The W5 “Crypto Bros” Story on the Bankruptcy of “Crypto King” Aiden Pleterski Explained

by Norman Groot, Investigation Counsel PC

On Saturday February 3, 2024, CTV’s W5 aired an episode entitled “The Crypto Bros”. The program informed Canadians about the Forex (foreign exchange) and cryptocurrency Ponzi scheme perpetrated by the self-proclaimed “Crypto King” Aiden Pleterski. The program also focused on the schemes perpetrated by two of Pleterski’s associates – Colin Murphy of Oshawa, Ontario, and Ryan Rumble of Chatham, Ontario.

Link: https://www.ctvnews.ca/video/c2860068-w5–the-crypto-bros

The W5 program raised the questions of why it was that Pleterski was living the high life while a bankrupt and why all three “Crypto Bros” were not subject to criminal charges. The W5 program reported on how Ontario’s civil courts have jailed Murphy[1] and issued an arrest warrant for Rumble,[2] yet Canada’s criminal system has not issued charges against Pleterski, Murphy or Rumble, and Canada’s bankruptcy system has not imposed sanctions on Pleterski to curb his wild spending.

The purpose of this blog post is to answer inquiries that we have received from the public and Pleterski investors arising from the airing of the W5 “Crypto Bros” program. Our law firm and our investigators, led by Keith Elliott of Reed Research, were interviewed for the W5 production due to our involvement in the bankruptcy process with Pleterski and with the civil court prosecutions of Rumble and Murphy.

While the W5 program is very informative, there are gaps in it that we fill in this post and which explain why Pleterski is running free as a bankrupt while Rumble and Murphy’s lives are restricted by means achieved through Ontario’s civil courts. This blog post explains why Canada’s civil justice system is the practical place to seek justice when it comes to a timely response to fraud recovery projects.

The W5 episode also mentioned the fascinating allegations that bankruptcy inspector Akil Heywood was involved in a “self-help” form of recovery from Pleterski in which threats were made against not only Pleterski, but also against Pleterski’s bankruptcy trustee Rob Stelzer. These kinds of shenanigans are a first of their kind. We also discuss Akil Heywood’s role in the bankruptcy below.

Pleterski’s Scheme

The W5 program informatively explains the life story of Aiden Pleterski, from being a teenage baseball enthusiast, to a Fanshawe College drop-out, to a self-promoting “crypto king”. The W5 story told how Pleterski initially dabbled in foreign exchange and cryptocurrency trading, and then began to accept investor money solicited on claims that he was obtaining phenomenal returns at low risk. The story states that Pleterski promoted himself by purchasing a story to run in Forbes Magazine describing himself as the “Crypto King”.

The reality is that Pleterski was never a “Crypto King” or any kind of “King” for that matter. The bankruptcy court filings indicate that Pleterski did very little foreign exchange or cryptocurrency trading. Instead, he operated a Ponzi scheme in which phenomenal “investment return” payments was actually just the return of part of an investor’s own funds. Pleterski used the remainder of investor funds for various purposes including exorbitant personal spending that created the illusion that he was actually wildly successful as a foreign exchange and crypto trader. Pleterski’s act of genius was not forex trading, but how he figured out how to rip so many people off.

Like most Ponzi schemes, it eventually imploded. Starting around March 2022 Pleterski stopped communicating with most of his investors. By May 2022 a “fixer” operating under the name “Mike” who had been hired by some of the Pleterski investors, created sufficient disruption to Pleterski’s life that he went underground. Pleterski’s non-communication resulted in investors contacting lawyers. By June 2022, civil litigation commenced. More on “Mike” the “fixer” is explained below.

The Pleterski Mareva Injunction

In July 2022 our office received an inquiry from an investor who had transferred approximately $1.1M to Aiden Pleterski for foreign exchange and cryptocurrency trading. Our investor had signed contracts with Pleterski personally and later with his alter ego company AP Private Equity Limited. Our client’s funds were sent by wire transfer to bank accounts as directed by Pleterski. Our client received some returns on his investment but became concerned when Pleterski stopped communicating with him.

Our firm undertook the usual litigation searches and learned that in June 2022 an investor named Sacha Singh had commenced an action in Oshawa and obtained a Mareva injunction against Pleterski and AP Private Equity. A Mareva injunction is an asset freezing order which restrains a defendant from dealing with their assets pending the outcome of legal proceedings. Another investor named Akil Heywood had also joined along with a third investor named Ryan Rumble and his company Banknote Capital Inc. Between Mr. Singh,[3] Mr. Heywood, and Mr. Rumble[4], approximately $9.215M had transferred to Pleterski for foreign exchange and cryptocurrency trading.

In an updated litigation search we learned that a fourth investor group headed by Braden Martyniuk also sought to join Mr. Singh, Mr. Heywood, and Banknote Capital on the Mareva injunction.[5] However, Mr. Singh and his counsel would not share information they received through the Mareva injunction process with Mr. Martyniuk. In retaliation Mr. Martyniuk filed an application to assign Aiden Pleterski and AP Equity into bankruptcy, which effectively ended Mr. Singh’s civil litigation.

A bankruptcy has the effect of staying civil litigation, which in Pleterski’s case resulted in him being freed from the civil court restrictions. The bankruptcy assignment date was August 29, 2022. Had Pleterski remained subject to the civil system, there would have been a better chance of curtailing his conduct and drilling down to his source of funds. Undoubtedly Mr. Martyniuk did not foresee the wild bankrupt Pleterski spending that was about to unfold. As the saying goes, hindsight is 20-20.

The Pleterski Bankruptcy

Based on the recommendation of Mr. Martyniuk, Rob Stelzer of Grant Thornton LLP was appointed as the trustee of the Pleterski and AP Private Equity bankruptcies. No other investor had a say in hiring Mr. Stelzer as the trustee. Who gets to pick a trustee is a feature of the bankruptcy system. Our client wanted to know whether Mr. Stelzer had experience in dealing with large-scale Ponzi scheme frauds, what Mr. Stelzer’s strategy was, and the scope of the Pleterski scheme.

In furtherance of our client’s objectives, our firm posted an investor notice on our firm website requesting information on Pleterski. Within days we were flooded with approximately 150 investor inquiries reporting losses in excess of $21M in addition to the $9M reported by the Singh litigants. The rumors of Pleterski’s downfall were spreading like wildfire through investor circles because many of them had become investors on the recommendation of prior investors. This is why our firm received more investor complaints than the bankruptcy trustee.

While we were receiving the investor complaints, we learned that the Mareva injunction obtained by Mr. Singh had only preserved approximately $343,000.[6] The obvious question was: where is the money?! It could not all be spent on ‘lifestyle’. As mentioned, as a result of Mr. Martyniuk assigning Pleterski and AP Private Equity into bankruptcy, the civil action of Mr. Singh was stayed and the efforts to trace money through the civil courts stopped. Our client wanted trustee Stelzer to advise on the substance of his recovery plan and his experience in such cases.

In furtherance of our client’s objectives, we contacted Mr. Stelzer and made these inquiries. Mr. Stelzer’s plan was not to take any action against Pleterski until after the first meeting of creditors – approximately a month away. The only steps taken by Mr. Stelzer was to contact Pleterski and ask him to voluntarily provide a list of investors, their contact information, and their investments. The Civil Courts had already declared Pleterski a rogue – so relying on Pleterski for information was never going to be effective. Our client was very disappointed with the trustee’s strategy.

The reality is that to increase the chances of recovery, investigations related to Ponzi schemes require locating and preserving the rogue’s data through an Anton Piller order, which is akin to a civil search warrant. Mr. Singh had not attempted to obtain an Anton Piller order through the civil court process. Mr. Stelzer did not wish to take use the bankruptcy court processes to preserve Pleterski’s data before a first creditors’ meeting. During this period of time, Pleterski was not feeling the pressure of the law.

There is some legal debate as to whether tracing and preserving funds and searching for and preserving data and paper evidence is slower in the bankruptcy process than what can be achieved through the civil court. Given our client’s frustration with the lack of action being taken by Mr. Stelzer, our client asked us to assist him in being appointed as an inspector in the bankruptcy and to hold a vote to replace Grant Thornton as the trustee with a more proactive bankruptcy trustee.

The Pleterski Bankruptcy Investigation

On August 29, 2022, the first meeting of creditors was held. It was somewhat of a gong show. Aiden Pleterski did not show up in person as required. Pleterski did not turn over his phone, electronic devices, or any other evidence to Grant Thornton. Mr. Stelzer had not put Pleterski under surveillance and could not independently verify his whereabouts. Pleterski showed up by video link and provided no meaningful responses to investor inquiries. Some investors yelled death threats at Pleterski.

Given the lack of meaningful information obtained by investors at this first meeting of creditors, a vote was held to replace Grant Thorton as the trustee. Our client was not the only investor who wanted to replace Rob Stelzer – investor Akil Heywood also proposed an alternative trustee. To foreshadow, Akil Heywood is alleged to have engaged in self-help recovery to get ahead of investors.

For now, we return to the story of the first meeting of creditors. As there were three trustees that investors could vote for, a vote splitting occurred resulting in Grant Thornton remaining the trustee. Upon being confirmed as the trustee, inspectors were nominated and voted on. Our client, Mr. Singh, Mr. Heywood, Mr. Martyniuk, and a fifth investor were voted in as inspectors.

Thereafter a meeting of inspectors was held. Solicitor Leanne Williams was retained as counsel to the trustee. Trustee Stelzer made demands of Pleterski to surrender his iPhone and relevant data.  When that was ignored, Mr. Stelzer made an application to the bankruptcy court for an order that he do so failing which Pleterski be jailed. The application was scheduled for September 13, 2022.

On the eve of the September 13, 2022, hearing Pleterski turned over a phone (there were multiple phones he was using). As one would expect, given that the application was on notice and the passage of time since the Singh Mareva injunction, the phone was devoid of any useful data to assist a recovery. On September 13, 2022, the bankruptcy court adjourned Mr. Stelzer’s application for Pleterski’s arrest given that he had partially complied and promised to more fully comply.[7]

Shortly thereafter, Trustee Stelzer brought a second application for Pleterski’s arrest for non-cooperation with the bankruptcy process. The application was scheduled for October 6, 2022. At this hearing, Justice Kimmel of the Bankruptcy Court noted that Pleterski had not turned over all of his data or made the required disclosures to his trustee, and as a result trustee Stelzer was seeking his arrest to obtain compliance; i.e. to coerce him to do so. Trustee Stelzer’s motion was brought under sections 168(2), 198, and 205 of Canada’s Bankruptcy and Insolvency Act.[8]

Again, on the eve of the application, Pleterski feigned cooperation such as a promise to turn over some property, a second iPhone, and to attend to meet with his trustee. Justice Kimmel held that sections 168(2), 198, and 205 of Canada’s Bankruptcy and Insolvency Act operate similarly to contempt of court prosecutions in Ontario’s civil courts. Justice Kimmel stated:

The Court does not grant warrants for the arrest, detention and incarceration of individuals in civil matters, even when they have acted in contempt of the Court’s orders, except in very extenuating circumstances… A custodial sentence [for contempt of court] is typically reserved for the most serious contempt or where there is no choice but to jail a contemnor in order to coerce compliance or to express deterrence and denunciation.

 So far the two times the Trustee has brought forward its motion it has resulted in the primary objective of compliance being achieved… While the extreme remedy of an arrest warrant and an order for detention and incarcerate on of Pleterski has not been found to be warranted today, I do not foreclose that as a possible future remedy if this pattern of conduct continues.[9]

Thereafter, no timely applications were made by trustee Stelzer to the Bankruptcy Court to incarcerate Pleterski as a means to coerce him to disclose assets or surrender data. Without judicial deterrence, Pleterski started travelling the world creating and posting videos essentially mocking Canada’s bankruptcy system. These Pleterski-made videos were featured in the W5 program.

The most recent of the Grant Thornton reports dated October 18, 2023, indicates that the Trustee has paid out $3.15M in dividends to creditors. Trustee Stelzer further reported that he “considers the administration of the estate to be substantially complete with the exception of a small number of unresolved litigation matters… and that in late 2023 or early 2024, prior to the statutory deadline, the Trustee will appear at Pleterski’s discharge hearing.”[10]

The most comprehensive reporting by Grant Thornton is contained in its Third Report of the Trustee dated March 14, 2023. In this report trustee Stelzer disclosed that Pleterski’s bank accounts contained $41.5M of receipts and disbursements,[11] of which $15.9M (38.4%) were investor repayments (Ponzi payments), and of which $13.5M (32.7%) was spent on Pleterski’s extravagant lifestyle. Only $670,706 (or 1.6%) was “invested” (meaning traded per his investor contracts). Other transfers were to his associates, including Colin Murphy.[12]

Neither the most recent of the Grant Thornton reports dated October 18, 2023, nor the prior reports disclose precisely how much Grant Thornton has recovered from Pleterski or what has the trustee or its counsel has charged Pleterski’s estate for their recovery efforts. Our understanding is that approximately $4 to 5M has been recovered, that Grant Thornton and its counsel have charged $1 to $1.5M in fees and disbursements, leaving a total of approximately $3.5 to 4M (or 10%) being returned to creditors. The number of creditors and the amount of creditor claims also not been reported.

What is clear, however, and what was discussed in the W5 episode, is that Pleterski continues to live an extravagant lifestyle as a bankrupt and that the trustee does not know his source of funds to support this lifestyle. The obvious inference is that Pleterski is using investor funds not reported to the trustee to support his spending. The ineffectiveness of the bankruptcy process to control Pleterski is what the focus of the W5 episode was about.

It is suspected that the cash and cryptocurrency that Pleterski obtained from investors that has not been reported to his trustee is the source of funds that Pleterski is using to fly around the world posting his lifestyle on livestreams. Pleterski, on his postings, alleges that he is still trading, but that seems comical given his known conduct before the bankruptcy. That said, why would Pleterski fail to continue to pay investors with his unreported stash of cash and crypto to avoid the implosion of his Ponzi scheme? Theories on this issue are discussed below.

For now, we note that not all investors have filed losses with the trustee. As the W5 production mentioned, some investors are concerned about disclosing their source of funds and therefore have not filed claims in Pleterski’s bankruptcy. Other investors hope to receive a private “self-help settlement” with Pleterski. Other investors are so concerned about their personal safety that they opted out of filing claims. All of this to say that the $40M of reported losses is likely a very conservative estimate of all investor losses, and that Pleterski may be living off what was not disclosed to date.

Civil Court Prosecutions: Sutherland’s Complaint About Colin Murphy

The complainant Craig Sutherland is featured on the W5 story. We are counsel to Mr. Sutherland in his civil litigation against Colin Murphy. The discussion below is developed from facts that are in the public record that we filed in the civil courts. Mr. Sutherland has not waived any privilege.

Mr. Sutherland provided funds to Colin Murphy based on Mr. Murphy’s representation that Pleterski was a successful trader, that his funds would be invested in Forex trading, that Pleterski made significant returns, and that Murphy could obtain significant returns. Mr. Sutherland swore an affidavit indicating that Murphy had shown him a crypto wallet or account on his (Murphy’s) iPhone containing in excess of $4M of Bitcoin. We knew from the Pleterski bankruptcy that Pleterski had transferred $1.3M+ to Murphy, and that Murphy was engaging in cash transactions with Pleterski.

Mr. Sutherland filed his complaint with our office because the Pleterski bankruptcy would only accept claims from investors who transferred funds directly to Pleterski. As Mr. Sutherland transferred his funds to Murphy, Mr. Sutherland asked our firm if we would attempt a recovery against Murphy. As Murphy was not a bankrupt, it was open to him to use the civil court process.

When we carried out standard litigation searches on Murphy, we learned that a Mareva injunction already existed against him by a claimant named Anthony Milne. He (Mr. Milne) had obtained a Mareva injunction against Murphy but had not located him or forced him to attend court. Mr. Milne had not commenced contempt of court proceedings against Murphy or attempted to obtain his data.

A reasonable attempt at recovery from Murphy required an Anton Piller order (civil search order) to attempt to preserve digital and paper evidence and digital and cash assets. Similar to Mr. Singh’s Mareva injunction against Pleterski, Mr. Milne’s Mareva injunction against Murphy was lacking in results. Mr. Stelzer was not pursuing Murphy for recovery of the $1.3M that Pleterski had transferred him. We therefore located Murphy and placed him under surveillance while we filed materials to obtain an Anton Piller order in the civil courts.

The Murphy Anton Piller Order Execution

At the time that the Anton Piller order was issued, Murphy was residing with his girlfriend at her mother’s residence. Given Murphy’s online postings of firearms, the court authorized use of a firearms expert to seize weapons from Murphy. The court also authorized the attendance of police to keep the peace in the event that the Anton Piller order execution escalated to violence.

The execution of the Anton Piller order was videotaped and later shown in open court. The W5 program shows parts of the Anton Piller order execution. The “door knock” at the residence was shown. The video then cuts to the confrontation in the kitchen when Murphy refused to surrender the iPhone targeted by the search order. Not shown was a 30-minute standoff at the front door with the mother of Murphy’s girlfriend. When the standoff ended, a search commenced, and the target iPhone was located – the iPhone with the wallet or digital account holding the $4M of Bitcoin.

The target iPhone was located by investigator Keith Elliott. However, Murphy snatched it back and another standoff commenced. Murphy threated to use force on any member of the search team who attempted to obtain the iPhone from him. The video shown by W5 includes the cautions given to Murphy about being jailed for contempt of court by the civil court for failing to surrender the iPhone.

Notwithstanding the cautions, Murphy refused to surrender his iPhone. Rather, he attended at the civil court the following day and turned over his iPhone with all of its contents ‘wiped’. During the Anton Piller order execution, we had obtained a screenshot of the iPhone’s contents before Murphy grabbed it back, meaning we knew the number of applications on the phone. The following day, upon attending court, any crypto wallets, exchange accounts, or other accounts were removed, and all communication data relevant to the Pleterski crypto scheme had been deleted.

The Prosecution of Murphy for Contempt of Court

Justice O’Connell declared Murphy in contempt of court for failing to comply with the evidence and asset surrender provisions of the Anton Piller order. After his first court appearance, Murphy was subject to multiple examinations in aid of contempt proceedings. Notwithstanding that the iPhone had been wiped, we knew that Murphy had preserved data. Murphy admitted in his examinations to “air dropping” the data to another device.

As depicted in the W5 program, our firm prosecuted the sentencing phase of Murphy’s contempt of court. This required multiple court attendances and filings of additional evidence. On February 2, 2024, Murphy was sentenced to five months in jail with a condition to return to court upon the completion of his sentence to disclose the location of a missing Lamborghini and other assets, and to otherwise comply with the Mareva injunction reporting. The ordeal is not over for Murphy.

Unlike what has occurred in the Pleterski bankruptcy, where Pleterski runs around free posting his spending exploits, the consequence of incarceration has been imposed on Murphy through the civil courts. Murphy remains under the court’s coercive powers as the contempt proceedings continue upon his release from prison. This could have occurred in Pleterski’s bankruptcy had the trustee continued filing additional evidence and pressing the bankruptcy court to uphold the rule of law.

In Pleterski’s bankruptcy proceedings, Justice Kimmell held that Pleterski could be incarcerated if evidence of contempt for the bankruptcy process continued. A court needs evidence to incarcerate for contempt and Pleterski’s trustee simply has not provided the bankruptcy court with sufficient evidence to incarcerate him as was done in the civil courts with Murphy.

In an effort to detract responsibility for the fraud, during the civil contempt proceedings Murphy turned over to us data that he alleged he had obtained from Pleterski’s iCloud through an unauthorized hack. We turned that data over to the trustee. According to Mr. Stelzer, this data did not assist his investigation in locating any of Pleterski’s missing crypto or cash, or any other kind of recovery. We have not reviewed the data from Pleterski’s iCloud ourselves.

At Murphy’s contempt sentencing hearing, the entire video of the execution of the Anton Piller order was shown to the court by investigator Keith Elliott. CTV sought permission of the civil court to publish extracts from this video, given privacy interests of filming inside of the residence where this took place. The Court held that the “open court” policy of the courts permitted CTV to show parts of the Anton Piller order execution. This was the first airing of an Anton Piller order execution in Canada.

At Murphy’s sentencing hearing we also called data forensics expert Tom Warren as a witness. Mr. Warren was qualified by the Court as an expert on data forensic issues. Mr. Warren’s evidence included his opinion that the data on the iPhone was downloaded to be stored elsewhere before Murphy’s iPhone was wiped. Mr. Warren also testified about the location of a parking lot where the iPhone was taken and the time the iPhone data was downloaded and wiped.

Murphy testified that in fact he had downloaded data from his iPhone after the Anton Piller order execution was abandoned, but he refused to disclose where it was (or is) stored. No one believes this. Murphy remains in contempt of court. Perhaps he will change his mind and disclose assets and evidence when he attends for his return hearing after serving his five-month sentence. There is no early release for contempt.

Hime’s Complaint about Ryan Rumble

Emily Hime is also featured in the W5 story. We are counsel to Ms. Hime in her civil litigation against Ryan Rumble, Banknote Capital Inc., and others. The discussion below is developed from facts that are in the public record that we filed in the civil courts. Ms. Hime has not waived any privilege.

Ms. Hime provided funds to Banknote Capital Inc. whose operating mind was Ryan Rumble. Unlike the Murphy and Pleterski stories, there was data evidence available from Banknote with which to trace investor funds. One of Banknote’s former employees, Brock Tedford, who was also featured on the W5 program, downloaded Banknote’s data and provided it to the Ontario Securities Commission and to our firm. To state otherwise, an Anton Piller motion was not used to obtained Banknote data.

The Banknote scheme obtained approximately $13M from approximately 125 investors. By the time the Hime litigation started, the Pleterski bankruptcy had been ongoing for approximately 8 months recovering approximately 10% of losses and imposing no meaningful restrictions on Pleterski’s lifestyle. In fact, by the time of filing the Hime litigation, Pleterski was posting videos of his extravagant lifestyle while a bankrupt.

The reason Ms. Hime came to us with her complaint was because Banknote had transferred approximately $5M to Pleterski. Banknote had filed a claim in the Pleterski bankruptcy. Hime learned that Banknote was going to be paid a dividend from the Pleterski bankruptcy. Given that Banknote was a Ponzi scheme itself, Ms. Hime wanted to preserve the dividend from the Pleterski bankruptcy and any other Banknote assets before Rumble or others could dissipate them through Banknote.

We were of the view that a class proceeding in the civil courts was a better option for Ms. Hime than attempting to assign Banknote or Rumble into bankruptcy. Ms. Hime agreed to be the representative plaintiff for a class proceeding against Banknote, Rumble, and others. Armed with data evidence from Banknote produced by its former employee Mr. Tedford, the civil court issued a Mareva injunction against Banknote and an order that Rumble attend for examination. Banknote did not challenge Mr. Tedford’s data disclosure. Approximately $500,000 in Banknote assets was preserved.

As a result of Rumble’s conduct, and further evidence developed during the Banknote Mareva injunction, we later applied to the civil courts for, and received, a Mareva injunction against Rumble personally. We received evidence that upon the issuing of the Mareva injunction Rumble left the country for Dubai. We applied for and were granted an order that Rumble immediately surrender his passport to us. We applied for, and received, the same passport surrender order for Murphy as well. Pleterski’s trustee has not applied for an order that Pleterski surrender his passport.

After the order to surrender his passport was issued, Rumble attended the come-back motion via Zoom. Rumble boldly told the Court that he had no intention of surrendering his passport. Rumble alleged that he was in Dubai. The Court held the rule of law must prevail. The Court issued a warrant for his arrest that remains outstanding. It can be said that Rumble remains a fugitive to this day.

After the civil court’s Mareva injunction process had run its course, we had Banknote assigned into bankruptcy. We did not have Rumble assigned into bankruptcy. A contempt proceeding remains outstanding against Rumble. While the warrant for his arrest is outstanding, Rumble is not exhibiting the uncontrolled spending that Pleterski displays through the bankruptcy process.

The reason the Rumble fugitive story and the Murphy contempt story are important and were told by W5 is because many of the creditors in the Pleterski bankruptcy do not understand why it is that the criminal process and the bankruptcy courts are not imposing restrictions on Pleterski.

Akil Heywood and Allegations of Kidnapping and Extortion against Pleterski

Inspectors in a bankruptcy act as a “board of directors” to the trustee. In a bankruptcy, inspectors are elected at a first meeting of creditors. Inspectors are often creditors, and as such they have an interest in a bankruptcy making an optimal recovery. Inspectors have private meetings with the trustee and discuss their investigations and recovery plan. Inspectors are supposed to act in the best interests of all creditors. It is not supposed to be an opportunity to get ahead of other creditors.

Akil Heywood has a criminal record for drug trafficking. It is available on the internet for anyone to find.[13] When Mr. Heywood was elected an inspector in the Pleterski bankruptcy, we informed trustee Stelzer of this issue. Mr. Stelzer advised that the Bankruptcy and Insolvency Act does not contain any provisions to remove inspectors who pose a threat to the integrity of the bankruptcy process.

It is now common knowledge that inspector Akil Heywood has been arrested and charged by the Toronto Police with being a conspirator to the kidnapping of Pleterski. The video image of a beaten Pleterski is on the internet. CBC reports that:

The 39-year-old [Heywood] is also charged with threatening Grant Thornton bankruptcy trustee Rob Stelzer to induce him to pay $2 million in cryptocurrency later that month and faces the same threat-for-money charge involving another man connected to the case. [14]

Heywood has told the CBC that he is innocent. Mr. Stelzer did not respond to W5’s interview request.

An issue in the criminal proceeding against Akil Heywood is how it was that Pleterski was found by the kidnappers? Did Akil Heywood learn of Pleterski’s location through the bankruptcy investigation as a result of his role as an inspector? We are not aware of any bankruptcy story quite like this one.

“Mysterious Mike” aka Kristopher Cadiano

Above we mentioned that Pleterski’s Ponzi scheme imploded in part because of a ‘fixer’ using the name “Mike”. We have since learned that ‘anonymous Mike’ is actually Kristopher Candiano. Mr. Candiano is a defendant in the Sutherland v. Murphy litigation.

Evidence related to “Mike’s” calls to our office has been filed by affidavit in the Sutherland v. Mrphy litigation. According to “Mike”, he was tasked by persons who preferred to operate outside the judicial process to recover their ‘investment’ from Pleterski. In order to do so, “Mike” had to locate Pleterski. Through his inquiries, “Mike” contacted Murphy. They hatched a plan to download Pleterski’s cloud data, and Murphy sent aspects of Pleterski’s data to “Mike”. It was through the hack of Pleterski’s cloud data that “Mike” learned that Pleterski was not using investor funds for forex trading, and that in reality Pleterski was operating a Ponzi scheme.

“Mike” then used non-judicial methods to persuade Pleterski to payback those whose source of funds was not to be exposed. “Mike” made some form of recovery, directly or indirectly, from Pleterski. This all took place in March to May of 2022. As mentioned above, given the intervention of “Mike”, Pleterski stopped communicating with most of his investors and his Ponzi scheme imploded. This is why it may be that Pleterski has retained some of his loot to support his spending today. The Pleterski bankruptcy process has not reported to creditors on the “Mike” issue.

Fraud Recovery – Comparing the Bankruptcy and Criminal Process to the Civil Process

What the W5 program did not have time to explore was which judicial process has better controlled the wild spending of the “Crypto Bros” rogues. As explained above, in the case of Pleterski and his associates, the civil courts have been most effective to date dealing with Murphy and Rumble.

No criminal charges have yet been laid. Criminal investigations operate under a veil of secrecy, and we have no insight into what will occur in the future. Obviously, the police do not disclose the status of their investigation or whether charges will be laid. Criminal investigations and prosecutions are to serve the public interest, not the private interests of individual creditors.

What is known generally is that criminal investigations can take an extensive amount of time due to the processing of production orders for banking and other documents domestically and abroad, and due to the R. v. Jordan decision mandating that criminal trials must be held in defined periods of time, resulting in police being required to file completed investigations before making arrests.[15]

In some criminal cases, those arrested are placed under release conditions that would curb the type of conduct that Pleterski currently displays. That said, as mentioned above, given that the criminal process is ‘handcuffed’ by the Jordan decision, creditors of Pleterski cannot look to the criminal process for timely controls being placed on Pleterski. This leaves the creditors watching the W5 program to hope the civil or bankruptcy process places restraints on Pleterski’s spending.

As mentioned above, Pleterski is no longer under the control of the civil courts due to the stay of proceedings imposed by his bankruptcy. Given the number of creditors in Pleterski bankruptcy, it is not reasonable for a creditor to attempt to lift the stay of proceedings and attempt recovery through the bankruptcy courts. Only Pleterski’s bankruptcy trustee has the authority to seek timely control of Pleterski’s conduct.

The W5 program asked how it is that Pleterski can continue to spend lavishly on lifestyle while a bankrupt. Mr. Stelzer is no longer the trustee of the Pleterski bankruptcy. The new trustee at Grant Thornton has not scheduled a discharge hearing or any other court dates in the Pleterski bankruptcy. Creditors of Pleterski must wait until Pleterski’s trustee files its next report.

The duty of a bankruptcy trustee is to all creditors. Unlike cases in the civil courts where plaintiffs such as Mr. Sutherland and Ms. Hime can direct their lawyers to pursue contempt proceedings against Murphy and Rumble and thereby control their behaviour, a bankruptcy trustee takes its direction from the inspectors. The bankruptcy trustee has to weigh whether the spending required for contempt declarations and coercion (sentencing) passes the ‘cost-benefit’ test.

Whether inspectors actually give instructions to trustees is seen by some as a form of legal fiction. Inspectors are often creditors without experience in investigating Ponzi schemes. Accordingly, inspectors are looking for direction from a trustee and their lawyer for what steps should be taken. That inspectors in the Pleterski bankruptcy are frustrated by the bankruptcy process and the lack of controls on the Pleterski’s spending is understandable.

The W5 episode is helpful as it educated Canadians about the problems a bankruptcy trustee has with bankrupts who are not ‘honest but unfortunate debtors’. Significant return of investor funds were recovered from the Madoff recovery scheme because there were banking records and data used to trace funds. When dealing with Ponzi schemers who have obtained cash and crypto currency, the task of the bankruptcy trustee to trace and recover is much more difficult.

Inquiries

At Investigation Counsel, 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.

www.investigationcounsel.com

February 15, 2024

 

[1] https://www.cbc.ca/news/canada/toronto/crypto-king-associate-colin-murphy-contempt-sentencing-1.7075987

[2] https://toronto.ctvnews.ca/arrest-warrant-issued-for-crypto-king-associate-who-claims-he-fled-to-dubai-1.6687833?cache=ityrlpnlmderht%3FautoPlay%3Dtrue

[3] Singh v. Pleterski / Court File No. CV-22-000000915-0000 / alleged a $4,565,000 liquidated loss

[4] Re Bankruptcy of AP Private Equity / Court File No. BK-22-00208581-OT31 / alleged a $4,650,500 loss

[5] Re Bankruptcy of AP Private Equity / Court File No. BK-22-00208581-OT31 / alleged a $2,895,000 loss

[6] Motion Record of Grant Thornton LLP dated October 21, 2022, Second Report of the Trustee, paragraph 34

[7] Motion Record of Grant Thornton LLP dated October 21, 2022, Exhibit F, Endorsement of September 13, 2022

[8] Endorsement of September 13, 2022, paragraphs 1 to 3

[9] Endorsement of September 13, 2022, paragraphs 7 and 8

[10] Motion Record of Grant Thornton LLP dated October 18, 2023, Fifth Report, paragraphs 31 to 33

[11] Third Report of the Trustee, paragraph 18

[12] Third Report of the Trustee, paragraph 18

[13] https://nowtoronto.com/music/meet-carnivals-youngest-band-leader-ovos-akil-heywood/

[14] https://www.cbc.ca/news/canada/toronto/investor-lost-money-among-5-men-charged-kidnapping-ontario-crypto-king-1.6907548

[15] R. v. Jordan, [2016] 1 SCR 631

Tracing Bitcoin: Navigating the Complex Web of Digital Transactions

By Dave Oswald, Forensic Restitution

In the digital age, cryptocurrencies have emerged as revolutionary financial instruments, with Bitcoin being the pioneer. The allure of cryptocurrencies lies in their promise of financial autonomy, offering a level of anonymity and detachment from traditional banking systems. This very feature has made cryptocurrencies a subject of intense scrutiny and debate. Tracing Bitcoin transactions, therefore, is not just about understanding a digital phenomenon; it’s about navigating a complex web of technological innovation, legal frameworks, ethical considerations, and criminal activities.

Understanding the Blockchain: The Foundation of Bitcoin

The blockchain, the technology behind Bitcoin, is a public ledger that records all transactions made with Bitcoin. Each transaction is visible to anyone who accesses the blockchain, but the identities behind these transactions are encrypted. Transactions are stored in blocks, each linked to the previous one, forming a chain. This structure ensures that once a transaction is recorded, it becomes immutable, meaning it cannot be altered or deleted. This immutability makes the blockchain a trustworthy and secure technology for financial transactions.

Example: Imagine a chain of blocks, each representing a transaction or a series of transactions. When John sends 1 Bitcoin to Alice, this transaction is recorded in a block. If Alice then sends 0.5 Bitcoin to Bob, this is recorded in a new block that is linked to the previous one. Anyone can see that 1 Bitcoin was transferred from John to Alice, and then 0.5 was sent from Alice to Bob, but the identities of John, Alice, and Bob remain concealed behind their cryptographic addresses.

The Complexity of Anonymity and Pseudonymity

While transactions are transparent and traceable on the blockchain, the identities of the individuals or entities behind these transactions are not directly visible. Bitcoin operates under a level of pseudonymity where addresses identify users – strings of alphanumeric characters that do not directly reveal the user’s identity.

Example: If John’s Bitcoin address is ‘1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa’, and he sends Bitcoin to Alice’s address ‘3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy’, anyone looking at the blockchain can see the transaction but cannot inherently know that John sent funds to Alice.

The Role of Advanced Analytical Tools in Tracing Bitcoin

Despite the pseudonymity of Bitcoin transactions, various analytical tools and techniques have been developed to trace these digital trails. One such method is cluster analysis, which groups together Bitcoin addresses based on transactional behaviours, potentially linking them to the same owner.

Example of Cluster Analysis: If a group of addresses frequently interact with each other and have similar transaction patterns, they might be controlled by the same entity. For instance, if addresses A, B, and C frequently transact with each other, and one of these addresses is later identified to belong to a particular individual or entity, there’s a possibility that the same individual or entity also controls the other addresses in the cluster.

Forward and Backward tracing

Tracing Bitcoin in the context of a known fraudulent transaction, such as a ransomware attack, exemplifies the power and complexity of blockchain analysis. When a ransom is paid to a hacker’s wallet, investigators begin to trace the funds. A forward trace is conducted from the hacker’s wallet, following the digital breadcrumbs as the ill-gotten gains are moved, possibly through various addresses, in an attempt to obscure their origin. This forward tracing can reveal the network of wallets involved and identify withdrawal points where the funds are converted into fiat currency or other assets. Concurrently, a backward trace from the identified wallets can be just as revealing. It can uncover a pattern of transactions leading back to the hacker’s wallet, potentially unveiling a broader web of victims who might have been exploited in the attack. This dual approach of tracing not only sheds light on the perpetrator’s attempt to launder the ransom but also helps in piecing together the scale of the attack, offering insights into the number of victims and the total sum extorted, thus painting a fuller picture of the cybercriminal’s operation.

The Use of Mixers and Tumblers: Complicating the Trace

To enhance privacy, some users employ services like mixers or tumblers. These services obfuscate the trail of Bitcoin by pooling together funds from multiple addresses and redistributing them, making it more challenging to trace the original source of the funds.

Example of Mixing Services: John sends 1 Bitcoin to a mixing service, Alice sends 2 Bitcoins, and Bob sends 3 Bitcoins. The mixer pools the 6 Bitcoins and then redistributes them such that John receives 2 Bitcoins, Alice receives 3 Bitcoins, and Bob receives 1 Bitcoin, but not from their original inputs. This process obscures the trail of individual Bitcoins, making it difficult to trace the path from sender to receiver.

Legal and Regulatory Frameworks: The Evolving Landscape

The pseudo-anonymous nature of Bitcoin has attracted privacy-conscious individuals and those involved in illicit activities. This has prompted governments and regulatory bodies worldwide to develop legal frameworks to monitor and regulate cryptocurrency transactions.

Example of Regulatory Action: In a bid to combat money laundering, the European Union’s Fifth Anti-Money Laundering Directive (5AMLD) requires cryptocurrency exchanges and wallet providers to implement strict Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. This includes verifying the identity of their users and monitoring transactions for suspicious activities.

Law Enforcement and Blockchain Analytics

Law enforcement agencies and private firms specializing in blockchain analytics use sophisticated software to analyze the blockchain and detect suspicious patterns. These tools can link pseudonymous addresses to real-world entities, aiding in criminal investigations.

Example of Law Enforcement Action: The U.S. Federal Bureau of Investigation (FBI) has successfully traced Bitcoin transactions in various cases. In the infamous Silk Road case, law enforcement shut down the dark web marketplace and traced millions of dollars worth of Bitcoin transactions to the site’s operator, Ross Ulbricht, leading to his conviction.

Privacy Concerns vs. The Need for Regulation

The ability to trace Bitcoin transactions raises significant privacy concerns. Privacy advocates argue that financial privacy is a fundamental right and worry that tracing Bitcoin could infringe upon personal freedoms.

Example of Privacy Concerns: In a hypothetical scenario, if John donates Bitcoin to a controversial cause or organization, the ability to trace his transaction could potentially expose his personal views or affiliations, leading to social or legal repercussions, especially in countries with repressive regimes.

The Future of Bitcoin Tracing

The future of Bitcoin tracing will involve a delicate balance between enhancing privacy measures and developing more sophisticated tracing methodologies. As regulatory frameworks evolve and integrate cryptocurrencies into the traditional financial system, standardized approaches to monitoring and tracing digital assets may emerge.

Example of Future Developments: Innovations in privacy-enhancing technologies, like Confidential Transactions or Mimblewimble, could further obscure transaction details on the blockchain. In response, regulatory agencies might develop more advanced analytical tools or collaborate with cryptocurrency platforms to ensure compliance with AML and KYC regulations, striking a balance between privacy and transparency.

In conclusion, tracing Bitcoin transactions is a complex endeavour that sits at the intersection of technology, law, ethics, and finance. While the blockchain provides a level of transparency, the mechanisms of pseudonymity, privacy-enhancing technologies, and regulatory efforts add layers of complexity to the tracing process. The evolving nature of cryptocurrencies and their regulatory environment suggests that the field of Bitcoin tracing will continue to adapt and evolve, representing a pivotal aspect of the ongoing discourse surrounding digital currencies and their place in the modern financial landscape.

https://forensicrestitution.com/

 

 

Untying the Deception: The Knot’s Controversial Advertiser Practices Exposed

By Dave Oswald, Forensic Restitution

In the ever-evolving landscape of the wedding industry, The Knot emerged as a pioneering force, leveraging the power of digital technology to reshape how couples plan their big day. However, beneath the surface of its success story lies a web of controversy, allegations, and ethical concerns that have come to define its recent history. From its rise as a wedding industry giant to the accusations of fraudulent practices, The Knot’s journey is one marked by innovation, ambition, and challenges that threaten to tarnish its reputation.

Early Digital Pioneer

Founded in 1996 by David Liu and Carley Roney, The Knot quickly established itself as a trailblazer in the burgeoning digital era. The founders recognized the gap in the market for an online platform that could simplify wedding planning, from inspiration to vendor selection. Their vision was fueled by their own wedding mishaps and a determination to provide couples with a comprehensive resource to navigate the complex world of wedding preparations.

As the internet revolutionized consumer behaviour, The Knot capitalized on this shift by creating an online community that connected brides and grooms with vendors, enabling them to streamline the planning process. With initial funding from AOL, The Knot pioneered features like online gift registries and forums where couples could share ideas and experiences.

Rapid Growth and Allegations

The Knot’s ascent was meteoric. It evolved from a social network for wedding enthusiasts into a comprehensive wedding planning portal, boasting partnerships with industry leaders like Kleinfeld Bridal and JLM Couture. The company’s initial public offering on the NASDAQ marked a significant milestone, highlighting its relevance in the digital era.

However, the journey was not without its challenges. The allegations that have come to define The Knot’s recent history began to surface, casting a shadow over its achievements. Former employees accused the company of defrauding advertisers and investors in the lead-up to its $1 billion sale in 2018. Claims of manipulating contracts and inflating revenue figures to attract investors and drive up stock prices raised serious concerns about the company’s ethical standards.

Controversy Amid Changing Landscape

As the wedding industry evolved and new competitors like Zola and tech giants like TikTok and Instagram entered the scene, The Knot found itself in a battle to remain relevant. The proliferation of platforms offering direct vendor connections threatened to render the middleman role of The Knot obsolete. To stay competitive, the company faced immense pressure to innovate and adapt its business model.

The controversy surrounding The Knot’s alleged unethical practices added another layer of complexity to its challenges. The accusations of fraudulent conduct tarnished the company’s reputation and led to investigations by regulatory bodies like the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC). While The Knot vehemently denied the allegations and emphasized the investigations conducted internally and externally, the controversy persisted, impacting its image and relationships with partners.

From Pioneer to Reckoning

The Knot’s journey mirrors the broader narrative of many tech-driven companies that disrupt industries. It began as an innovative force that reshaped an industry, attracting investors and customers alike. However, the quest for growth and profitability can sometimes lead to ethical lapses, damaging not only the company’s reputation but also the trust of stakeholders who rely on its services.

The allegations of misleading advertisers and investors, altering contracts, and engaging in questionable financial practices raise significant concerns about the company’s commitment to transparency and integrity. While The Knot maintains that it has thoroughly investigated these claims and stands by the accuracy of its financial statements, the allegations continue to cast a shadow over its operations.

Future Prospects and Challenges

As The Knot contemplates a potential initial public offering (IPO), it faces a critical juncture. The controversies of the past have the potential to impact investor sentiment and public perception, making it challenging to regain trust and restore its reputation. The current competitive landscape, characterized by evolving consumer preferences and emerging technologies, adds another layer of complexity to The Knot’s path forward.

To succeed in this dynamic environment, The Knot must not only address the allegations of unethical practices but also demonstrate a renewed commitment to transparency, integrity, and responsible business conduct. Rebuilding relationships with advertisers, investors, and customers will require more than denial; it demands concrete actions that align with ethical standards and stakeholder expectations.

The Knot’s journey from early digital pioneer to a company embroiled in controversy underscores the delicate balance that companies must strike between innovation, profitability, and ethical conduct. Its challenges serve as a cautionary tale for businesses navigating the complexities of the modern business landscape. The Knot’s future hinges on its ability to navigate these challenges, make amends, and regain the trust of stakeholders who once believed in its potential to revolutionize the wedding industry.

https://forensicrestitution.com/

 

 

Fraud Schemes to Watch Out for in 2023: A Guide for Businesses

By Dave Oswald, Forensic Restitution

With the ever-evolving landscape of the business world, accounting and financial professionals must stay vigilant in their efforts to detect and prevent fraud. The COVID-19 pandemic has further accelerated this trend, with remote work, digital transformation, and economic uncertainty all presenting new risks for companies. In this blog post, we’ll explore five of the most common and pressing fraud schemes that organizations need to be aware of in 2023.

Cyber Fraud:
Cyber fraud has been on the rise for several years, and it’s only becoming more prevalent with the increasing dependence on technology and remote work. From malware and ransomware to password cracking and phishing scams, cyber criminals have a range of tools and techniques at their disposal. This year, companies must be particularly vigilant in their cybersecurity efforts, as fraudsters are likely to take advantage of the ongoing pandemic to target businesses and individuals alike.

Vendor and Seller Fraud:
Fraud by vendors and sellers is another common type of financial crime. From fictitious billing to duplicate invoice payments and check tampering schemes, it’s essential that organizations remain aware of these schemes and have processes in place to detect them. This year, it’s more important than ever to work closely with suppliers and ensure that they are adhering to best practices and established protocols.

Payment Fraud:
Payment fraud continues to be a major concern, with false transactions, lost or stolen merchandise, and false requests for refunds all falling under this umbrella. Companies must be proactive in their efforts to detect and prevent payment fraud, using data analytics, fraud investigation techniques, and computer-aided auditing methods to uncover any irregularities.

Healthcare Fraud:
Healthcare fraud is a significant issue, with schemes ranging from billing for services not rendered to misrepresenting the provider of service. In this year, it’s essential to have robust internal controls and a well-trained staff to identify and prevent healthcare fraud. Certified Professional Accountants (CPAs) can play a critical role in detecting and preventing healthcare fraud, leveraging their expertise in financial analysis and investigation to uncover any fraudulent activity.

Identity Theft:
Identity theft is a growing concern, with two main types: traditional identity theft and synthetic identity theft. Traditional identity theft involves a criminal stealing an individual’s personal information, while synthetic identity theft involves a fraudster using a combination of real and fabricated information to create a new identity. This year, organizations must remain vigilant in their efforts to protect sensitive personal information and ensure that their cybersecurity measures are up to date.

Combating fraud requires a multi-disciplinary approach, leveraging the expertise of accounting, financial, and legal professionals, along with the use of advanced data analytics techniques. With these tools and techniques, organizations can better detect and prevent fraud, reducing their exposure to financial crime and other risks. To stay ahead of the curve, companies should invest in the training and development of their staff, ensuring that they have the skills and knowledge necessary to detect and prevent fraud in the business world of 2023.

For more articles from Forensic Restitution, check out their blog Forensic Insights

 

 

 

 

How to get the Opportunist Fraudster to Confess

By David Debenham

In our paper last month, we found that the difference between those who committed opportunistic fraudsters were more likely to be overconfident to pull off a fraud than those who might actually have the ability to do so, but who feared all of the “unknown-unknowns” that could catch them out.   These overconfident people falsely transfer their brilliance in one field into their abilities in fields they know nothing about such as fraud.  Their body language, vocal tone, and rates of participation suggest confidence because of this false transference. This means that these overconfident individuals speak more often, speak with a confident vocal tone, provided more information and answers, and acted calmly and relaxed as they work with their peers in the midst of perpetrating a fraud. In fact, overconfident individuals were more convincing in their displays of ability than individuals who were actually highly competent in their tasks, who, when questioned, become nervous when their conduct is called into question.  The over-confident do not say “I’m really good at this.” Because for them they are past that stage: Instead, they led their “ability” speak for itself as they explain in great detail what they do, and how they do it, in a calm and relaxed way.’  These status seekers who believe their competence at coding transfers into their ability to play poker, chess, or commit fraud, will want to demonstrate this by simply participating more and exhibiting more comfort with any task you put to them, and that is the key to catching them out.  [1]

The key is to enlist the fraudster’s advice in solving the various issues in your case, much as Columbo does in virtually every episode.   So long as you don’t appear to be as capable as the suspect (and how could you be considering their status and yours?) you can simply pose a serious of problems and let the fraudster solve them for you, all the while incriminating himself. Consider Columbo’s “Bye-bye Sky High IQ Murder case”. Genius accountant Oliver Brandt has been embezzling funds in order to keep his high-maintenance wife in fine frocks and tropical getaways. His business partner Bertie Hastings has just found out – and he must be killed.  Oliver shoots him and rigs an umbrella to take the murder weapon up a chimney. He puts a heavy dictionary on the arm of a chair, balancing precariously.  Oliver then starts a record player playing by pushing the start button, which eventually leads to the sound of two shots fired sometime later when Oliver is safely ensconced in a room full of witnesses who have just entered the adjoining room.  The sound of a body falling between the two shots alarms the witnesses.   The group runs into the room to see Bertie shot. In the confusion Bertie pockets the Dictaphone. Later Oliver recovers the umbrella and disposes of the murder weapon.  Columbo asks if the record had the shots. Of course not.  There were caps in the umbrella that were exploded as soon as the arm of the record player moved.  So too the dictionary was pushed off the arm of the chair by the movement of the arm of the record player, so in sequence it was cap explosion, dictionary fall (“the body”), and second cap explosion. At each stage Columbo suggests a hypothesis and the overconfident “high IQ” Oliver sets him straight, until at the end there is no more mystery to resolve.  Interview technique has outwitted the overconfident murder.   So too, for you.  Enlist the overconfident fraudster to incriminate himself.

[1] https://newsroom.haas.berkeley.edu/why-are-people-overconfident-so-often-it%E2%80%99s-all-about-social-status/

 

 

Limitation Periods and Fraud Victims

By David Debenham

“We do not see things as they are, we see things as we are.” [1]

Traditional doctrine treats fraud victims as simply those with weak internal controls, just as we treat victims of theft as those who fail to lock their doors and install burglar alarms.  In my view the truth is far more complex.

There are fraud victims who are simply told lies, and who, as soon as they uncover the lies, they are mentally equipped to start a lawsuit.  They invested in the fraud based on a rational calculation, and when they find out the information they relied on was false, they rationally determine who is at fault and sue for compensation, report the matter to the police, or complain to the relevant professional body.  That, however, does not encompass the entire universe of fraud victims. Many victims believe lie after lie and invest not only their entire life savings, but beg, borrow and steal from relatives, or invest family members’ money until vast fortunes are lost in what appears to an avalanche of throwing good money after bad.  It is this second group of fraud victims that concerns us here.

Most limitation statutes begin the period in which tort victim must sue. When that person knew, or ought to have known with the use of reasonable diligence, that a tort had caused them damage. The usual exception is when the tort victim is a vulnerable person, such as a child, or person with a mental infirmity, the limitation period only starts when they regain their senses or reach the age of majority. ` The fact is the matter many cases the victim of fraud does suffer from a form of mental infirmity or delusion.

Fraudsters often create a “reality distortion field” of “fake news” that lures in precisely those persons most susceptible to their deceptions. To understand this, we have to go back to the first principles of cognition.

First, there is an objective reality, and the reality we perceive.  When we perceive we literally are of two minds:

  • The logical mind, which, subject to errors due to logical fallacies, is what we use to form an analysis that leads to a logical conclusion. This takes effort, and time, and is susceptible to changed conclusion based on additional data.  This our scientific brain at work.
  • The emotional or intuitive mind often operates at the level of the unconscious and allows us to make a myriad of innocuous decisions without taking the time and trouble of going through a rational analysis. We bought A instead of B simply because we liked A more, often for reasons that are obscure even to us. At work are a series of unconscious lens or biases that assist in making “irrational” decisions quickly so we can move on with life without being slowed down by the sheer volume of decisions we have to make in life.

Mr. Spock of Star Trek fame is the shining example of the rational “Vulcan” who represses his “emotional” side to be the optimal “science” officer.  Counter-balancing him is Dr. McCoy, the simple country doctor who sees the “human” (emotional) side of every dilemma.  Captain Kirk then makes the final decision based on the submissions of Spock and McCoy.  So, we would want to believe that we all balance our logical and emotional decision-making minds in perfect harmony.  We know better.

Big decisions are often made quickly, and on irrational grounds.  “Love at first sight”.  I just “love” the white Toyota Corolla but I wouldn’t be caught dead in the red Toyota Corolla even though the white one costs $5000 more and it would only take $250 to paint the red one white.  We often make important decisions without rational analysis.  “Go with your gut”, “it just feels right”, or “let your instincts guide you” rather than be trapped in “analysis paralysis” caused by reasoning to a solution.  If the rational analysis later “kicks in” we say “buyer’s remorse” or “acted in haste, now repent at leisure”.    Fraudsters often prey on this by playing on our unconscious biases, including irrational trust cues (“you can trust me, we are both lifelong Blue Jays fans”), and then put on time limits to commit the fraud victim to a rush to judgment that excludes rational reflection.  Once committed, the fraud victim can only reverse their decision by doing the hardest act known to our species—-admit they made a mistake.

Instead, what happens is the fraudster avoids reflection and buyer’s remorse by repeating and emphasizing misinformation that play on unconscious biases. “Go with your gut”.  “Ley your intuition be your guide”.  “Come on, you know it feels right”.  “Don’t listen to your sister, she’s just jealous because you got the jump on her for a change”.  Rather than engage in a painful analysis that would lead to the conclusion you made a mistake; your emotional self irrationally emphasizes positive data and rejects negative data in order to remain comfortable with the original decision.  Remember the old car commercials that had the beautiful woman lying on the hood—they were as much about making male purchasers of the car irrationally feel good about their purchase than they were about buying the car in the first place— either way, they were never about a rational analysis to buy one car over another.

Let us begin with machine learning as a model for our brain. For sake of arguments, we start with a blank slate at birth then we are bombarded with a host of stimuli that the brain has to sort into 1) relevant and irrelevant, and 2) prioritize relevant stimuli in order of importance so that we can “judge” the situation and “act” appropriately. With babies this is a continued process of trial and error where we learn to “trust” our caregiver’s guidance in determining the relevance and importance of the sensory data inundating our senses. Objective reality is flooding our brains with data and our parents and siblings are providing us with the guidance as trusted advisors how to organize these data into useful organization or paradigm. Data overload in the form of unfamiliar reems of unfamiliar data causes stress leading to crying followed by parental reassurance and guidance.

“Experiences” is thus a combination of our own primary perception of the word (data) and our secondary perception of how to filter this data of useful information based only on our own experiences but those secondary experiences from those we learn to trust from guidance.

As we grow up, we learn to trust friends, teachers, and relatives’ judgments and how to filter data, resulting in tension between our own existing filters and new filters which we have to reconcile with our personal judgments. On an empirical level, our filters are used to predict results and by striving to minimize the “predictions and errors” we improve our filters through which we “see” reality. Teenage angst is caused by attempting to reconcile old filters we have traditionally accepted from our parents and our new filters we accept from our peers and the need to reconcile the tension between the two. Eventually “freeze” our filters when they achieve “unacceptable level of success” with only minor changes when new data is not explained or understood by the existing paradigm, we are using to explain the world around us and to act and guide our actions accordingly. Think of a magic trick. The magicians slight of hand makes it appear that a rabbit was pulled out of the hat. That, however, contradicts our experience we look for an alternate framework to explain this “prediction error” regarding the origin of the rabbit. The more the search in vain for that better explanation, the better the trick. But why do we enjoy the trick— because it proves there is more to life that reason and logic— no one wants to be a Vulcan.

You see, gentlemen, reason is an excellent thing, there’s no disputing that, but reason is nothing but reason and satisfies only the rational side of man’s nature, while will is a manifestation of the whole life, that is, of the whole human life including reason and all the impulses”

Doestoevsky

So where do things go wrong?  The “twitch reflex”, or master controller of our brain that makes the initial decision to go with our reflexes or analytical processes, is an emotional one that uses our biases to make immediate decisions when we feel pressed to act.  The fraudster therefore creates an “emergency” for the fraud victim to act reflexively rather than reflectively.

Having passed this gate, the fraudster then plays upon our “trust” reactors. Everyone intuitively trust different people for different reasons. Trust, Trust — whether in a person or a product — is a compilation of data biased by “positive” or “negative” emotive experiences. It is that data squeezed through some individual emotional filter, active in every encounter.  Are affinity frauds the result of happy group experiences throughout your childhood?  Do you fall for charmers because they remind you of your father and how he made you feel? When that filter blinds you to danger — when it nudges you again and again to put your faith in a fraudster despite a dearth of data, your individual trust filter betrays you.  To another, the same stimuli may make a person “hate” the fraudster precising because his charm reminds the potential mark of a charming father who ran off and abandon his family.

So, what went wrong? A problem at the perception level is often associated with mental illness. A problem at the “filter” level is associated with the “trust imbalance”. Presume we are not all together in life or there’s another motivation we are likely to trust someone we ought not to of. If there is a perceived imbalance between our perceived self worth and our actual lot in life that suggests we deserve more, we may decide that our personal paradigm is the problem. In order to get the life we deserve, we then fasten-on cult ideology or scheme that promises us our just desserts. All we have to do is shrug off the shackles of our existing belief systems (filters) and see the world in a new way be advocated by someone we are being asked to trust to come and act accordingly. Like Morpheus giving Neo the red pill in the movie the Matrix, we are shown that the world we believed was real is illusory and that once we see the real world as exposed by the red pill, our path to happiness becomes real. The fraudster performs two tasks simultaneously, he or she encourages trust by playing on our unconscious biases while simultaneously discouraging our reliance on our reflective, logical thought processes.  Those who revert to logical reflection see the fraudster’s trick for what it is and reject it out of hand.  Those whose unconscious biases are triggered are blind to the trick and “fall” for it. What follows is a trust in someone that overwhelms our previous trust sources and now becomes a new depository of our trust and with that creation of a new filter that rejects what we previously believed to be true and real as either false or incomplete.

In the case of fraud, the fraudster’s “red pill” or “black box” promises a world of happiness and contentment so long one keeps faith with the new paradigm being advocated by the fraudster. Examining the paradigm carefully would reflect a disappointing lack of trust in the fraudster which would result in being cast out of the group of new believers and forfeiting the benefits being promised as part of the fraudulent scheme.

As the new filter results in evidence to the contrary being rejected as irrelevant or misleading those who propose these other filters are rejected as untrustworthy sources of data. The believers reinforce their common belief to the new paradigm “filter” out data uncomfortable data. The true believers “will power” is tested and the new paradigm defended against those “naysayers” trying to test the fraud victim’s resolve with “false news”.  The so- called echo chamber of social media groups do more than repeat beliefs, they actually reinforce them as like minded “true believers” reproduced the emphasized trustworthiness of the original source by amplifying and enhancing and refining the new paradigm. In such a way, a “community” becomes splintered into a group of competing and rival communities based on competing paradigms. It is only when the trustworthiness of the new paradigm is irrefutably demonstrated (usually by the victims having run out of money without any happy result) that the scales fall from the fraud victims’ eyes the paradigm failed for them and they are ready to trust other sources of information as trustworthy by engaging in conscious reflection on irrefutable data. Usually, the victims ask themselves how they could have been so stupid or greedy, when they should ask themselves what unconscious biases made them so susceptible to the “snake oil” being sold to them. It is only when the fraud victim “comes to” and engages their logical brain and they come to the realization of having been duped that the limitation period for them to sue should begin to run.  Before that the unconscious mind has control of the “true believer” in a form of stupor akin to a hypnotic trance that prevents the victim from acting rationally.

 

Exemplar: Professional Bias

“The study of law is something unfamiliar to you… unlike any other schooling you’ve had before… I trained your minds. You come in here with a skull of a mush; you leave thinking like a lawyer.” [2]

Athletes develop their “twitch” muscles to improve their quickness or reflexes.  We do the same mentally with various educational systems, training and experiences that allow us to “intuitively” know the right answer without going through the long, laborious rational analysis that a novice would require.  This requires us to build a mental framework or “paradigm” that provides shortcuts to the right answer.   The first stage in this process is to add someone we trust for the right answer— the instructor. The instructor provides you with a new way of looking at problems, you either trust the instructor and adopt his or her worldview, or you fail the course. Paradigm change or a change in one’s world view results in the change in the person or people you trust, at first to expand that group and eventually substitute the new group for the past one.

In the movie the “Paper Chase”, one student, Brooks, had a photographic memory so he could remember all of the “facts” of a particular case, but this was useless to him as a prospective lawyer because of his inability to adapt the filter of the law proposed by this law professor that says which “facts” are a) legally admissible, b) legally relevant and material, and c) legally dispositive. Without the ability to absorb these new filters, whether consciously or through osmosis, Brooks failed out of law school. The main character, Hart, on the other hand works hard to learn these legal filters only to reject them at the end of the movie because of the delayed realization of the distasteful person it caused him to become.  The point is that adoption of a professional worldview is critical to professional success, and that worldview comes with conscious codes of conducts and unconscious biases.  So, for example, lawyers are trained to blind themselves to the flaws of their clients in order to represent them, which often results in lawyers becoming the dupes for their clients’ illegal enterprises.  Police officers’ unconscious biases can oft en cause them to blindly “rush to judgment” about the guilt of a particular suspect.  It is therefore important to understand that fraud victims who have changed their paradigm because they accepted a fraudster as their instructor, who taught them a false paradigm that  that led them become victims are no different from the rest of us.  Secondly, until they regain a more sensible footing on whom they trust to form their world view, they are helpless to see the fraud for what it is.

Thomas Kuhn’s, The Structure of Scientific Resolutions, illustrates the “stickiness” and resilience of paradigms in the contest of the world of science. Scientists historically rejected new paradigms that suggested the sun as the centre of the solar system rather than replacing the paradigm that the earth was the centre of the solar system by discounting evidence to the contrary as unreliable or misleading. Until the existing paradigm, 1) is faced with overwhelming contrary evidence and 2) there’s a new paradigm that “fits the existing and new evidence better than the old one”, old filters will persist. Without a new paradigm, the brain is left with no choice to use the old filters. Only methodologies are used in the in the absence of new methods.

Consider all the biases we know of —are they not conservative of the present way of thinking? Confirmation bias filters out evidence that does not support what we already believe. Implicit bias, or stereotyping, sees new evidence through the existing patterns of behaviour that we are familiar with. Expert bias, or the Einstein effect, means that experts will use old tools to solve new problems no matter how unsatisfactory instead of simply developing new tools because of the power of the use existing paradigm.

Consider the following hypothetical: I have three water jugs, 3, 21, and 127 litres of water in size. I can fill and empty the water jugs as many times as I want but I must get exactly 100 litres. Solution: fill the one 127 litre jug, pour 21 litres into the second jug, and then pour the remaining water into the 3-litre jug twice. Result: 100 litres (127-100-3-3).

Now make it the hypothetical of 3, 23, and 49 litre jugs – how do we get exactly 20 litres? Those who are familiar with the first solution normally would do 49 – 23 – 3 – 3 to get 20 litres. Those unfamiliar with it simply fill the 23-litre jug and pour 3 litres out of the second jug for the more elegant solution 23 -3 = 20. Paradigms can block the blindingly obvious. And so, to what fraudsters their paradigms (stories) they create. As a result, those who have bought into those fraudsters paradigms will do the same mental gymnastics as those calculating the second jug problem rather than get to the blindingly obvious solution.

As one author noted:

“We may believe that we are thinking in an open-minded way completely unaware that are brain is selectively drawing attention away from aspects of our environment that could not inspire new thoughts. Any data that does not fit the solution, we are already clinging to is ignored or discarded.” [3]

So, what causes radical paradigm shifts? It is often a mental reflex of one’s unconscious that says “I really love this guy” or “I really love this idea” that causes fraud victims to fall down the rabbit hole of a “reality distortion field” created or adopted by the fraudster for nefarious purposes. That translates into dropping existing or traditional way of thinking about the world in the face of a revolutionary new one that promises great hope of alleviating present discontent.   Once down the rabbit hole all of our conservative biases confirm the “new reality” in the face of contradictory evidence.  The hardest thing for any person to do is admit they were wrong.  Instead, the logical, analytical mind remains in suspended animation until the fraud victim is jarred out of their delusional state by some dramatic event.

 In the face of this it is the job of the fraud fighter to show the fraud victims that (a) they are a trustworthy source, and (b) they have fallen victim of an trustworthy source so the victim can be deprogrammed by an intervention that shows the victim a way out of their present predicament beyond simply investing more money in a fraudulent scheme. Without that the fraud victim will simply say that this may be the world that you live in, but they choose not to live in it. Until their rational self takes over, they remain  under a spell that makes the idea of suing the fraudster unthinkable.

 

 

 

[1] Nin, Anais. “Seduction of the Minotaur” (1961)

[2] Professor Kingsfield. “The Paper Chase”.

[3] Bilakc, “Why good thoughts block better ones.” Scientific American, Pg 13 (Fall 2020).

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.