Our firm receives frequent requests from fraud victims for general information about the fraud recovery litigation process. Our firm also receives requests from fraud victims who already have lawyers for our opinion on the strategy their counsel have taken. This blog is an overview of the conversation we typically have with fraud victims on our views of how a typical fraud recovery action should be handled.
Recommended Response to the Discovery of Fraud
We have blogged in the past that our recommended response to the discovery of fraud is for fraud victims to contact fraud recovery counsel before contacting police, confronting the fraudster, or discussing the discovery with anyone associated with the fraud. Fraud victims should also preserve and organize their documents: https://investigationcounsel.com/what-you-should-consider-if-you-discover-you-are-a-victim-of-fraud-our-views-on-triaging-your-fraud-case/.
The Intake Meeting
During our intake calls or at our intake meetings, we typically ask fraud victims to tell their story in a chronological format, starting with describing who the fraudster is, how they came in contact with this person, and what transpired to the time of the discovery of their loss. After hearing the initial account, we typically ask questions to address issues we may have concerns with, especially if it appears there may be an opportunity to freeze the victim’s money. We also explain the cost and process of fraud recovery: https://investigationcounsel.com/throwing-good-money-after-bad-considerations-in-selecting-your-fraud-lawyer/ .
Part of the discussion of whether fraud victims should invest in a recovery is limitation periods. We usually advise fraud victims that one of the first decisions they should make is whether to walk away from their loss and put it behind them, or to take action and seek ‘justice’ against the fraudster and those who may have facilitated or benefited from the fraud. This decision must be made within two years from the discovery of the fraud or the claim may be statute barred, but the reality is that the decision should be made when the fraud is discovered, as delay only assists the fraudster: https://investigationcounsel.com/fraud-victims-know-limitation-periods/
Retainer Agreements
If the fraud victim wishes to seek ‘justice’ (recovery and retribution), we usually discuss our initial investigation process, the litigation process, and our retainer. The investigation and litigation process is discussed below. If a retainer is agreed upon, we commence the process. We are often asked whether we will take on fraud recovery on a contingency basis. We generally do not, but in the appropriate circumstances, such as where funds can be frozen to judgment, we will consider risk sharing forms of retainers after we complete our initial assessment of the case.
With respect to initial assessments, we provide clients with an estimate that reflects the time it takes to conduct the initial interviews, review documents, conduct searches, make inquiries through our investigative and legal networks and draft our legal opinion. Once we provide our legal opinion, we typically negotiate a second retainer for the various stages of the litigation. If the time and disbursements of our initial opinion exceed our estimate, we typically negotiate a fair resolution so that we can move the file to the next stage. For information on retainer agreements, see: https://investigationcounsel.com/retainer-agreements/.
Will States
In cases where the decision is made to seek ‘justice’, the process typically starts by creating what we refer to a ‘will-state’ – or a summary of the victim’s anticipated evidence. We draft will-states so that we have a record of the information the fraud victim provided us for the purposes of drafting our opinion and drafting their claim. Will-states are also the document upon which we create a complaint to police in those cases where a complaint to police is appropriate.
During this initial will-state process, we also ask fraud victims to disclose to us whatever could be negative or hurtful to them about their case. Sometimes fraud victims have skeletons in their own closets that may affect the strategy decisions in moving their case forward. For example, if the fraud victim colluded in tax evasion with the fraudster before realizing they were played, as lawyers we should be aware of this, as legal fees may be wasted if a fraud victim pleads for equitable relief but does not have clean hands. In some cases the skeletons are such that it is best that the fraud victim not attempt a recovery through the court system at all but rather resort to ‘self-help’ (a topic not suitable for a blog). These skeletons do not have to form part of the will-state, but they should be disclosed under the spectrum of confidentiality and solicitor-client privilege and be considered when providing the initial opinion to the fraud victim.
Document Collection and Preservation, and Updating the Will-States
Upon completing the first draft of a will-state, we usually take steps to preserve and obtain all of the fraud victim’s documents. We typically focus on the fund transfer documents, any contractual agreements, invoices and communication documents. Often we use electronic forensics specialists to preserve and collect all emails, texts and other electronic communications. We then scan these documents to our systems, create document identification numbers, and update the will-states with facts referenced to the documents. There is an old saying about documents referenced in legal circles that is often worth repeating:
Words may be twisted, memories may fail, but the ink on paper remains indelible and unfading for a long period of time.  Oral evidence is persuasive because it lives and moves.  Documentary evidence is decisive because it is unchangeable.
During the time when the documentation is being collected and preserved, we often conduct searches on the fraudster and related parties and identify and interview relevant witnesses. Information from the searches and witness interviews forms part of our ‘fact summaries’ – which is the living document that forms the basis of the litigation file used for drafting pleadings, conducting examinations, drafting motions, and other aspects of the litigation process.
Updating the Will States
Upon completing the second draft of a will-state, we then usually conduct a second interview with the fraud victim, filling in oral information that is not contained in the documents and may have been missed during the first intake meeting.
This process of collecting and preserving documents, conducting searches and witness interviews, and preparing detailed will-states and fact summaries is more time consuming and expensive than most fraud victims appreciate. However, the failure to go through this process sometimes results in costly mistakes being made, which come to light later in the litigation process. As such, agreed upon will-states and fact summaries reduce the risk of disputes between the fraud victims and their counsel. Where urgent motions need to be brought, this process can be abbreviated – but ultimately this process should be followed as time allows for.
Opinion and Recommendations
Based on the initial investigation process discussed above, we typically draft a legal opinion, summarizing the facts, the causes of action that can be alleged against the primary fraudster, and the causes of action that can be alleged against secondary defendants such as those who facilitated and benefited from the fraud. It is based on this document that the fraud victim decides who they will sue, the nature of the allegations they will make, who else should be investigated and what other strategy issues should be considered. It is also the document upon which we provide estimates of the cost of the stages of the litigation going forward.
The decision of who is sued and what allegations are made has significant bearing on the cost or the litigation. Sometimes fraud victims have sought a second opinion from our firm because the defendant fraudster and / or the secondary defendants have brought motions for particulars, to strike their pleading, for summary judgment or other reasons – resulting in litigation costs that fraud victims did not anticipate when they issued their claim. In cases we have reviewed, typically will-states were not taken and opinion reports were not provided to the fraud victims. We also often find that fraud victims were not aware of the necessity of pleading fraud and related torts with particularity against each defendant.
To underscore the point to this blog, the value the initial investigation, including the drafting of will-states and fact summaries, should not be underestimated. They, along with an opinion letter, are often the focus of a review if things go wrong later on in the file. They are also living documents – meaning they should be constantly updated as the litigation moves forward.
The Pleadings and Urgent Motions Stage
Once the fraud victim and their counsel have agreed on who is to be sued and what the nature of the allegations will be, the process of drafting a Statement of Claim takes place. In some cases, applications may be brought to obtain evidence from third parties such as financial institutions to trace the victim’s funds and identify potential defendants. A discussion of what are often referred to as Norwich applications is beyond the scope of this blog, suffice to say that the cost of bringing these applications should be discussed with the client so that a cost-benefit analysis is conducted and good money is not thrown after bad.
Once the fraud victim approves the draft claim, and the claim is issued by the Court, and the process of serving the claim takes place. In cases where the fraud victim believes motions to freeze or preserve assets are justified, ex parte (without notice) motions may be brought. Where ex parte freezing motions are brought, the claim is served on the fraudster and the secondary defendants with the court order and motion record to obtain the injunction. Where ex parte orders have been issued by the Court, typically return motion dates are held within 10 days from the date the order was issued. This motion process is often lengthy, complicated and expensive, and require full disclosure by the fraud victim – again reinforcing the need to prepare detailed will-states, document collection and preservation, and investigation at the front tend. For further information, see: https://investigationcounsel.com/what-fraud-victims-should-know-about-freezing-orders-mareva-injunctions/ .
At some point, the primary fraudster and secondary defendants will have to serve and file their Statement of Defence. If they refuse to respond, they can be noted in default. When defences are received or defendants are noted in default, the pleadings stage will ‘close,’ which means the case can move forward to the discovery phase – which is discussed next. Where defendants are noted in default because they do not defend, default judgment motions can be brought. Pleadings motions may be brought by either the defendants or the fraud victims, which may lengthen the pleadings stage and make the litigation expensive – these issues are beyond the scope of this blog and most intake discussions.
Criminal Complaints and Controlling the Pace of the Civil Litigation
We often advise fraud victims to wait until they have received a response from the fraudster and / or the secondary defendants before they make a decision on making a criminal complaint. The reasons for this are set out in our blog on coordinating criminal and civil justice for fraud victims: https://investigationcounsel.com/coordinating-criminal-and-civil-justice-as-a-means-of-recovery-for-fraud-victims/ . There are exceptions, of course, to this general advice.
It is at the close of the pleadings stage that some fraudsters attempt to bring motions to stay the civil case against them. If criminal charges have been laid, these motions are often brought under the guise of maintaining their right to silence. Typically these motions are not successful because there is no right to silence in the civil litigation system. Once these stay motions are dismissed, the fraud victim will again control the pace of the civil litigation going forward. See: https://investigationcounsel.com/what-fraud-victims-should-know-about-a-fraudsters-attempts-to-stay-civil-recovery/ .
In those cases where fraudsters are successful in having civil actions stayed, it is often because the fraud victims have used confidential discovery information obtained during the discovery process for improper or other purposes – a concept referred to as a breach of the deemed undertaking rule. This is another reason to consider making a criminal complaint at the close of the pleadings stage – as by making the criminal complaint before discovery phase commences, the fraudster will not have a basis to allege a breach of the deemed undertaking rule. See: https://investigationcounsel.com/fraud-recovery-and-the-deemed-undertakings-rule/ .
The Discovery Phase
Discovery should be completed within two years of the close of pleadings, as the Courts will issue an automated dismissal notice if an action is not set down for trial within two years of the close of pleadings. The Courts typically will extend the time to set an action down for trial at a status hearing, but extensions are often ordered with a timetable on moving the case forward, and attending status hearings costs fraud victims money. The implication is that fraud victims should prepare their case for discovery at the time they are preparing their claim. This should be explained to fraud victims by their lawyers at the time they are considering whether to issue a claim, as simply issuing a claim is not the end of their litigation expense and responsibilities.
The Discovery Phase is broadly broken down into two parts – documentary discovery and oral discovery. At the close of the pleadings phase, fraud victims and defendants are required to exchange a Discovery Plan setting out a timetable for discovery. Often fraudsters and their lawyers refuse to do so, requiring fraud victims to bring motions to compel this process. Sometimes fraud victims will elect to skip the discovery phase if they feel their case is strong enough. If a fraud victim elects to forego the discovery phase, they may simply file their Trial Record (to enter the trial phase) after serving their affidavit of documents.
When the documentary discovery phase is completed (which may require motions to compel the fraudster’s documents and / or documents from third parties), oral discoveries should take place. It is often to the advantage of fraud victims to serve their affidavit of documents before the defendants, as this gives them the right to examine the fraudster or the secondary defendants first. This is another reason to investigate the victim’s case fully at the outset of the file. Before oral discoveries, fact summaries should be updated with information from the defendants’ documents – as this often forms part of the outline for the examination.
Often fraudsters and some or all of the secondary defendants will fail to attend their examinations, requiring motions to be brought to compel them to do so. And often when fraudsters do attend their examinations they refuse to answer relevant questions and refuse to disclose relevant documents. This often leads to further motions, which means further delay and litigation expense. Fraud victims should be aware that estimating the cost for defendant shenanigans is impossible at the time when the initial opinion is given to them by their counsel.
The motions courts dealings with discovery procedure are often the most painful part of litigation process for fraud victims. The motions courts, particularly the Master’s courts, are slow, and often grant fraudsters numerous opportunities to correct their wayward conduct – sometimes seemingly caught up in the same charm the fraudster used on the fraud victims to perpetrate their fraud in the first place. Unfortunately, as frauds are often perpetrated by concealment, fraud victims are sometimes required to invest in multiple discovery motions to compel documents and answers from fraudsters and third parties who may possess the relevant information needed to successfully obtain judgment and identify the unnamed Doe defendants.
It is because the discovery phase of litigation can be so difficult and expensive that some fraud victims elect to wait to see if the criminal process will run its course before they invest in the discovery phase of their litigation. This is done on the theory that if a criminal conviction is entered, there is a presumption of liability for their civil recovery case, and they can move for summary judgment only having to prove damages. Further, in some cases fraud victims may wish to wait to see if the fraudster will seek to settle their civil claim so they can show the criminal courts that they have made restitution before sentencing. This strategy is sometimes elected because often the criminal courts will dismiss criminal charges or grant more lenient sentences if the fraudulently obtained money has been returned. The issue of the enforcement of criminal restitution orders through the civil process is also often considered by fraud victims at this stage – see: https://investigationcounsel.com/enforcing-criminal-restitution-orders-and-the-canadian-victims-bill-of-rights/ .
The bottom line is that fraud victims have to embark on a cost-benefit analysis of the pace they move their action forward to trial in cases where a fraudster will not settle. Fraud victims also have to keep in mind limitation periods on bringing other actions against ‘Doe’ defendants (defendants whose identities is not known) or new causes of action that come to light through the discovery process.
The Trial Phase
At some point before the trial phase fraud victims should consider mediation to see if a settlement can be reached. In Toronto mediation is mandatory before a case can be set down for trial. If a fraud victim is dealing with a particularly obnoxious fraudster and lawyer, the fraud victim can bring a motion to have mediation dispensed with. We often use telephone mediations with obnoxious fraudsters and their lawyers to circumvent the mediation process by taking the position that we anticipate the mediation will fail. Telephone mediations expose fraud victims to the minimum expense to get the process over with.
When mediation and settlement attempts have failed, the trial phase commences with the filing of a Trial Record. A Trial Record consists of the Statement of Claim, the Statement of Defence, any Replies and Orders that may be relevant for a trial judge to consider before a trial commences. Once the Trial Record is filed, the Court will issue a Certificate of Trial Readiness form. Once this form is filed, the Court will issue pre-trial and trial dates.
Pre-trials are held well in advance of trial dates to have a judge review the case to determine whether settlement is possible, and if not, to ensure the case is ready for trial. At the pre-trial, motions that may be necessary to be heard before trial are canvassed. This may result in multiple pre-trial attendances. Importantly, in the modern era, fraud victims may ask the Court to have the trial proceed by way of a Hybrid Trial as a means to shorten the trial process – see: https://investigationcounsel.com/an-argument-for-hybrid-trials-for-victims-of-fraud/ and https://investigationcounsel.com/supreme-court-canada-urges-access-justice-fraud-victims/.
The trial itself is often where the sheen of the defiant fraudster is finally lost and a judgment is either consented to or ordered. A discussion of the types of relief that may be sought is beyond the scope of this blog, suffice to say that the goal of a trial is a ‘Declaration’ of the torts alleged in the Statement of Claim, a ‘Declaration’ the judgment survives bankruptcy, a judgment for the amount lost by the fraud victim along with interest and their litigation and investigation costs, and written reasons that form part of the public record. For a discussion on enforcing judgments and obtaining a recovery, see: https://investigationcounsel.com/enforcing-judgments/ .
The foregoing are our views on the initial information provided to fraud victims on how fraud cases should be investigated and litigated. Other lawyers may have different views – which is fine as investigations and litigation is an art, not a science. Certainly further issues are often identified and discussed as a case unfolds that are not addressed during an intake meeting. We often suggest to fraud victims that they review the blogs we post to better understand the fraud recovery process. If you discover you are a victim of fraud, we welcome you to contact us to have your case assessed and a strategy for recovery put in place.
Norman Groot, LLB, CFE, CFI – February 20, 2015