ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) SUPPLEMENTARY FACTUM OF THE ONTARIO SECURITIES COMMISSION

Transcription

1 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) Court File No.05-CL-5792 B E T W E E N: ONTARIO SECURITIES COMMISSION Applicant - and - PORTUS ALTERNATIVE ASSET MANAGEMENT INC., PORTUS ASSET MANAGEMENT INC. and BANCNOTE CORP. Respondents SUPPLEMENTARY FACTUM OF THE ONTARIO SECURITIES COMMISSION PART I ORDER SOUGHT 1. The Applicant is seeking the relief set out in paragraphs 1 (abridging time for service), 3 (confirmation regarding the Receiver s Charge, as defined herein), 4 (examination rights), 5 (production of documents), 6 (expansion of the receivership to include the Trusts and SAM, as such terms are defined herein), and 8 (expansion of the receivership to include the Canadian assets of the Cayman Companies, as defined herein) of the Notice of Motion dated March 17, 2005 (the Notice of Motion ). The balance of the relief sought in the Notice of Motion has been adjourned to April 8, 2005.

2 PART II OVERVIEW 2. By Order of the Honourable Mr. Justice Campbell of the Ontario Superior Court of Justice (Commercial List) (the Court ), KPMG Inc. was appointed as receiver (the Receiver ) of the property of Portus Alternative Asset Management Inc. ( PAAM ), Portus Asset Management Inc. ( PAM ) and BancNote Corp. (collectively, Portus ) pursuant to an Application brought by the Ontario Securities Commission (the Commission ) under section 129 of the Securities Act (Ontario). The Commission brings this Motion for the relief set out in paragraph 1 and paragraphs 3 to 8 of the Notice of Motion, on the basis that such relief is critical to protecting the interests of the Investors and the due administration of the Securities Act (Ontario). 3. Capitalized terms used herein are as defined in the Second Report of the Receiver dated March 17, 2005, the Affidavit of Robert M. Rusko sworn March 22, 2005 (the Rusko Affidavit ), the Supplementary Affidavit of Robert M. Rusko sworn March 24, 2005 (the Supplementary Affidavit ), or the Affidavit of Robert Castonguay sworn March 22, 2005 (the Castonguay Affidavit ), unless otherwise defined herein. PART III THE FACTS Receiver s Charge and Representative Counsel Charge 4. The overarching mandate of the Receiver is to protect the interests of the Investors. The mandate of the Representative Counsel is to represent the interests of the Investors in these proceedings herein. 5. The Receiver has located and identified an account in the name of PAAM at the Royal Bank of Canada designated as account MPS (the Account ). There is approximately $15,105, in the Account. Supplementary Affidavit at paragraphs 5 and 6. 2

3 6. Investor funds were deposited to the Account but the Account was not operated as a trust account. Receipts from Investors into the Account did not balance with payments out to Investors on a monthly basis. RRIF payments to clients and administration fees to Portus were paid from the Account. Rusko Affidavit at paragraphs On February 9, 2005, the day before the Applicant obtained its second Temporary Order by which Portus ability to operate its accounts was restricted, there was the sum of $15,415, in the Account. When the Initial Order was made on March 4, 2005 there was the sum of $15,105, in the Account. Rusko Affidavit at paragraph There are relatively few accounts which appear to contain Portus s own funds. The largest balance in any of these accounts is approximately $72, Rusko Affidavit at paragraph The balance of the accounts operated by Portus appear to be accounts into which client monies were deposited. Rusko Affidavit at paragraphs The Receiver requires funds to pay for the ongoing administration of the Receivership. In addition, the Representative Counsel requires funding to fulfil its role. The activities of both the Receiver and the Representative Counsel are intended to be for the benefit of the Investors. Supplementary Affidavit at paragraph Consequently, the Initial Order provided that the Receiver s and the Representative Counsel Charge would each constitute a first ranking charge, ranking pari 3

4 passu and pro rata with each other, against the Property, which term for greater certainty includes property held in trust by Portus. Supplementary Affidavit at paragraph 4. Initial Order at paragraphs 2, 3 and The Receiver will return to Court on notice at the appropriate time to implement a process to ensure that the costs of the receivership are borne by all the Investors and not only those whose funds are in the Account. Examination Rights and Production of Documents 13. Portus business records are incomplete. Prior to the receivership, attempts were made to destroy critical information with respect to the Investors, the Trusts, and the finances and accounting of Portus, thereby preventing anyone from analyzing the full scope of Portus activities, operations, and financial information. The Receiver will not be able to recover all of the missing data. Rusko Affidavit at paragraphs 38, 43. Castonguay Affidavit at paragraph Without the assistance of Portus personnel, the Receiver cannot be assured that it has identified all of the missing information. The Receiver thus far has been unable to secure the cooperation of anyone at Portus who is willing and able to fully explain the complex legal and financial relationships between and among the Portus companies, the Trusts, the Investors, and certain other related and unrelated parties. Accordingly, the Receiver has had to develop a picture of Portus business and affairs based in part on incomplete documentation and salvaged electronic records. Rusko Affidavit at paragraphs 30 and 32 to The key decision makers for PAAM, PAM and BancNote Corp. have not cooperated fully with the Receiver. Michael Mendelson through counsel advised on 4

5 March 24, 2005 that he would consent to be interviewed by the Receiver. The Receiver requires full and complete disclosure of information from Boaz Manor, Ali Hamid and Michael Mendelson. The Receiver is of the view that these persons may not provide full disclosure unless compelled by Court Order to attend an examination under oath. Rusko Affidavit at paragraph 43. Second Report at paragraph Certain documents related to the business and affairs of Portus are being held by third parties including counsel to the Portus companies. The Receiver requires production of documents relating to the corporate structure and transactions of the Portus companies. The Receiver does not seek production of documents covered by litigation privilege relating to this proceeding or investigations by the OSC. Second Report at paragraph 51. Expansion of Receivership 17. In view of the role of the Trusts in the investment structures implemented by Portus, and the degree to which SAM and the Cayman Companies are integrated into Portus business, the Receiver requires an expansion of the receivership in order to protect the interests of Investors and to otherwise discharge the Receiver s mandate. 18. SAM shared premises with the Debtors and was involved with the Debtor s business. Mendelson is listed as the sole officer and director on SAM s Corporate Profile Report. 19. It appears that SAM provided administrative services to PAM. There are significant intercompany accounts between SAM and PAM. SAM s financial results were consolidated with those of PAAM and PAM in Portus internal financial records. 5

6 20. If the receivership is not expanded to include the Trusts, SAM, and the Canadian assets of the Cayman Companies (collectively, the Additional Parties ) there is a serious risk of prejudice to the interests of the Investors. Supplementary Affidavit at paragraphs 14 to 21. PART IV THE ISSUES (1) Does the Court have jurisdiction to grant the Receiver s Charge and the Representative Counsel Charge against the Account? (2) Does the Court have jurisdiction to compel the attendance of persons to attend an examination by the Receiver? (3) Should the Receivership be expanded to include the Additional Parties? PART V THE LAW (1) Jurisdiction re the Charges 21. The Court has jurisdiction to impose the Receiver s fees and disbursements upon trust assets not belonging to the person against whom the receiving order is made. Where a person seeks to enforce a claim to an equitable interest in property, the Court has discretion to require, as a condition to giving effect to that equitable interest, that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. Ontario (Securities Commission) v. Consortium Construction Inc., 1992 CarswellOnt 176 at paragraphs 9, 10 (Ont. C.A.) 22. Where a receiver is appointed pursuant to the Securities Act, the authorizing sections reinforce the Court s authority to impose upon such trust property for fees and expenses. The Receiver cannot be expected to perform services without an assurance that it will be able to recover its fees and expenses. 6

7 Ontario (Securities Commission) v. Consortium Construction Inc., supra, at paragraphs 10, 32, The Court has jurisdiction to impose the fees and disbursements of Representative Counsel, appointed to represent the interests of the Investors, upon assets held in trust for the benefit of the Investors, as the work to be performed by the Representative Counsel will be of substantial benefit to the trust property and to the persons with an equitable interest therein. Ontario (Securities Commission) v. Consortium Construction Inc., supra, at paragraphs 9, 10. (2) Jurisdiction re Compelling Examinations 24. The Superior Court of Ontario has broad and universal jurisdiction over all matters of substantive law unless the legislature divests from this universal jurisdiction in unequivocal terms. The Court may exercise its inherent jurisdiction even in matters which are regulated by statute or rules of the Court. 80 Wellesley Street East Ltd. v. Fundy Bay Builders et al [1972] 2 O.R. 280 ABN Amro Bank Canada v. NsC Diesel power Inc. (N.S.C.A.) [1991] N.S.J No The case law is clear that the Court has inherent jurisdiction to compel Manor, Mendelson and Hamid to attend at an examination, under oath, by the Receiver. Re SLMSoft Inc., 2003 CarswellOnt 4730 at paragraph In Montreal Trust Co. et al. v. Churchill Forest Industries, the appellants challenged the court s inherent jurisdiction to grant an order allowing the receiver to examine a witness in the context of a receivership established pursuant to statutory authority. In Montreal Trust Co. et al. v. Churchill Forest Industries (Manitoba) Ltd. (1971), 21 D.L.R. (3d) 75 (Man. C.A.) 7

8 27. In reviewing the scope of inherent jurisdiction, the Court of Appeal in Montreal Trust confirmed that inherent jurisdiction is derived not from any statute or rule but from the very nature of the Court as a Superior Court of law. The Court held that it could exercise its inherent jurisdiction to give vitality to its orders. Montreal Trust, supra 28. The Court in Montreal Trust noted: to say that the Court lacked the jurisdiction to make the order for Mr. Mochary s examination would be to leave the receiver largely barren of power and to render the original order to a great extent ineffective. Montreal Trust, supra 29. In confirming the broad jurisdiction of the court to make ancillary orders the Court in Montreal Trust held the following: To return to the point earlier made, jurisdiction of the Court of Queen s Bench to appoint a receiver carries with it such ancillary powers as are necessary to make that jurisdiction effective. The receiver is entitled to certain information and records under the order, he has not been able to obtain these; Mr. Mochary, not a stranger off the street but a person who is closely identified with the defendants, appears to be able to provide in whole or part that which is being sought in our view the order was within the jurisdiction of the Court and was a proper one to be made in the circumstances. [emphasis added] Montreal Trust, supra Canadian Asbestos Services Ltd. v. Bank of Montreal, 1992 CarswellOnt 936 at paragraph Section 129 of the Ontario Securities Act places no restrictions on the powers that may be given to a receiver. Provided the appointment is valid, the court under its residual source of powers, can make whatever orders it considers necessary to give effect to the appointment. 31. The inherent jurisdiction of this Superior Court to make ancillary orders necessary to enable a receiver to act effectively within its jurisdiction does not change simply 8

9 because a receiver is appointed under the Ontario Securities Act rather than under the Courts of Justice Act or any other legislation. 32. Given the substantial gaps in the books and records of Portus and its related companies and the evidence of document destruction, the Receiver requires full disclosure of information from, at minimum, Manor, Mendelson and Hamid. There is good reason to believe that these former officers of Portus have information relevant to the Receiver s mandate. The Receiver will not be able to obtain such disclosure without an Order compelling such persons to attend an examination, and accordingly the Order requested is necessary for the effective operation of the receivership. 33. It is therefore submitted that the argument that this Court has no jurisdiction to make an order for the examination of witnesses ancillary to the appointment of a receiver has no basis in Canadian jurisprudence. (3) Expansion of Receivership 34. In considering whether to appoint a receiver under section 129 of the Securities Act (Ontario), important considerations include the preservation of the company s property and the protection of investors. Other considerations include the financial position of the company, whether questionable transactions occurred, and the failure to disclose material facts to creditors. Victoria Mortgage Corp, Re. (1985), 57 CBR (N.S.) 157 (BCSC) at p. 164 to In considering the best interests of the creditors the Courts have interpreted the scope of creditors broadly to include creditors of interlocking or inter-related companies and investors claiming a trust relationship over assets. Centennial Mortgage Corp. v. British Columbia (Securities Commission), supra, at para 42. Ontario (Securities Commission) v. Consortium Construction Inc. (1991), 9 CBR (3d) 278 (Ont. Gen. Div.) at pp. 307; varied on other grounds (1992), 9 O.R. (3d) 385 (CA). 9

10 PART VI RELIEF REQUESTED 29. The Applicant seeks an Order, inter alia: (i) confirming that the Receiver s Charge and the Representative Counsel Charge each constitute a first ranking charge, ranking pari passu and pro rata with each other, upon the Account; (ii) authorizing the Receiver to examine, under oath, Boaz Manor, Michael Mendelson and Ali Hamid, and directing such persons to attend an examination at the request of the Receiver; and (iii) appointing KPMG Inc. as Receiver of all property, assets and undertaking of the Trusts, SAM, and the Canadian assets of the Cayman Companies. ALL OF WHICH IS RESPECTFULLY SUBMITTED March 28, 2005 Kelley M. McKinnon Manager, Litigation and Chief Litigation Counsel Ontario Securities Commission Melissa J. MacKewn Litigation Counsel Ontario Securities Commission 10

11 SCHEDULE A Centennial Mortgage Corp. v. British Columbia (Securities Commission), (1969) CarswellBC 232 (BCCA) British Columbia (Securities Commission) v. DiCimbriani (1996), 138 DLR (4 th ) 263 Victoria Mortgage Corp, Re. (1985), 57 CBR (N.S.) 157 (BCSC) Ontario (Securities Commission) v. Consortium Construction Inc. (1991), 9 CBR (3d) 278 (Ont. Gen. Div.); varied on other grounds (1992), 9 O.R. (3d) 385 (CA) Re SLMSoft Inc., 2003 CarswellOnt Wellesley Street East Ltd. v. Fundy Bay Builders et al [1972] 2 O.R. 280 ABN Amro Bank Canada v. NsC Diesel power Inc. (N.S.C.A.) [1991] N.S.J No. 108 Montreal Trust Co. et al. v. Churchill Forest Industries (Manitoba) Ltd. (1971), 21 D.L.R. (3d) 75 (Man. C.A.) Canadian Asbestos Services Ltd. v. Bank of Montreal, 1992 CarswellOnt 936 at paragraph 24 11

12 SCHEDULE B Securities Act, R.S.O. 1990, c.s.5, as amended, ss. 1(1) and 129 R.S.O. 1990, c. S.5 s.1(1) Definitions Ontario Statutes Securities Act Interpretation "Ontario securities law" means, (a) this Act, (b) the regulations, and (c) in respect of a person or company, a decision of the Commission or a Director to which the person or company is subject; 129. Part XXII -- Enforcement 129(1) Appointment of receiver, etc The Commission may apply to the Ontario Court (General Division) for an order appointing a receiver, receiver and manager, trustee or liquidator of all or any part of the property of any person or company. 129(2) Grounds No order shall be made under subsection (1) unless the court is satisfied that, (a) the appointment of a receiver, receiver and manager, trustee or liquidator of all or any part of the property of the person or company is in the best interests of the creditors of the person or company or of persons or companies any of whose property is in the possession or under the control of the person or company or the security holders of or subscribers to the person or company; or (b) it is appropriate for the due administration of Ontario securities law. 129(3) Application without notice The court may make an order under subsection (1) on an application without notice, but the period of appointment shall not exceed fifteen days. 12

13 129(4) Motion to continue order If an order is made without notice under subsection (3), the Commission may make a motion to the court within fifteen days after the date of the order to continue the order or for the issuance of such other order as the court considers appropriate. 129(5) Powers of receiver, etc A receiver, receiver and manager, trustee or liquidator of the property of a person or company appointed under this section shall be the receiver, receiver and manager, trustee or liquidator of all or any part of the property belonging to the person or company or held by the person or company on behalf of or in trust for any other person or company, and, if so directed by the court, the receiver, receiver and manager, trustee or liquidator has the authority to wind up or manage the business and affairs of the person or company and has all powers necessary or incidental to that authority. 129(6) Directors powers cease If an order is made appointing a receiver, receiver and manager, trustee or liquidator of the property of a person or company under this section, the powers of the directors of the company that the receiver, receiver and manager, trustee or liquidator is authorized to exercise may not be exercised by the directors until the receiver, receiver and manager, trustee or liquidator is discharged by the court. 129(7) Fees and expenses The fees charged and expenses incurred by a receiver, receiver and manager, trustee or liquidator appointed under this section in relation to the exercise of powers pursuant to the appointment shall be in the discretion of the court. 129(8) Variation or discharge of order An order made under this section may be varied or discharged by the court on motion. 1994, c. 11, s

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