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Fraud - General

. Kadonoff v. OSC

In Kadonoff v. OSC (Div Court, 2023) the Divisional Court considered a s.9 Securities Act appeal of "a finding of the Ontario Securities Commission (“OSC”) that he engaged in fraudulent conduct pursuant to s. 126.1 of the Securities Act, and the penalty imposed by the [SS: now named] Capital Markets Tribunal (CMT) in that proceeding".

Although this was an administrative (CMT) ruling, the appellant sought to advance a common law 'due diligence defence' [which is more commonly advanced strict liability (eg. POA) prosecutions], and in the course of that attempt the court considered a related 'defence of reasonable reliance on legal advice':
Did the Panel err in law by finding that Mr. Kadonoff had not established a due diligence defence under s. 126.1 of the Securities Act?

[35] Mr. Kadonoff argues that the Panel erred in stating that due diligence is not an available a defence to an allegation of breach of s. 126.1 of the Securities Act. The Panel made this comment in the context of its consideration of the defence of reasonable reliance on legal advice. At paragraph 239 of the reasons the Panel wrote:
[239] We will now review the defence of reasonable reliance on legal advice and consider whether it is available to the respondents on the facts of this case.

[240] The defence is available in a Commission proceeding in respect of an allegation that requires Staff to establish an intentional or wilful act. An allegation of fraud contrary to the Act falls into that category. The defence is therefore available, subject to a respondent satisfying the criteria for its use.

[241] Subsection 126.1(1) of the Act does not provide for a due diligence defence, and under these circumstances none is available. Instead, a respondent who asserts the defence must establish that:
a. the lawyer had sufficient knowledge of the facts on which to base the advice;

b. the lawyer was qualified to give the advice;

c. the advice was credible given the circumstances under which it was given; and

d. the respondent made sufficient enquiries and relied on the advice.
[242] The last of these four components has a due diligence aspect to it, and even though the defence in this context is not a true due diligence defence, diligence on the part of the respondent asserting the defence may play a role both in the assessment of the mental element at the merits stage and as a potential mitigating factor at the sanctions stage (if any) of a proceeding. (Citations omitted).
[36] The defence of due diligence is a defence available at common law or by statute for strict liability offences. It involves an individual proving on a balance of probabilities that they took all reasonable care or took all reasonable steps to avoid committing the offence: R. v. Sault Ste Marie (City), [1978] 2 S.C.R. 1299, 1978 CanLII 11 (SCC), at p. 14.

[37] This defence is also incorporated in some statutes, including in s. 122 of the Securities Act in the case of a prosecution for the offence of making misleading statements:
Defence – Without limiting the availability of other defences, no person or company is guilty of an offence under clause (1)(a) or (b) if the person or company did not know and in the exercise of reasonable diligence could not have known that the statement was misleading or untrue or that it omitted to state a fact that was required to be stated or that was necessary to make the statement not misleading in the light of circumstances in which it was made.
[38] In contrast to s. 122 which uses the language of “reasonable diligence,” s. 126.1 of the Securities Act provides:
Fraud and market manipulation

126.1(1) A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,

a. results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative; or

b. perpetrates a fraud on any person or company.
[39] Due diligence can take several forms. As counsel for the OSC concedes, a mistake of fact is an aspect of due diligence which can be a legitimate defence in a prosecution under s. 126.1 of the Securities Act. Mr. Kadonoff raised that defence, testifying that he did not know that SIF#1’s funds were being used to fund the distributions by SIF#2 in June, July and August of 2015.

[40] Had the Panel accepted this evidence, then this would have been a defence, at common law, akin to due diligence. Mr. Kadonoff’s mistake would have countered the allegation that he knew or reasonably ought to have known that the acts done perpetrated a fraud. But the Panel did not accept his evidence on this point, finding that although Mr. Kadonoff raised concerns about the transfers, he signed the cheque to SIF#2 distributions in his capacity as an officer of SIF Inc. The Panel went on to say that “a reasonable inquiry would have revealed exactly what Mr. Kadonoff feared was indeed happening, we cannot accept his wishful assertion that he relied on others to justify his signing the cheque.” Thus, although the Panel did not describe his defence as one of due diligence, it nevertheless considered Mr. Kadonoff’s defence of mistake of fact, and his lack of knowledge and rejected his evidence on that point. I find that in considering the defence of mistake of fact, and in observing that there was no statutory defence of due diligence in s. 126.1, the Panel did not fall into legal error.

[41] In reading the detailed reasons for each of the defences raised by Mr. Kadonoff and considering the discussion of due diligence in the context of the section, I conclude that it is likely that the Panel meant that s. 126.1 does not include an explicit statutory defence of due diligence. The Panel understood the defences raised by Mr. Kadonoff at common law and addressed them. This raises a question of mixed fact and law. I see no error in law or any palpable and overriding error in the Panel’s application of the law to Mr. Kadonoff’s defence of mistake of fact or purported exercise of due diligence. Thus, I would not give effect to this ground of appeal.
. Ontario v. Madan

In Ontario v. Madan (Ont CA, 2023) the Court of Appeal considered an ambitious fraud defence of contributory negligence, here one that amounts to the accusation that the victim left themselves open to the fraud:
[18] The contributory negligence defence advanced by the appellants is predicated on Ontario’s alleged failure to take adequate steps to protect itself from the fraud perpetrated against it. The defence, as framed in the statements of defence, applies to all of the claims advanced by Ontario, including the fraud, theft, and conversion claims: see e.g., Shalini’s Statement of Defence, at paras. 30-33, 35.

[19] The proposition that a fraudster’s liability for damages flowing from its fraud should be reduced to reflect a victim’s failure to protect itself from the fraud would, if accepted, strongly suggest that if perpetrated against the right victim, crime would indeed pay. Thankfully the law is to the contrary. As the motion judge held, a victim’s negligence or carelessness affords no defence, partial or otherwise, to an allegation of dishonesty: Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at paras. 67-71; Man Financial Canada Co. v. Keuroghlian, 2008 ONCA 592, 47 B.L.R. (4th) 190, at paras. 44-46.


[25] Apart from the state of the case law, the appellants’ claim fails on a first principles analysis. The appellants maintain that even if they are in possession of assets that are the indirect proceeds of the frauds perpetrated against Ontario, and even though the appellants have no legitimate claim to any part of the proceeds of those frauds, they should be entitled to keep the assets, or at least part of the assets, which are the indirect proceeds of the fraud, presumably to “punish” Ontario for not taking adequate steps to protect itself from the fraud.

[26] On this approach, the appellants become the beneficiaries of what can only be described as a windfall, occasioned by Ontario’s failure to protect itself from Sanjay’s fraud. I am unaware of any equitable principle which justifies this result. Indeed, the result, a permanent financial loss for Ontario, the victim of the fraud, and a windfall gain for the appellants, bystanders to the fraud, seems the antithesis of equity.


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Last modified: 29-10-23
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