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Breaking Fraud Cases from Canadian Courts
At Canadian Fraud News, we report on decisions issued by Canadian Courts related to fraud, that are not reported in the main stream media, and that contain legal issues the Canadian public and fraud recovery experts should be aware of. The following is one such story.
On July 31, 2017, Justice Karen Kear-Jodoin of the Superior Court in the Province of Quebec released her decision in the investment fraud action of three elderly persons against their late financial advisor Donald Lewis and the company that Lewis was licenced through, IPG Investment Corporation, formerly known as the Independent Planning Group Inc.
The decision of Justice Kear-Jodoin is curious in that she made findings of fraudulent conduct, but then was reluctant to impose a finding of fraud on the deceased investment advisor Lewis. While finding that Lewis was professionally negligent, the Court also failed to make his supervising company vicariously liable for the misconduct of Lewis. It is unknown whether the elderly victims will be able to recover against Lewis’ estate.
The plaintiffs, Beverly Mulley and Fred Smith, of Montreal, are seniors. Mulley is a retired teacher. Smith is a retired labourer. Their investment advisor, Donald Lewis, had been a financial advisor for 50 years. Lewis had been the financial advisor of Mulley since 1994, and of Smith since 2004. Lewis passed away in 2004. Lewis’ estate acknowledged that Lewis had a close professional relationship with the plaintiffs for over 20 years – a longstanding relationship of trust.
As is the case with most seniors, they asked that their investments be placed in low risk to no risk investments. Mulley wanted her money available for her retirement. Smith wanted his money available for his children’s education. As dead people do not talk, Lewis’ evidence as to what Mulley and Smith told him about their risk tolerance was not available to the Court.
What is known is that Lewis invested the money of Mulley and Smith in something called Focus Management Inc., a company based in the Cayman Islands offering unsecured loans. While Lewis described the investments to Mulley and Smith as “safe as government bonds”, quite obviously unsecured loans in a foreign jurisdiction are not a risk free investment. Mulley and Smith had no history of being involved in high risk investments.
In 2005 Lewis advised Mulley and Smith that Focus was in financial difficulty, and that they should redeem their investments. Mulley and Smith blindly followed Lewis’ advice. Mulley recovered some of her investment. Smith recovered all of his investment. There was no return on investment, however, for the years that Smith was invested in Focus.
Remarkably, in 2005, Lewis advised Mulley and Smith to invest in another off-shore unsecured (obviously high risk) investment, this time a “loan debenture” at Bridge Management Company located in Barbados. Lewis again advised Mulley and Smith that their investment at Bridge was as secure as government bonds – a fundamental misrepresentation.
In 2008 Lewis joined the Independent Planning Group. Lewis had been licenced with a company known as Triglobal Capital Management. Mulley and Smith were lead to believe by Lewis that their investments, including their debentures with Bridge, would be transferred by to IPG and placed under its supervision.
In 2010 Mulley and Smith each attempted to liquidate their investments in Bridge. The usual excuses of fraudsters entailed. Bridge was later found to be a fraudulent investment scheme. No money was returned. The only option to Mulley and Smith was to sue.
In July 2011 they both brought action for their combined $240,000. Lewis was examined in December 2011 as a defendant, and passed away in April 2012 before the trial took place. The transcripts of Lewis’ discovery evidence was used for his defence at trial.
Was it Fraud or “Bad Behaviour”?
The Court noted that the plaintiffs alleged fraud, “bad behaviour” and professional negligence against Lewis. The Court held the allegation of “bad behaviour” was not the “best choice of words”, but that Lewis understood that “bad behaviour” meant that he breached his obligations towards the plaintiff as their financial advisor.”
The Court than went on to make statements that are curious as it relates to the fraud allegations:
“The Court finds that Lewis’ professional negligence and fraudulent conduct was the source… of the claim.” (64)
“The evidence offered is very enticing to lead the Court to conclude that Lewis was either a willing participant in a fraud perpetrated upon the plaintiffs, or at the very least [a participant] in the subsequent cover-up of the fraud” (73)
…Why would [Lewis] induce the plaintiffs, especially an elderly widow, to redeem their savings from secure investments and invest in… unsecured loans in an offshore company…” (74)
“The Court is convinced that Lewis’s recommendation to invest in Bridge was not a simple good will gesture on his part… His explanation as to why he would recommend an investment for which he would receive no benefit simply does not hold water.” (81)
“The Court cannot fathom why Lewis did not recommend to the plaintiffs that they immediately repatriate their money to Canada.” (82)
“There are too many questions and too few answers.” (83)
“The Court finds credible the testimony of the plaintiffs that they advised Lewis that they were risk adverse… The plaintiffs were not sophisticated investors. Their savings had always been in safe investments. Lewis represented to Smith that the
loans at Focus were a no risk guaranteed return in five years. He represented to Smith that the investment in Focus was similar to government bonds. Similar representations were made to Mulley. (97)
These representations were untrue. (98)
“They were vulnerable and they trusted him… Lewis provided the plaintiffs with promotional literature which underscored the minimal risk of the Investment. It was very convincing. (101)
“Notwithstanding the foregoing, fraud is a very serious allegation. The evidence before the Court must be clear and cogent. It cannot be based upon speculation or hypothesis. The standard of proof is on the balance of probabilities. The burden is upon the plaintiffs to establish that the allegations of fraud are more likely true than not.” (84)
“The Court finds the evidence offered by the plaintiffs is insufficient to satisfy the burden of proof required to establish the fraud allegedly committed by Lewis.” (89)
Norman Groot, a fraud recovery lawyer in Toronto with the law firm Investigation Counsel PC, has commented that “It would appear that the Court gave a dead man a break – although Lewis’ representations “were untrue”, the evidence of fraud was “insufficient.” Maybe this was because as a dead man, Lewis could no longer wash away his debt by assigning himself into bankruptcy.”
Rather than find fraud, the Court found that Lewis was professionally negligent. It is unclear whether there was insurance coverage for negligence. It is unlikely there would be insurance coverage for fraud.
With respect to the vicarious liability of IPC, the Court held that there is a presumption that an investment firm is responsible for their registered representative’s actions based on a firm’s duty of surveillance of its employees. However, in cases where the investment firm is not aware of actions of its employees, it would not be held liable.
The Court found that no correspondence of Lewis to the plaintiffs was on IPG letterhead. Oddly the Court held that it was the plaintiffs who kept IPG “in the dark” as to the investments they had in Bridge being recommended by Lewis. The Court held that the plaintiffs did not act in a “prudent and diligent manner”. The Court found that the excuses offered by Lewis were bizarre, yet the plaintiffs did not complain to IPG. The Court held that because IPG did not have knowledge of what Lewis was doing, they were not liable for Lewis’ bad behaviour.
Full Reasons for Sentence
To review all the contradictory statements contained in this judgment, see the full reasons at: CanLII
For further information on this case, or any other fraud recovery inquiry, contact Canadian Fraud News Inc. at [email protected] .