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What Fraud Victims Should Know About the Interplay between OSC and Police Fraud Investigations

Can a Complaint to the OSC Prohibit a Criminal Prosecution?

On May 29, 2018, the Ontario Superior Court of Justice released its decision in R. v. Vuong and Quach, 2018 ONSC 3348. This case is helpful to fraud victims in terms of the information it provides about the interplay between police (criminal) and regulatory (securities commission) investigations, the appropriate body to which to make a complaint, and when this should be done. At the end of this blog we comment on the interplay of public and civil fraud prosecutions.

The decision pertains to an abuse of process application in the context of a criminal fraud case against the accused April Vuong and Hao Quach (“Vuong and Quach”). The Crown alleged that Vuong and Quach committed fraud through a company operating as Systematech Solutions Inc. (“Systematech”).

The fraud case pertains to an investment program that police allege was essentially a Ponzi scheme. The Court described the case as “a complex web of investments and trading of various types of securities such as options, the buying and selling of currencies (FX trading) and the leveraging of funds.” The allegation is that fourteen clients of Systematech lost over $5 million.

Vuong and Quach had moved to stay proceedings based on an infringement of their rights under section 7 of the Charter. Their stay of proceedings motion was based on what they considered to be four separate forms of abuse of process: issue estoppel, Crown misconduct, police misconduct, and misuse of an expert witness. This blog post focuses only on issue estoppel.

Issue estoppel is a legal principle that essentially means that where an issue was decided in a previous action, it cannot be tried a second time (the issue is “estopped” from being re-litigated). The issue must be a finding that is fundamental to the outcome of the prior decision. The idea is that it is not fair for people to be tried on the same issue twice, especially if it would result in a different outcome.

To understand the issue that Vuong and Quach were alleging should be estopped from being tried a second time, and in order to understand the interplay between security regulators and police investigations, it is helpful to review the chronology of the police and Ontario Securities Commission (“OSC”) investigations and prosecutions:

Dateline of the OSC and Police Investigation and Prosecution

From June 2011 to May 2012, various investors of Systematech filed complaints of fraud with the Peel Regional Police. The Police did not commence an investigation at the time – they simply took in the complaints and opened a file. The investors also filed complaints with the OSC.

On December 15, 2011, the OSC issued a Temporary Order as against Systematech, Voung and Quach, prohibiting them from trading in securities. The securities that Systematech were engaged in trading were promissory notes to solicit funds for Systematech’s foreign exchange trading.

On October 31, 2012, the OSC issued a Statement of Allegations as against Systematech, Voung and Quach. In the OSC context, a Statement of Allegations is similar to a charge in the criminal context in the sense that it is the form to make allegations. The OSC alleged that Systematech, Voung and Quach had solicited securities without being registered, offered securities without filing a prospectus, and had engaged in conduct that amounted to securities fraud.

The OSC Investment Fraud Allegations

The OSC alleged in their Statement of Allegations that the fraud engaged in by Systematech through its operating minds Voung and Quach included misrepresenting that:

  1. Vuong was formerly a trader employed with a major bank;
  2. other investors had achieved specific rates of return as specified on investors’ statements;
  3. investors’ principal investments were guaranteed and were not at risk;
  4. the values of investors’ accounts with Systematech were increasing;
  5. Vuong was successful in her trading during the material times;
  6. all investor monies accepted by Systematech were being invested; and/or
  7. Systematech had large amounts of money on deposit at financial institutions.

The OSC alleged that contrary to the representations made by Voung and Quach to investors, the majority of the investor funds received by Systematech were not used for the purposes of trading. Rather, a large portion of the investor funds were used to pay returns and redemption payments to investors. Other money was lost in trading or used for personal purposes. Although not stated, Systematech was effectively insolvent and could not pay back its investors.

The Police Criminal Fraud Investigation & Charges

In April 2013, after the OSC Statement of Allegations was issued but independent of the OSC investigation and prosecution, the Peel Regional Police commenced their own investigation. The Police conducted their own investor interviews. The Police also issued production orders to financial institutions, received and analyzed the results of those production orders, and made attempts to interview other investors.

In October 2013, the Police executed a search warrant and then arrested Voung and Quach. The Police charged Voung and Quach with fraud under the Criminal Code.

The OSC Plea & the Disgorgement Agreement

In November 2013, within a month of being charged with criminal fraud, Systematech, Voung and Quach entered into a settlement with the OSC. Systematech, Voung and Quach admitted to soliciting securities without being registered and offering securities without filing a prospectus with the OSC. They agreed to various market bans prohibiting them from soliciting securities going forward or being involved with investment companies. They further agreed to “disgorge” to the OSC $5,623,954.96, being the amount that they had solicited from investors and not paid back.

Although Systematech, Voung and Quach agreed to “disgorge” $5,623,954.96 to the OSC, the Settlement Agreement specifically stated that Systematech, Voung and Quach were not admitting to securities fraud. The Agreement also stated that the police fraud charges against Voung and Quach were outstanding, and that if Voung and Quach were convicted on the police fraud charges, the OSC could continue their prosecution on their securities fraud allegations.

Continuation of the Police Criminal Fraud Investigation

In 2014, while going through the property seized in the execution of their search warrant, the Police came across documents involving lawyers. This resulted in an investigation of the lawyers and the Police putting the Law Society on notice of their investigation. Various documents relating to lawyers were ordered sealed. This development delayed the prosecution of the case.

In 2015, a preliminary inquiry in the criminal fraud case was held. Voung and Quach were committed to trial.

In 2016, further documents were received by the Police from financial institutions pursuant to their production orders. The Police engaged an OSC forensic accountant to draft a report.

In 2017, the forensic accounting report was served on Voung and Quach. They moved to stay the charges on the basis of a breach of their section 11(b) Charter right to a trial within a reasonable amount of time. This application was dismissed.

In 2018, after their section 11(b) Charter application failed, Voung and Quach brought the section 7 Charter application at issue in this blog, alleging abuse of process. It is worth noting that seven years has passed since the investors first made their complaints to Police and the OSC.

The “Issue Estoppel” Issue

In their application, Voung and Quach alleged that the same issues (fraud) as were before the OSC and were the subject matter of their Settlement Agreement were before the criminal courts. They claimed they were being tried for criminal fraud after also being charged with securities fraud meant that they were being tried for the same offence twice.

The Court held that the most compelling rationale for retaining the legal principle of issue estoppel in criminal law is that fairness to the accused requires that an accused should not be called upon to answer allegations of law or fact already resolved in his or her favour by another judicial determination on the merits.

The Court found that the OSC was investigating fraud from the time it commenced the investigation, and that the OSC proceedings involved the same complainants and the same facts as those involved in the criminal proceedings. The Court accepted Voung and Quach’s submission that the OSC had investigated the same financial assets, transactions and records and that the OSC had conducted its own forensic financial analysis.

The Court also agreed with Voung and Quach that issue estoppel may apply in the context of an OSC Settlement Agreement where there are concurrent criminal proceedings based on the same facts. The Court held that such a scenario was equivalent to a civil fraud consent to judgment being issued before a criminal fraud trial – see R. v. Dieckmann, 2017 ONCA 575, at para 35.

Where the Court parted company with Voung and Quach, however, was on whether the OSC Settlement Agreement determined the fraud issue. The Court held that while fraud may have been investigated by the OSC, it was not part of any determination or finding. The issue of fraud was specifically excluded in the Settlement Agreement signed by Voung and Quach. The Court held:

These criminal proceedings do not involve the re-litigation of issues that were already determined in the Applicants’ favour in an earlier proceeding. The OSC made no finding either explicitly or implicitly with respect to the allegation of fraud against [Voung and Quach]. Furthermore, the parties did not enter into a consent or agreement that addressed the issue of fraud. The OSC was very clear in the Settlement Agreement that fraud was excluded. There are no issues of finality or fairness that are violated in finding that issue estoppel does not apply.

OSC Disgorgement Orders and Criminal Restitution Orders

It appears that Voung and Quach mistakenly believed that by agreeing to “disgorge” $5,623,954.96 to the OSC, they had effectively been penalized for the same conduct the police were alleging in their criminal fraud case. The Settlement Agreement, however, specifically stated that the disgorgement order related to the amounts they received from non-compliance with the Securities Act, i.e.: the failure to be licensed and the failure to file a prospectus, as opposed to securities fraud.

What appears really at issue is whether an OSC disgorgement order, which is similar in appearance to a criminal restitution order, can be imposed by the OSC without an OSC finding of securities fraud. In any event, as mentioned, Voung and Quach consented to the disgorgement order and consented to deferring prosecution on the securities fraud until after the criminal fraud case was adjudicated.

OSC Fraud Proceedings after Criminal Fraud Convictions

The Court further noted that the OSC Settlement Agreement was entered into with knowledge of the outstanding criminal investigation and that new proceedings could be commenced pursuant to s. 127(10) of the Securities Act. This provision of the Securities Act authorizes OSC staff to seek an Order from the Commission “where a person or company has been convicted of an offence [including a criminal offence] arising from a transaction, business or course of conduct related to securities or derivatives.”

The Court held that it was evident that rather than making any determination of fraud, the OSC specifically and clearly recognized that once the criminal proceedings concluded, it could take further steps at that time, if warranted. The Court held that this was not a situation of an acquittal before the OSC, or where an agreement of any kind regarding liability for securities fraud was reached. The OSC decision with respect to how to proceed regarding any finding of fraud in the criminal matter was deferred pending the outcome of the criminal proceedings.

The Different Mandates of Criminal versus Securities Act Fraud Cases

In the Voung and Quach criminal stay application, the Court expressly pointed out that the matter before the OSC was an administrative proceeding, whereas the matter before the Court was a criminal proceeding. What was not made transparent by the Court was why criminal and securities prosecutions have different purposes.

In a case from the Alberta Securities Commission decision under title of Re Magee, 2015 ABASC 846 involving unregistered day traders, the Commission held:

 

143      Sections 198 and 199 of the Act authorize an ASC hearing panel to impose a variety of sanctions against a respondent when it is in the public interest to do so. Potential sanctions include cease-trade orders, director-and-officer bans, bans on other types of capital-market activities, disgorgement orders and administrative penalties.

 

  1. Sanctions are aimed not at punishing a respondent but at protecting investors and our capital market (Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37at paras. 39-45). Sanctions are meant to deter, where necessary, the respondent (specific deterrence) from a repetition of misconduct, and others (general deterrence) from emulating the respondent’s misconduct (Re Cartaway Resources Corp., 2004 SCC 26 at paras. 52-62; and Re Podorieszach, 2004 ABASC 567 at para. 17).

 

It is the role of the Criminal Courts to protect society generally by prosecuting, punishing and rehabilitating offenders – often through incarceration. While role of securities regulators has an aspect of punishment through the imposition of administrative penalties, their focus is to impose measures to protect investors and capital markets through cease-trade orders, director-and-officer bans, bans on other types of capital-market activities, etc.

To say this another way, notwithstanding that there is a similar legal test for imposing a conviction for criminal fraud and securities fraud, securities regulators cannot impose a sentence that includes incarceration. While the goals of general deterrence, specific deterrence, and denunciation are common to criminal, regulatory and civil fraud recovery prosecutions, the sanctions vary between the three streams of enforcement based on their purpose.

The OSC and the Hibbert Prosecution

The OSC’s Hibbert prosecution is an example of a situation where criminal fraud charges did not proceed after an OSC prosecution for securities fraud. Marlon Gary Hibbert, a pastor of a Toronto church, fleeced members of his congregation by operating a foreign exchange program that was nothing more than a Ponzi scheme. Hibbert took his parishioners for more than $8M.

In 2011, the OSC investigated and issued a Statement of Allegations which included charges of operating without being registered, failing to submit a prospectus, and securities fraud. In January 2012, Hibbert was found liable for securities fraud by the OSC. In December 2012, the OSC issued its decision on sanctions, imposing administrative penalties, disgorgement orders, and market registration bans – see Marlon Gary Hibbert et al., 2012 ONSEC 33

In May 2013, after his OSC conviction, the Toronto Police charged Hibbert with 38 counts of criminal fraud, alleging that Hibbert had perpetrated an $8.6M Ponzi scheme. The underlying facts were the same as those relied on by the OSC. Oddly, there is no reported decision or press release on whether Hibbert was convicted or if the charges were withdrawn against him. We have been advised by the Courts that the criminal charges against Hibbert were withdrawn.

The lack of accountability by the Crown to publish why the Hibbert prosecution was withdrawn is disturbing. Was it because of this issue estoppel issue, or some other reason? Whatever the case, Hibbert walked free from his $8M fraud without serving a day in jail – and with much of the money remains unaccounted for. The OSC disgorgement orders and administrative penalties were not paid. The parishioners could not afford paying private lawyers to enforce their civil judgments.

Civil Recovery before Criminal or Security Regulator Complaints

As stated at the outset of this blog, this case of R. v. Vuong and Quach, 2018 ONSC 3348 is helpful for fraud victims to understand the interplay between police (criminal) and regulatory (securities commission) investigations, to whom they should make their complaint and when.

It is our view that fraud victims should make their fraud complaint to civil fraud recovery lawyers before making a complaint to police or securities regulators. The police and securities regulators are not in the business of recovering funds for victims. Criminal restitution orders and securities regulators’ disgorgement orders are generally only collected through the civil process. By the time that police or securities regulators obtain a conviction, the stolen funds are often long gone.

Fraud victims should also be aware that there are limitation defences that fraudsters may take advantage of if a civil claim is not instituted within two years from the discovery of the loss. Often criminal and securities fraud prosecutions are unsuccessful. If fraud victims wait to see what the outcome of the criminal or securities fraud complaints are, they may learn the hard reality that if no conviction is entered, or if there is a conviction but no restitution or disgorgement order is made, they are timed out at then launching a civil fraud recovery prosecution.

What fraud victims should focus on is addressing their private interests first, and the state interests later. Fraud victims should consider issuing their civil fraud claim first, and determine if any assets can be recovered. If assets are not recovered from fraudsters at the outset, fraud victims run the real risk of having their funds spent by fraudsters on defending the very criminal and regulatory complaints that they made.

We advise most fraud victims that once the limitation period issue is addressed by way of issuing a claim, and once it determined whether assets can be recovered, then the issue of whether a public prosecution is in their best interest should be considered. The bottom line is that there is no limitation defence to criminal fraud charges – and as the R. v. Vuong and Quach case demonstrates, a criminal prosecution for fraud should take place before a securities regulator seeks a determination on the merits of a securities fraud charge.

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.

 

Norman Groot

About Norman Groot

Based on my police experience and my experience thereafter as a litigator, I have joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

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