The simplest forms of fraud are alive and well, under a veil of economic jargon and computer networking.
One of the simplest scams, the Ponzi scheme, involves paying returns with the investor's own capital and later, with the money of new investors.
By their nature, they have to crash sometime, and picking up the pieces can be a laborious and difficult task. While recent legislative amendments and special common law remedies provide some assistance, lawyers who practise fraud law are finding the appointment of a receiver to be their most effective tool.
Ontario has just seen the largest Ponzi scheme ever to be investigated in Canada. Andrew Lech, a one-time securities salesman from an old Peterborough, Ont., family, managed to convince investors to entrust him with over $100 million because of his purported expertise in stock options trading. He guaranteed returns of 15 to 25 per cent, which he paid from the investors' own money.
"We have found the money," says David Kirwin, a partner at Szemenyei Kirwin MacKenzie LLP (SKM), which acts for the receiver in the Lech case and is running the class action on behalf of the victims. "There was no big trust or transfer off-shore. The marbles are still on the schoolyard, but Billy now has Bob's."
The 15-year lifespan of Lech's scheme makes the original Ponzi scheme look like a flash in the pan. In Boston, between 1918 and 1920, Italian immigrant Carl Ponzi raked in about $10 million by alleging he could leverage the exchange rates of countries that issued overseas reply postal coupons to make huge profits. That fraud was so bold and startling that the old "bubble" schemes have been called Ponzi schemes ever since.
Jim Patterson is the partner in charge of the Bennett Jones LLP fraud law group. He identifies a litany of problems with using normal litigation to clean up a Ponzi-style mess, starting with the reluctance of victims to come forward.
"Many Ponzi-style contracts have a confidentiality provision that says if you tell anyone you will forfeit your investment," says Patterson. "Victims also fear that they are throwing good money after bad by incurring legal fees with little hope of recovering anything. Lastly and most importantly, they haven't reported the profits in their income tax. It makes them soul-search when it's time to pursue it."
Obtaining a restitution order in any criminal proceeding is the simplest way to recover the money, but it is often too late.
"The beauty of a restitution order is that it can be converted to a civil judgment," says Patterson, "but it may take months or even years for criminal proceedings to commence, by which time the assets have disappeared."
In the Lech case, it was 2.5 years from the issue of the first search warrant to the day in May 2006 when almost 100 charges of fraud over $5,000 were laid against Lech.
"There were 16,000 transactions analyzed," says Det. Sgt. Randy Craig of the anti-rackets section of the Ontario Provincial Police. "Each bank had to produce thousands of documents."
Class actions are another possible but challenging alternative.
"It depends on being able to meet the issues of commonality," says Patterson. "It's difficult to get over the threshold with a Ponzi scheme because the same story and the same documents are not used for every victim."
Due to the nature of Ponzi schemes, the victims have high levels of conflict between them. "Say No. 3 victim invested $10,000 and got $15,000 back," continues Patterson. "The money he took out as interest is really victim No. 75's. It's tough sitting down with all the victims to say, 'Let's go after the bad guy,' when No. 3 is the beneficiary of No. 75's money! Also No. 99 may still be in cahoots with the bad guy who is stringing him along."
Patterson became aware of another alternative when his firm was asked to act for the U.S. Securities and Exchange Commission to recover monies from a U.S.-based Ponzi scheme that purported to invest in high-yield banking transactions. One of the perpetrators, Frederick Gilliland, moved to a waterfront apartment in Vancouver with some of the proceeds. The SEC had been appointed receiver in the case.
Bennett Jones sought Mareva and Anton Pillar injunctions to recover Gilliland's car, house, and bank accounts, which were put into the pool administered by the receiver. They found it much easier to get instructions from one client than from 100 competing victims.
"If there are competing claims between victims, the receiver can sort that out," says Patterson.
Bennett Jones has now successfully taken the U.S. model and used it in the case of Courtney Wallis Simpson, a real estate broker in Stouffville, Ont., who convinced people to invest in non-existent interim occupancy mortgages. Section 101 of the Courts of Justice Act and Rule 40.01 of the Rules of Civil Procedure (Ontario) empower the judge to appoint a receiver where it appears just and convenient, and to grant the receiver sweeping powers to prevent dissipation of the assets.
The 2005 Alberta Court of Queen's Bench case Re Titan Investments Ltd Partnership was helpful in getting a receiver appointed in the Simpson case. Justice Gerard Hawco held that a bogus investment fund was insolvent from the first investment. All the monies paid to early investors were fraudulent preferences that had to be repaid to the receiver and distributed on a pro rata basis to all the investors.
SKM also had a receiver appointed in the Lech case.
