What’s a Body to Do?

by David Debenham

In many cases those facing litigation or disciplinary proceedings are required to make some form of disclosure.  What if they choose not to do so, even if it means facing a fine or jail time?   One answer is to appoint an investigative receiver.  In Boutin v. Boutin, the husband refused to make the appropriate financial disclosure to his wife during the course of family law proceedings.   He was held in contempt and an investigative receiver was appointed to investigate his financial affairs. 

The court appointed receiver is an officer of the court. The Receiver does not, and cannot act, as the agent of either party. The Receiver is in a fiduciary capacity to all interested parties. As such, the Receiver and the terms of the Receiver’s appointment must maintain the court’s neutral and impartial position in the litigation as well as that of the Receiver. [58]  While Receivers commonly take control of a party’s specified property, Receivers can also be appointed to investigate personal or business affairs or to investigate certain transactions to protect a party’s interest pending trial.  The idea of appointing a receiver or monitor with investigative powers — and sometimes, with only those powers — has emerged in recent years. The appointment of a Receiver is an extraordinary and intrusive remedy.  A Receiver should be appointed only after a careful balancing of the need for such an order and the effect of such an order on all parties and others who may be affected by the order.  

The court has broad powers to impose terms as a penalty where a person is found in contempt. In addition, the court has jurisdiction to make an appropriate order under its inherent jurisdiction to control its own process and maintain the integrity of its own process.  In this case the foundation for the finding of  contempt was anchored in Mr. Boutin’s failure to make complete and accurate financial disclosure.  A penalty of appointing a non-possessory Investigative Receiver with all the powers and rights that Mr. Boutin has, including his rights as owner, shareholder, director, officer, tax payer, debtor, and creditor, to seek, request, and obtain possession of all relevant financial documentation and information relating to the financial issues in this case for the purpose of preparing a report to this court regarding Mr. Boutin’s assets, properties, financial transactions, was appropriate and necessary in the circumstances of this case (the “Investigative Receiver”).  This will, in essence, permit the Investigative Receiver to put before the court what Mr. Boutin could have done, should have done, but failed to do.  This was one of those situations where the appointment of a receiver to investigate the affairs of a debtor or to review certain transactions — including even, in proper circumstances, the affairs of and transactions concerning related non-parties – was a  a proper exercise of the court’s “just and convenient” authority under s. 101 of the Courts of Justice Act.  It was also a fair penalty as a term of sentencing for contempt.

Most administrative tribunals have no contempt powers.  These are reserved for the courts.  In Ontario, s. 13(2) of the Statutory Powers Procedure Act contemplates proceedings for contempt of a tribunal order be brought in the Divisional Court.  If the Tribunal in question does not have authority to appoint an investigative receiver in order to enforce a duty to cooperate, it can go to the Divisional Court and ask for that remedy if it can satisfy that court that the member is contempt of a tribunal order to cooperate with a regulator investigating allegations of professional misconduct. 

Trusts and Tracing

by David Debenham

A “trust” is a formal arrangement in which the donor or “settlor” of the trust places certain assets or rights he owns into a “trust” that is to be managed by the “trustee” for the benefit of trust beneficiaries, also called cestui qui trust.   Once transferred into trust by a trust deed, the settlor of the trust no longer has an interest in the trust assets he transferred, and the “legal” title in the asset is owned by the trustee and the “equitable title” is owned by the trust beneficiaries.  As far as outsiders to the trust are concerned, the trustee has the full right to deal with the trust assets as if the trustee owned the entire interest in them.  However, as between the trustee and the trust beneficiaries, the trustee must strictly observe the terms of the trust deed, and the trust beneficiaries have the right to sue the trustee for breaching his trust obligations to them. 

Where a fraudster has misappropriated funds, the courts often impose a “constructive” trust to protect the victims’ rights, such that they have all the rights of a trust beneficiary.

That the trust beneficiaries have a personal claim against their trustee for breach of trust is plain enough. What about if the trustee is insolvent such that a personal claim would be futile?  What about if the trustee conveyed the trust property to third parties in breach of trust, and the beneficiaries want the trust property put back into trust?  The case law speaks in terms of “proprietary” , or “in rem”, rights to recover the trust assets, and “personal rights” to sue individuals for participating in a breach of trust.

The proprietary claim is limited to those persons who have title to, or in possession of, the trust property. The trust beneficiary can recover the trust property, or property purchased with trust property, into whomever owns it, so long as tracing can make the connection to the present holder of the property. The fact that the holder of the property may be insolvent is irrelevant.   If title in the trust property passed because of a valid transaction with the trustee (even if it was in breach of the trust deed, unbeknownst to the purchaser), then the tracing is an equitable one, meaning that a court will not allow the proprietary claim to succeed against a bona fide purchaser for value without notice of the wrongdoing.[1] A creditor is unknowingly paid with trust property, the creditor is considered a bona fide purchaser for value without notice.[2] Being a proprietary remedy, if the bona fide purchaser for value without notice then “gifts” the trust property or its substitute to someone (called a “volunteer” in legal parlance), then the trust beneficiary can claim the property back from the volunteer so long as the volunteer owns it[3].

If the proprietary remedy is not available, the trust beneficiaries can assert personal remedies against these who (1) knowingly assisted in the breach of trust, (2) were, at one time, in knowing receipt of trust property, or (3) volunteers.  A personal remedy entitles the holder of a personal, possessory or proprietary right to damages for interference with his rights.

Change of Position Defence and Ponzi Schemes

What happens if the fraudster gives the proceeds of his fraud to his wife, who is unaware of his fraud, and she spends it on a vacation she would never have taken but for the receipt of this windfall?  A court find it inequitable for the victim of fraud to recover the money she received, because she is being forced to pay for a vacation she would never have paid for out of her own money.  This is called the “change of position” defence.

Where a trust beneficiary is engaged in a proprietary tracing, English courts have held that the change of position defence cannot be used.[4]  In Canada it is not so clear. The authorities are clear that the defence of change of position requires more than the mere spending of the monies received:[5]  Thus spending on everyday expenses would not suffice as these are not liabilities incurred specifically as a result of the receipt of the monies in question.  The volunteer must provide a full account of any expenditure alleged to be attributed to the windfall, and there must be (1) an exceptional expenditure (2) caused by the payment in question, or incurred in reliance of its receipt, (3) and spent in good faith. The defendant is required to show that his position “has so changed that it would be inequitable in all the circumstances to require him to make restitution,”[6]   It is hard to imagine a situation in which the equities will favor a Net Positive investor keeping their windfall in the face of the claim of a trustee-in-bankruptcy, receiver or other person acting for Net Negative investors in the context of a claw back claim. [7]  It would appear that the operating maxim is “equality is equity” and the courts will require cogent evidence to suggest any change of position would result in an oppressive inequity to the Net Positive Investor.[8]

[1] Re Diplock [1948] ChD 465;[1948] 2 All ER 318; Yorkshire Trust Co v. Empire Acceptance Co. [1983] CanLii 357, at para 10

[2] Williams v. Leonard & Sons [1896] 26 S.C.R. 406, at 410

[3] Royal Bank v. Safeco Ins Co. [1988] CanLii 3453 at para 48 (Alta, Master)

[4] Taylor v. Blakelock (1886) 32 ChD 560, atr 568

[5] International Longshore & Warehouse Union Local 502 v. Ford, 2016 BCCA 226 at para 47-9

[6] “Lipkin Gorman (a firm) v. Karpnale Ltd., [1991] 2 AC. 548 (UKHL) at p. 534(e).

[7] Samji (Trustee of) v. Whitmore [2107] BCSC 1917 at para 124; Den Haag Capital, LLC v. Correia [2010] ONSC 5339, at para 70; MGN Ltdf [2009} All ER 99, at para 33

[8] Re Titan Investments Ltd [2005] ABQB 637 at para 47; Principal Group v. Anderson (1997) AR 169, at para 47; RE Principal Group Ltd [1997] 200 A.R. 169, at para 11,`14, 16 (C.A>)

A Case of Interest?

By David Debenham

In the normal case, the plaintiff’s damages are determined as of the date of breach of contract or breach of duty and pre-judgment interest is used to compensate the plaintiff for time value of money between the date of breach and the date of trial.  [1]

Now consider the case where a fraudster has underpaid for an item due to his deceit.  The victim is entitled to damages, plus interest on the money he should have been paid if the misrepresentations had not taken place less what was actually paid.  However, should there be pre-judgment interest credited to the fraudster for the money that was actually paid as well?  In Tuke v, Hood[2] the English Court of Appeal considered the suggestion that credit should be given for the time value of the money, measured as notional interest, to be fundamentally misconceived, contrary to principle, and bad policy.  “the upshot of requiring such credit to be given would be to reduce the recoverable damages the longer the fraud went undetected, and thus to allow a dishonest defendant to benefit from the concealment of his fraud or dishonest assistance in a breach of fiduciary duty.  It would also be contrary to the fundamental aim of fully compensating a victim of fraud for all the loss directly flowing from the fraudulent transaction, including consequential loss.  Far from being overcompensated, [the victim] would not be fully compensated if he were to be required to give any credit for the time value of the money he received.”

Let us see why this must be so.  Let us consider the case where I own 2 cars, one worth $5,000 and the other $10,000.  The fraudster persuades me to sell the second car for $2,000 for the second car by telling me that the car is not road worthy when he knows it is.  What is my loss?  Why, it is $8,000 of course.  If the first car appreciates by $5,000 it does not mitigate my loss related to the second.  So too the $2,000 I received is not a benefit that offsets the $8,000 I actually lost: It simply reduces the amount of my loss.  If the aim is to put the injured party in the position that he would have been in if the fraud had not occurred, that aim is generally achieved by ensuring he gets back the value, in money terms, of what he parted with.  So, for example, if he is fraudulently induced to sell an asset worth $10,000 for $2000, he is compensated by an award of $8,000 because, by keeping the $2,000, he has received $10,000 in total.  If he also had to give credit for interest notionally (or even actually) earned on the $2,000 he would be under-compensated, because he would receive less than the full $10,000 that the asset was worth at the time of sale.  The notional interest to be earned in future is not part of the value he receives for the asset from the purchaser, nor is it properly described as a benefit conferred on him by the sale transaction.

The longer the delay in the award of the $8,000, the greater the amount of that under-compensation would be.  The difference would not be eliminated by an award of interest on the $8,000 because that reflects the loss of use of that sum from the date on which it should have been paid to the injured party.  It is not difficult to envisage circumstances in which the supposed “benefit” might wipe out the loss altogether.  There is no difficulty in concluding, therefore, that a claim for credit for the “time value” of the money received as consideration for the sale should not be allowed as part of the basic award of damages.

Now suppose that the asset sold at an undervalue was bought as an investment, and by the time the balance of the $10,000 (i.e.  the $8,000) is awarded, the asset is worth $25,000 and the injured party proves that he would have kept it but for the misrepresentation that it was not road worthy.  The consequential loss is $15,000, which is the difference between the $25,000 (i.e.  what the asset would now be worth if he had not sold it to the fraudster) and the $10,000, which is what it was worth when he did sell it to the fraudster.  If the victim receives the $15,000 on top of the £6,000 basic damages, he is put in the position in which he would have been but for the fraud (i.e.  when the $2,000 paid to him for the asset is taken into account, he has received in total $25,000).  The fact the claimant gets the base value of the asset at the time of sale restored to him by a combination of the $2,000 he retained plus the $8,000 damages, has nothing to do with the further $15,000, which measures the lost capital appreciation of the asset between the date of the sale and the value at the time when it would otherwise have been sold (or value at trial).  There is no logical basis for suggesting that the claimant would be over-compensated if he receives that additional $15,000 without credit being given for the “time value” of the $2,000, because that $2,000 has already been subsumed in the valuation of $10,000 which forms the starting point for the claim for lost capital appreciation.  If there is no principled reason for requiring interest on the $2,000 to be offset against the $10,000 valuation when that is calculated, there is even less justification for requiring it to be offset against the $15,000.  Any such offsetting will result in the injured party receiving less than the $25,000 which puts him in the position he would have been in but for the fraud.

As a matter of principle, the question to be asked is whether the claimant is unjustly enriched by keeping a benefit rather that giving a credit to the wrongdoer.  Let us say that victim of the fraud goes to a casino with the $2,000 and doubles his money.  Instead of interest, should the fraudster be credited with $4,000 instead?  The answer must be “no”, just as if the first car was sold to a third party for twice what it was worth.  There simply is no unjust enrichment (deprivation of the fraudster) associated with the remaining $2,000.  So too if the claimant had lost the $2,000 at the Casino, he could not add that loss to his claim against the fraudster. 

The court confirmed that all that the innocent party is required to do, in order to reflect the position as it would have been if the deceit had not occurred, in a case where the measure of damages is reflected by comparing the value of what was sold with the value of what was received, is to give credit for the money (or money’s worth) he received under the transaction itself.  This does no injustice to the fraudster, who only pays interest on the difference between the market value of the item sold and what the innocent party received for it.  No further credit has to be given for a notional amount of interest on that money even if there is a claim for consequential losses in which the starting point for the assessment is the market value of the item at the date of the sale.  To do otherwise, encourages the fraudster to delay the proceedings in an effort to increase the value of the credit “earned” as a result of the time value of money. 

[1] Tuke v Hood [2022] EWCA Civ 23

[2] Kinbauri Gold Corp.  v.  Iamgold International African Mining Gold Corp., 2004 CanLII 36051 (ON CA)

Expert Evidence and Testimony

By David Debenham

“If only you could see what I have seen with your eyes” (Blade Runner, 1982)

The role of the optometrist is to prescribe spectacles or contact lenses.  It is to assist the patient in seeing the world more clearly.  So too, expert witnesses should bring their skillset to bear to help a judge to better evaluate the evidence they are seeing.  Too often experts behave like the over-anxious, over-achieving student who shouts out the answer to the class rather than simply explains the steps to be taken by the class to get to the right answer. The expert’s role is to educate the judge by using technical expertise that the court is not privy to, not to supersede the judge or jury as decision maker. 

In Logix Data Products v. The Queen[1] the taxpayer claimed a Scientific Research and Experimental Development tax credit (a “SRED”) in relation to a solar panel it developed to replace shingles on a roof. CRA alleged that the panel did not advance the science by conducting scientific research, and therefore did not qualify for the credit.  The court disallowed the expert’s report on several grounds: (1) it purported to give an opinion on the ultimate issue before the court, being, whether the work done by the taxpayer constituted scientific research for the purposes of the Income Tax Act, rather than merely assisting the court in making that determination, (2) the expert report contains several opinions without setting out the facts and assumptions upon which those opinions are based, (3) the report does not set out the professional literature that supports the basis of his opinion, and was reviewed prior to giving his opinion(4) the report voices the opinion that the taxpayer’s claim meets the requirements of SRED was not an independent evaluation but was one sided advocacy, (5) giving an opinion of the proper interpretation of domestic law is inadmissible, as this is the purview of the judge.  The court noted:

“ An expert opinion may assist the court in evaluating technical evidence…. But, at the end of the day, the expert’s role is limited to providing the court with a set of prescription glasses through which the technical information may be viewed before being analyzed and weighed by the trial judge. Undoubtedly, each opposing expert witness will attempt to ensure that its focal specifications are adopted by the court. However, it is the prerogative of the trial judge to prefer one prescription over another.[2] 

[1] [2021] TCC 36

[2] Citing RIS-Christie Ltd. v. The Queen 1998 CanLII 8876 (FCA), [1998] F.C.J. No 1890, [1999] 1 CTC 132 (FCA) [RIS-Christie], at para. 12.

Filters, Folklore, Fake News, and Faulty Investigations

By David Debenham

I am myopic and color blind.  My father was hard of hearing.  We all have our perceptional strengths and weaknesses.  Less obvious is our beliefs about people, and the world in which we operate, form a filter through which we perceive the world as we experience it.  Known pejoratively as a “reality distortion field” in which the objective world is filtered through our view of the way the world operates to form the world we experience. Typically, a person’s Weltanschauung would include a person’s philosophic, moral, and religious conclusions about the individual, society, and existence (however tentative) at a particular time in their life used to filtering their life experiences. It is the personal barometer that determines “real” and “fake” news at an individual level.  It determines what is “dependable” data, and how that data is organized into “information”. Another popular word is “paradigm”.  Aa paradigm is a set of assumptions governing how we interact and interpret the world. Every human has a personal paradigm which is influenced by outside forces acting on them and their own experiences and internal beliefs in support of the paradigm. Cognitive dissonance is when one’s experience conflicts with our belief system, causing us to either (i) reject the experience as false data, (ii) or amend our belief system to account for the phenomenon. Usually rejecting the experience as false data is the easier path, and thus the one most taken. However, when the experiences that are inconsistent with the paradigm pile up to the point that they can no longer be ignored, the individual is forced to undergo a “paradigm shift’ in which they are forced to amend their old worldview to account for these experiences. The individual often says that the “scales impeding their vision of reality fell from their eyes” and they could see the world truly for what it was for the first time.

As an investigator, we have to be wary of the witnesses’ worldviews and our own.  Witnesses who are deceived by fraudsters are often lured into a distorted worldview, but one in which they believe they see the world for what it truly is for the first time.  Eventually the fraudster’s worldview must give way when the number of intensity of experiences convinces the mark that it can no longer be true, and the mark realizes that they have “gone down the rabbit hole” to share a false reality with the fraudster.  Thus, a fraud victim often two paradigm changes, the first being the worldview of the fraudster and their “black box” of miracles in which they cannot lose, and the second when they have so uncontrovertibly lost, that they now see the fraud for what it was. Thus, a fraud victim’s account of what is happening, or what has happened, varies radically depending on which paradigm they believe in and the time of your interview. 

For investigators, the danger is in forming a worldview that leads us to conclude what type of person is most likely to have committed this offence, and then filtering the evidence based on this view.  As they say in “Casablanca”, we “round up the usual suspects”. For fraud cases this is extremely dangerous because the fraudster’s ability to be liked, trusted, respected is their stock and trade, as it makes them the least likely to be suspected by victim and investigator alike. Just as fraudsters prey upon people of their own sociological group because trust is presumptively the default (“affinity fraud”), so too fraudsters attempt to prey on our similar interests (sports, cars, etc) in an effort to win our trust. We have to ask ourselves, (1) am I focusing on a suspect because I dislike them and therefore don’t trust them? (2) am I minimizing the involvement of a potential suspect because they don’t seem the type? (3) if I gave all the evidence to another investigator with a background different from my own, would they weigh it in the same way as I have?

Let us take some examples from history.

I don’t believe the traditional account of the Battle of Gettyburg during the Civil War.  The traditional view is (1) Robert E. Lee was a brilliant battlefield tactician at the height of his powers during the Civil War, (2) during the third day of the Battle of Gettysburg he simply ordered the main line of his infantry to charge the cannons in what has been known as Pickett’s Charge, where they were mowed down, losing the battle and ultimately the war.  Now how do historians deal with this dissonance?  The traditional views are (1) hubris, Lee believed and his Army was invincible after a string of victories or (2) ill health, a heart attack earlier in the campaign had affected his judgment. These seem like poor attempts at reconciling the folklore of the battle, as a heart attack does not affect one’s faculties after one has recovered, and I doubt that a general on the most important day of his life abandoned his skills as a tactician.

What do I believe? At the Battle of Brandy Station shortly before Gettyburg Stuart’s cavalry engaged the Union cavalry in a fierce battle that resulted in a draw.  That battle revealed the increasing competence of the Union cavalry to the point that they were a match for Stuart’s Invincibles.   That, however, was unknown to Lee when Stuart rejoined Lee on the second day of the Battle of Gettyberg.   I believe Lee instructed Stuart to ride his cavalry around the union line and attack it from the rear, on the road between the Union troops and their retreat route to Washington. When they reached that point, Stuart would fire 4 cannon shots and charge the union position, with Pickett’s forces then charging the main line, and Longstreet from the other side of the Union line. The three pointed pincer attack would see the Union forces surrounded, leaving them no choice but to surrender. Unfortunately for Lee, Longstreet refused to attack and Stuart was repelled by Union General Custer after he had fired the 4 cannon shots, leaving only Pickett’s Charge proceeding as planned. 

What is interesting is not whether I am right or wrong, but the ire and fury visited upon me by my university Professors for attacking the “settled” fork lore of the battle.  Rather than entertaining a new theory that would keep the “settled” view of Lee intact, and explaining why Pickett’s Charge proceeded as it did, the new theory challenged the deeply ensconced views of the Professors at the hands of an “amateur” like myself, and was not be entertained no matter how much “proof” I provided. 

So too, my explanation of the Battle of Stalingrad during World War 2.  I explained it as the tactical equivalent of General Grant’s siege of Vicksberg to cut off Mississippi River, with the Volga River being used by the Soviets in the same manner as the Confederates.   I explained the difference in result being solely to a Gernan intelligence failure that had allowed the Soviet Union to ship the bulk of its forces in Siberia to the Volga undetected at the same time as it was shipping the bulk of its manufacturing plants in the opposite direction.  The result was to double the Soviet forces opposite Stalingrad, and then encircle Stalingrad before the Germans could believe what was happening.   To go from the cusp of ultimate victory to Germany’s largest defeat in history was too much to fathom.   So too, for Professors to believe that Stalingrad was anything other than a military, rather than intelligence failure, and my explanation was once again rebuked.  While university purports to be the place to explore new ideas, my experience was the opposite.   So too may be the case when you are doing an investigation that is led by seasoned professionals with deeply ensconced beliefs. 

All of this may tempt you into believing that there is a great more individual or social psychology in play during the investigative process that you might have previously believed.  Please adjust your worldview accordingly.

Is There a Need for an Expert to Prove Damages?

By David Debenham

Documents do not speak for themselves. A document tendered by itself as here is hearsay, and hearsay is presumptively inadmissible. Unless there is a “hearsay” exception that admits them documents prove nothing in themselves[1].  They need a live witness to testify as to the truth of the documents’ contents to prove their contents. 

A primary source is a document written by someone who was a witness to the events described in the document.  By contrast, a secondary document is written by someone who was not a witness to the events described in the document.[2]  Thus a source document is proven by someone with first hand knowledge of its contents, while a secondary document is generally proven by someone who collated source documents already admitted into evidence. Otherwise it is ”double hearsay”, an unsworn document based on other unsworn documents.

In accounting we start with the bookkeeper recording (journalizing) transactions in a daily record, using double entry methodology.  From there entries are transferred (posted) into ledgers, which are secondary documents that provide a summary of similar transactions during the accounting period, such as the ledger of purchases account. From the ledger, the various items are posted as specific entries in the financial statements. It follows that to prove financial statements in court that you need to prove the ledger and the journal by one or more witnesses unless an exception to the hearsay rule applies.

What about an expert witness?  The role of the expert witness is to assist the court through the provision of an independent and unbiased opinion about matters coming within the expertise of the witness and beyond the ken of the ordinary person.  The expert gives an opinion based on what they are told or read before trial, which is hearsay. The expert disclosed this second-hand evidence (hearsay) to show the information on which their expert opinion is based, not as evidence going to the existence of the facts on which the opinion is based.  In other words, the hearsay upon which the expert bases his or her opinion must be proven by other witnesses for the expert’s opinion to have any weight at all. 

There is no rule governing the necessity of expert evidence to prove damages.  Where actuarial calculations are necessary, for example, there is no requirement that they be introduced into court by an expert.  There is no question that expert actuarial evidence is valuable in cases involving complex calculations, such as claims for future lost income or medical care which must be discounted for various contingencies.  Nonetheless, the jurisprudence suggests that there is no requirement per se that a plaintiff obtain an actuarial assessment in every such case.  Indeed, one could easily conceive of a situation in which the plaintiff did not have the resources to retain an expert, but had other persuasive documentary or testimonial evidence at their disposal.  

Although it is customary that expert evidence is called there is no legal requirement to do so.  I would adopt the position expressed by Ferguson J. in Buksa v. Brunskill

The usual instruction to the jury is to suggest that if it finds that there will be a future loss of income it should determine the average annual loss and then consider the present value and then consider the various contingencies.  These calculations are customarily explained by an expert witness but in my view the jury must make its own calculations whether or not there is expert evidence.[3]

One case has suggested to some that expert evidence is necessary to collate and present damages to a judge or jury. n Fermar Paving Limited v. 567723 Ontario Ltd. o/a Winter’s Pit[4] the Plaintiff 2010, Fermar entered into a construction contract with the Ontario Ministry of Transportation (“MTO”) to provide road construction on a portion of Highway 26 in Simcoe County (the “Project”). To complete the Project, Fermar required two types of aggregate: granular “A” and granular “B”. The aggregate was required to meet the Ministry’s specifications.  The Defendant operating as Winter’s Pit (“Winter’s Pit”), approached Fermar to discuss Fermar’s needs for aggregate. After some discussion, Fermar sent a document (“the Document”) to Winter’s Pit setting out the proposed terms of an agreement. Winter’s Pit requested a higher price for the granular A and granular B but asked for no other changes. The Document was signed by both parties on September 3, 2010.[5]  A few days later, through its solicitor, Winter’s Pit said that it could not provide as much aggregate as it was required to in accordance with the signed Document. There were discussions over several months, but no new signed agreement was reached. In November 2010, Fermar was told to leave the site or Winter’s Pit would commence proceedings for trespass. Fermar brought an action for breach of contract by repudiation of the agreement and sought damages to compensate Fermar for the cost of having to source the aggregate from elsewhere. a) The Document was an enforceable agreement; and (b) c) Winter’s Pit repudiated the terms of the agreement such that it was responsible to pay the respondent damages in the amount of $816,436.37. The Ontario Court of Appeal found that the trial judge erred in her determination of damages, and referred the issue of damages back to the trial division for re-trial. 

The Court of Appeal agreed that Fermar had a right to source its aggregate elsewhere and sued Winter’s Pit for breach of contract. The trial judge correctly held that as a result of Winter’s Pit’s repudiation of the agreement, Fermar was entitled to be restored to the position that it would have been in had Winter’s Pit met its obligation to supply all necessary aggregate. Fermar was required to find other sources of aggregate and incurred costs for equipment rental, cost of the aggregate, transportation, labour and other valid expenses.  The trial judge awarded Fermar damages in the amount of $816,436.37, which she found to be the difference between what Fermar would have paid to Winter’s Pit and the amount it did pay to the third-party suppliers for the aggregate.  In so doing, the trial judge relied on only two documents. The first was a document entitled, “Cost Summary for Alternate Sourcing of Granular “A” and Granular “B” by Supplier”, which purported to summarize approximately 1000 pages of invoices and other documents. The second was a document entitled, “Production Cost Analysis”, which compared the costs that Fermar says it would have paid to Winter’s Pit and the costs it paid to third parties for the aggregate. These documents were adduced at trial through E, Fermar’s project manager.

The trial judge noted that E was responsible for planning all assigned projects, preparing contracts, progress certificates, payments and completion of the projects. He oversaw the completion of this project and obtained alternate sources of aggregate. E testified that Fermar obtained the requisite Granular A from Brock Pit and Granular B, as well as some additional Granular A, from Walker’s Pit.  E testified that he had to approve all invoices used in the analysis when they were originally received and did not review them again for purposes of preparing the summary. 

E prepared the cost analysis using the costs that were prepared, analysed and collated by the Accounting Department of Fermar. He stated that he did not do an independent analysis himself, as the information came from a reliable source, namely Fermar’s Accounting Department. 

It was the position of the defendant that these costs were not valid and should be rejected, given that they were not prepared by an accountant or an expert in the area, but rather by the Project Manager of Fermar, who was not an accountant. Further, it was the position of the defendant that the evidence given was opinion evidence and he had not been qualified as an expert. Finally, the defendant submits that the evidence was not “business record evidence” and no backup material was provided in support of the summaries. This was argued at the time of trial and it was the position of the plaintiff, and acknowledged by the defendant that approximately 1000 backup documents had been provided by the plaintiff as regards the cost summary but not produced at trial.

The trial judge found that the evidence adduced by the plaintiff pursuant to the testimony of E was not “opinion evidence”. He presented evidence in the form of a cost summary based on Fermar accounting information, including the invoices he had previously reviewed and approved for payment, on the basis of which approval, said invoices had been paid and that he had compiled with the assistance of the accounting department. “This was substantive evidence” according to the trial judge.  Further, the trial judge found that “while it would have been useful to have the supporting documentation, I am not satisfied that this was necessary in the circumstances of this case. I find Mr. E’s evidence to be credible. He testified in a straightforward clear, uncontradicted manner.”

The court of appeal found that it was not possible on this record to calculate the amount of the appellant’s damages because the source documents were not part of the trial record, nor was there agreement on the quantum of damages at trial. Because it is not possible for this court to make the factual findings necessary to determine these issues on the existing trial record, the Court of Appeal returned these issues to a judge of the Superior Court to quantify the damages.

So what does all of this mean?

  1. Expert opinions may be introduced at trial to give an opinion as to damages if the damages calculation is complex, and involves factors upon which the expert has expertise.  On the other hand, it is not necessarily the case that an expert opinion is required.
  2. An accountant or other professional may be collating information from source documents and introducing them in court.  That does not make the witness an “expert”, such that they must meet the qualifications of an expert as possessing expertise beyond the scope of the ordinary citizen.  Where the case involves the calculations that are relatively simple mathematics, no expert is required,[5] and the witness should not be qualified as an expert to testify regarding the calculations.
  3. Collated secondary/summary documents remain hearsay, such that the underlying source documents need to be produced, and proven at trial, before the secondary 

[1] Cambie Surgeries Corporation v British Columbia (Attorney General), 2017 BCSC 861 (CanLII), 

[2] Chippewas v Attorney General (Canada), 2016 ONSC 672 (CanLII),para 4

[3] [1999] O.J. No. 3401 (S.C.J.) at para. 5:

[4]  2020 ONCA 173 (CanLII), varying 2018 ONSC 5485.

[5] Graff v. Bennett, 1995 CanLII 4000 (SK CA)

Fraud Psychology 201

By David Debenham

When we discuss fraud psychology we start and end with the fraudster, and we usually focus of Cressey’s Triangle and its variants that include not only rationalization, pressure, and opportunity, but capability as well.  As an accountant and a lawyer, I can usually tell who the fraudster is by the means they use to perpetrate their fraud(s). Professionals are “comfortable” with abusing the types of techniques they use in everyday practice, such that a lawyer commits certain types of frauds, and accountants commit other types. When I was confronted with an exception to this rule recently, I said I bet the lawyer was aided and abetted by his firm’s bookkeeper, and it turned out he was.

This type of fraudster finds an opportunity in their everyday life, and is pressured by circumstance to step across (or erase) the ethical line for the greater good of the family or community that depends on them.  Once the pressure is removed, the fraudulent behavior continues because the ethical line is hard to retreat to.  

But frauds of opportunity are only part of the puzzle.  Many fraudsters have a long history of latent misconduct that only becomes apparent when their frauds are too large to hide or ignore.   They aren’t the “one-off opportunist” but are persons who made the wrong choice at a certain fork in the ethical road, and simply cannot find their way back without being caught and punished. 

Then we consider the “underachiever”.  There is a fraudster who has been told from childhood that they are gifted, and yet they go through school with grades that bely this assessment, so they cheat.  They lie and cheat at school, sports, games as a way of ensuring other assess them as they have self-assessed as superior.  The rules don’t allow them to show what they can really do, so avoiding the rules proves their ability.  They are often assessed as narcissists, psychopaths and the like because they obsess about their own image and ignore or the minimize the consequences to others.

There is also the grifter, who commits fraud in the same way that others steal or sell drugs for a living.  Fraud is simply a way to earn a living. 

But wait, this is only part of the picture.

What about the psychology of the “victim”?  Is there an employer that invites fraud by its employees by encouraging management fraud?  By treating those who join the business as family, without any vetting of the employee?   Affinity frauds are the marriage of fraudster with a certain sub-group of society?  Do fraudsters find their victims based on particular characters of the victims? If we identify a fraudster, can we identify which groups he or she might have victimized by the groups he has connected with in the past?

And what about facilitators?  Is there a certain psychology that identify certain persons as shills?  The fraudster rarely can perpetrate a fraud without help.  Some people won’t initiate a fraud, but will facilitate others in doing so, such as secretaries, personal assistants, junior colleagues.  Is it the charisma of the fraudster?  Is it that the fraudster financially rewards them? Is it that the fraudster promotes them above their abilities or otherwise charms with praise?  How do we identify the facilitators and distinguish them from “dupes”.

Dupes, or marks, are the ideal victim of fraud.  Not only are they susceptible to the fraudster’s message, but they are also likely to become “true believers” and lure others into the scheme (usually friends and family) based on their false believe in the fraudster.  Unlike the rank-and-file victim, they are the most likely to become evangelical in their belief in a fraudulent venture such that they lose everything and yet are the last to realize that they have been defrauded until, at last, the evidence becomes so overwhelming that the scales finally fall from their eyes and the fraud is revealed to them. 

Is there a type of person that makes an ideal dupe?  Do fraudsters intuitively identify them because of certain characteristics? Are there people uniquely vulnerable to fraud schemes?  Is there way to treat them to escape from such schemes and reveal the fraud before the scheme itself has run its course and victimized everyone?

As forensic investigators we need to understand everyone in the fraud food chain properly not only to allocate blame and compensation properly, but to move our practices from reactive investigations to proactive auditors. 

It Even Happens at Work…

By Dave Oswald

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Categories of Fraud Are Not Closed

By David Debenham

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

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

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

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

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

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

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

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

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

[1] 2016 MBQB 180 aff’d 2016 MBCA 126

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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