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


Fraud Psychology and the Forensic Process

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What Do Judges Want from Experts?

Justice Markus Koehnen[1]
Ontario Superior Court of Justice 

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

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

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

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

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

I. Why Do Courts Demand Impartiality?

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

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

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

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

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

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

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

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

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

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

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

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

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

“It is shocking to me that two reputable appraisers, taking their duties as experts seriously, namely to be independent and uninfluenced by the party who retained them, could come to such different conclusions, using essentially the same approach and methodology for each of these two comparables.  I find it suspect when each appraiser’s opinion so clearly aligns with the interests of the party who hired him.  While I recognize that valuation is an art, not a science, I would have expected the ultimate opinions to have been much closer to one another.”[12] 
“[Names of plaintiffs’ experts] describe themselves as forensic accountants.  They have experience and qualifications in matters of financial reporting and disclosure, GAAP and accountants’ negligence.  In the course of their reports, however, they repeatedly purport to give opinions on matters outside their proven expertise, including matters of corporate governance and securities law. … [Name of expert] has no proven qualifications to opine on governance principles or securities law, even if evidence of the latter was admissible, which it is not.”[13]
“The willingness of an expert to step outside his or her area of proven expertise raises real questions about his or her independence and impartiality.  It suggests that the witness may not be fully aware of, or faithful to, his or her responsibilities and necessarily causes the court to question the reliability of the evidence that is within the expert’s knowledge.”[14]
[Expert’s name] engaged in blatant advocacy, making exaggerated, inflammatory and pejorative comments and innuendos, which were argument rather than evidence[15].
[Name of defence expert] acknowledges that an expert’s approach to the issue of auditors’ negligence should not vary depending on the side for which he is called to testify; but I was disappointed to learn that he did not adopt that even – handed approach in the instant action.  …[This] negatively impacted his credibility and usefulness as an “independent” expert[16].

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

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

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

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

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

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

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

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

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

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

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

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

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

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

III. Specific Problems Arising out of Expert Evidence

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

(i) Testifying Outside of Area of Expertise

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

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

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

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

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

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

(ii) Partisan Language

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

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

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

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

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

(iii) Cherry Picking

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

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

(iv) Critique Reports

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

(v) Intellectual rigidity

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

(vi) Ghost Writing

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

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

(vii) Contradicting Previously Expressed Views 

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

(iv) Impartiality To Do List

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

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

Conclusion

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

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

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

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


Footnotes

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

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

[3] 2015 SCC 23 at para. 14.

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

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

[6] 2015 SCC 23 at para. 14.

 [7] R. v. Mohan, [1994] 2 S.C.R. 9

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

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

[10] 2009 ONCA 624

[11] Abbey at para. 90.

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

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

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

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

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

[17] 2012 ONSC 5184 at para 261

[18] 34 Queen’s L.J. 565 (2008-09)

[19] Encyclopedia Britannica: confirmation bias

[20] Paciocco at p. 582.  

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

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

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

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

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

The Door That’s Opening

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

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

Alexander Graham Bell

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

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

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

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

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

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

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

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

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

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

Implications for Investigators

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

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

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

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

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