant with respect to each transaction;
  2. the statement was knowingly false or reckless as to truth to obtain each transaction;
  3. the false statement was made with the intention that the plaintiff act on it; and
  4. the false statement materially induced the plaintiff to act, resulting in damage.

Inquiries

Deciding if and when to allege fraud is something that victims should canvas with a fraud recovery lawyer before commencing either process. Not every case, even if fraud seems apparent, is best litigated through fraud allegations. Some cases are better off not litigated at all. For further information, please contact us.
 
Norman Groot, LLB, CFE, CFI – January 4 2020
www.investigationcounsel.com
Disclaimer

Useful Quotes to Use on Motions for Mareva Injunctions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ndrive v. Zhou2020 ONSC 4568 (July 27, 2020)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Inquiries

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

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


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

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

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

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

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

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

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

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

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

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

The Facts

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

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

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

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

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

The Mareva Motion Process in the COVID-19 Era

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

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

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

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

The Decision – A Modified and Balanced Mareva Injunction Motion Outcome

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

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

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

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

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

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

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

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

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

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

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

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

The Bottom Line

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

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

Inquiries

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

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


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

Lenient Sentencing where No Restitution or Cooperation

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

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

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

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

Another Payroll Fraud Story

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

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

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

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

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

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

The Sentencing

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

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

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

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

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

The Bottom Line

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

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

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

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

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

Inquiries

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

Norman Groot

Investigation Counsel PC

www.investigationcounsel.com 

August 25, 2019



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

Criminal Funding Rights Override Victim Mareva Recovery Rights 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Cases That Have Followed CIBC v. Credit Valley

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

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

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

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

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

Do the Police Care if Fraud is Not Reported? 

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

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

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

The Bottom Line

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

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

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

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

Inquiries

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

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



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

Criminal Search Rights Override Victim Recovery Rights 

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

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

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

R. v. Tashanna Mullings, 2019 ONSC 2408 

In a decision dated April 16, 2019, the Ontario Superior Court of Justice (criminal courts) dismissed a criminal fraud prosecution against TM on the basis that, at the time of her arrest and detention for a bail hearing, she was subjected to a strip search that offended the Canadian Charter of Rights and Freedoms. This decision is important to fraud victims as it demonstrates how risky it is for victims of fraud to rely on the criminal justice process to even have their loss considered for restitution or retribution through a conviction and sentencing.

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

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

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

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

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

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

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

The criminal Court also went on to state “the mere possibility that a detainee may be concealing evidence or weapons is not sufficient to justify a strip search.” The criminal Court concluded that the strip search violated TM’ Charter rights. By way of remedy, the criminal Court concluded “there is no remedy, aside from a stay of proceedings that would be capable of adequately addressing the harm to the criminal justice system.” The concern of fraud victims reading this decision is that other remedies were not adequately analyzed. It is also worth noting that civil cases, where we suggest fraud victims seek recovery, would not engage in this debate. 

As stated, the criminal Court provided no analysis on the merits of the fraud case against TM. This is worth repeating. For the public and for victims of fraud, it is difficult to understand why this occurs. Rather, the criminal Court’s decision appears dismissive of the interests of the victims. The criminal Court held “while the charges are serious with significant losses to the business and the banks, there is no evidence that this remedy would cause additional difficulties for those parties. The harm to the criminal justice system outweighs the value with carrying on with the case.” Really? If someone engages in an alleged $1M fraud, is it not foreseeable that they may be arrested and searched incident to arrest? Is there not greater harm to the criminal system of ending a criminal case worth over $1M where there no analysis of the merits of the case? 

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

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

R. v. Villanti et al, 2018 ONSC 4259

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

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

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

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

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

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

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

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

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

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

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

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

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

Consider Criminal Complaints with Civil Recovery is a Lost Cause

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

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

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

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

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

Inquiries

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

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