Two recent decisions of the Ontario Superior Court demonstrate the willingness of Canadian judges to find fraud on the basis of material omissions in both civil and criminal cases. In Midland Resources Holding Limited v. Shtaif, 2017 ONCA 320, 135 O.R. (3d) 481 and R. v. Fontana, 2016 ONSC 707, omissions by the defendants were found to constitute fraudulent conduct.
Civil Fraud: Midland Resources Holding Limited v. Shtaif
In Midland Resources Holding Limited v. Shtaif, the Ontario Court of Appeal confirmed that the tort of deceit or fraudulent misrepresentation may:
involve not only an overt statement of fact, but also certain kinds of silence: the half-truth or representation that is practically false, not because of what is said, but because of what is left unsaid.
This case arose when a group of shareholders discovered that they had invested in a sham corporation (the “Shamco”). One architect of the scheme was Irwin Krakowsky, who had evidently assumed the aliases “Irwin Boock” and “John Howard” to conceal from investors that he had been criminally convicted of securities fraud and market manipulation. Krakowsky had served jail time and was prohibited from trading by the United States Securities and Exchange Commission and the Ontario Securities Commission.
Krakowsky was the principal of BDW Holdings Ltd. (“BDW”), which owned 12 million shares in Shamco. BDW was held out as a reputable investor to lend credibility to the venture, and was said to be associated with a successful businessman named “John Howard” (an alias of Krakowsky).
Toronto lawyer, Gregory Roberts (“Roberts”), served on the board of Shamco. He received two million shares in Shamco despite never investing any capital. He had known Krakowsky for years, and was previously retained to assist in legally changing Krakowsky’s name to Irwin Boock. Roberts was aware of Krakowsky’s criminal past.
At a meeting with the plaintiff investors, the trial judge found that Roberts touted BDW as a reputable senior investor which had committed to investing $70 million and that Roberts failed to inform the investors of what he knew at the time, including: (1) that “John Howard” was really Krakowsky and was using the alias to hide his criminal past; (2) that BDW and the Company were listed on the ‘Pink Sheets’ in the U.S., meaning they did not meet the reporting requirements to be listed as a public company on a major exchange, and would not attract Canadian institutional investors; and (3) that Roberts had previously received two million shares in Shamco without board approval.
The trial judge and Court of Appeal found that Roberts’ failure to disclose this material information constituted a breach of his fiduciary duty as a director of Shamco, and that the plaintiffs would not have invested their money but for Roberts’ misrepresentations. Roberts submitted that the material information was privileged and, as Krakowsky’s lawyer, he was not at liberty to disclose it. The Court of Appeal found that, if the information was privileged, Roberts should not have accepted the position as a director. Roberts chose to withhold the material information because he “had much to gain personally” from the plaintiffs’ investment. The Court of Appeal found this to be an “egregious” breach of fiduciary duty.
The Court of Appeal found Roberts liable in fraudulent misrepresentation for his “silence about ‘Howard’s’ background” at the board meeting. The Court held that a finding of misrepresentations by omission “always falls to be considered in the context in which it occurred”. The significant details in these circumstances were that Roberts knew “Howard’s” true identity was significant, and Roberts knew that the plaintiff investors were relying on the favourable impression about BDW created by his silence. Damages were assessed at $8.27 million USD, which is the sum the plaintiff investors had advanced by this time.
Other findings in fraud and conspiracy made against Roberts and the other defendants were also confirmed on the appeal. However, certain misrepresentations were found by the Court of Appeal not to have been pled with sufficient particularity and the trial judge’s findings on those allegations were set aside. This is an important reminder about the importance of ensuring that the allegations are carefully set out in the pleadings before the start of trial.
Criminal Fraud: R. v. Fontana
In R. v. Fontana 2016 ONSC 7076, Anna Fontana was convicted for fraud over $5,000 and fraud by conversion on the basis of material omissions and related misconduct.
The victim, an elderly woman, advanced an unsecured loan of $150,000 to Ms. Fontana. The loan was given for the specific purpose of financing Ms. Fontana’s dream of opening a restaurant. In exchange, Ms. Fontana provided a promissory note which provided for no interest on the $150,000 for one year, followed by monthly repayments of $2,5000. The promissory note did not provide that the funds were specifically advanced to finance a restaurant, however this was found to be a clear term of the loan which both parties had verbally accepted. There was also a clear understanding that Ms. Fontana would keep her lender apprised about how the restaurant business was developing.
Ms. Fontana briefly explored potential restaurant locations, but decided the business would require too much effort. She abandoned any intention to open a restaurant. Instead of returning the money, Ms. Fontana bought a BMW and gambled away the balance. She eventually depleted the funds and made an assignment into bankruptcy.
The Court found Ms. Fontana’s actions became criminal when she knew she was placing her lender’s money at risk by not using the money towards a restaurant business, and secondly when she began using the money to fuel her gambling habit. Ms. Fontana was found guilty of fraud by “other fraudulent means” under s. 380(1) of the Criminal Code because she failed to disclose that she had abandoned any plans to open a restaurant and instead spent the money for personal expenses and gambling. These omissions were found to constitute conduct “which ordinary, decent people would feel is at variance with straightforward or honourable dealings,” thus meeting the criminal standard for fraud.