Canadian Law on Unwitting Investments in “Ponzi” Schemes in Question
The law of Canada on the treatment of investments in Ponzi-schemes has been cast in the spotlight recently through developments in the bankruptcy of Virginia Tan (“Tan”).
The facts relating to Tan’s investment scheme are set out in the Settlement Agreement dated April 13, 2017 that is available on the British Columbia Securities Commission Website. The Agreed Statement of Facts in the Settlement Agreement indicates that:
- For several years prior to 2011, Tan operated a business through Letan Investments Management that involved making short-term, high interest loans to individuals and small businesses that were unable to obtain traditional financing from financial institutions, in a process she referred to as “factoring”;
- To finance her business, Tan raised funds from investors and issued promissory notes to them;
- By 2011, Tan had discontinued her factoring business, however, she continued to raise funds from investors.
In the Settlement Agreement, it is acknowledged that:
By failing to inform investors that she had no factoring business and was not earning income from any other business, and by using other investors’ funds to pay the investors’ purported returns, Tan perpetrated a fraud on the investors contrary to section 57(b) of the [Securities Act, RSBC 1996, c. 418].
Boale, Wood Ltd., the bankruptcy trustee (the “Trustee”), is currently pursuing claims against people who invested with Virginia Tan seeking to recover the net proceeds that were earned by some of the early investors (the “Net Winners”). This process is intended to result in the fairest possible distribution of the profits and losses between all victims of the fraudulent scheme.
The Supreme Court of British Columbia recently pronounced judgment in a similar case involving an investor in the notorious Ponzi scheme operated by Rashida Samji. The decision, reported as Boale, Wood & Company Ltd. v Whitmore, 2017 BCSC 1917 (“Whitmore”), involves analysis of the many legal issues that arise when a bankruptcy trustee seeks to recover funds that were paid out of a Ponzi scheme pursuant to the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163 (“FCA”). Importantly, the Court in Whitmore adopted the reasoning of American courts which have found that all payments made out of a Ponzi scheme are “intended to delay, hinder, or defraud creditors” within the meaning of the FCA because the scheme is insolvent from its inception. Based on this and other findings, the Court granted judgment to the bankruptcy trustee for the net proceeds that the defendant had received from Ms. Samji.
Whether the same conclusion can be reached in Tan’s bankruptcy has not yet been determined by the BC courts. If you invested with Tan or any other similar investment and are facing a claim by a Trustee, you should seek legal advice to determine what amounts, if any, you may be obligated to repay from your investment proceeds.
J. Reilly Pollard
Associate Lawyer in Dispute Resolution
Lindsay Kenney LLP – Vancouver Law Firm