Her Majesty the Queen v. Benlolo et al. [Indexed as: R. v. Benlolo]
81 O.R. (3d) 440
Court of Appeal for Ontario,
Moldaver, Feldman and Rouleau JJ.A.
June 8, 2006
Competition law -- Sentencing -- Misleading advertising -- Accused operating mail fraud scheme generating revenue of more than $1.1 million -- Two prime movers in fraud receiving 34 months' imprisonment and fine of $400,000 -- Accused given six years to pay and one year in default of payment -- Accused having prior criminal records -- Trial judge not erring in imposing significant custodial sentences in addition to large fine -- Amendments to Competition Act in 1999 signalling intention that serious cases of misleading advertising with hallmarks of fraud to be treated like criminal offences -- Third accused involved for only one of five fraudulent mailings accounting for small percentage of revenue -- Culpability lower than other two accused but not minimal -- Fine for third accused reduced from $100,000 to $35,000.
The defendants operated a mail fraud scheme that involved sending invoices to thousands of businesses purporting to be for the renewal of a listing in an Internet Yellow Pages business directory. The recipients were not existing customers of the directory, but were misled into paying for the "renewal" by threats of late payment charges and by the false assertion that these were, in fact, renewals. The revenues generated by five mailings exceeded $1.1 million. The defendants were found guilty of misleading advertising, contrary to s. 52(1) of the Competition Act, R.S.C. 1985, c. C-34, as am. by S.C. 1999, c. 2, s. 12. EB had a prior conviction for trafficking in a significant quantity of cocaine. AB was convicted in the United States in 1998 of conspiracy to commit wire and mail fraud. SB was involved with his older brother AB in the U.S. mail fraud, but he was very young at the time and was diverted from the criminal law system. The trial judge treated him as a first offender. Moreover, SB was involved in only one of the five mailings. AB and EB were each sentenced to 32 months' imprisonment, after credit for two months of pre-trial custody, and were fined $400,000. SB was sentenced to nine months' imprisonment, to be served in the community, and was fined $100,000. The defendants appealed their sentence. [page441]
Held, AB and EB's appeal should be dismissed; SB's appeal should be allowed in part.
In 1999, the Competition Act was amended to change the misleading advertising offence from a strict liability offence to a full mens rea offence and to add provisions that could be used by the Competition Bureau for civil enforcement to stop misleading advertising business practices without the need to resort to the criminal law. The trial judge correctly concluded that in making the amendments, Parliament intended that serious, egregious cases that had the hallmarks of fraud would be treated as criminal matters, while cases that were more akin to sharp practice could be processed through the new civil stream. The trial judge was entitled to find that the entire enterprise in this case was a scam designed to bilk unsuspecting recipients of the fake invoices, and that the defendants' conduct was not just an example of a legitimate business overreaching, but rather was much further along the continuum towards criminal fraud. She concluded that a significant sentence was required in order to denounce this kind of conduct and to demonstrate that this type of misleading advertising on a large scale was not merely unethical, but criminal. The trial judge made no error in imposing three-year custodial sentences for the offence of misleading advertising. The reality of the threat of jail sentences for general deterrence of individuals and corporate executives who commit white collar crimes has become an effective and apparently necessary tool in the arsenal of law enforcement agencies.
The trial judge did not err in fining AB and EB $400,000 in addition to their jail terms. One purpose of a fine as part of a sentence for an economic crime is to ensure that the offender does not retain the proceeds from the crime once the sentence is served. Also, a fine must be significant enough that it constitutes more than an effective licence fee or part of the cost of doing business. The trial judge erred in imposing a $100,000 fine on SB. He was acquitted on four out of the five mailings, and the evidence was that not more than $1,000 of revenue was attributed to the mailing for which he was convicted. The amount of the fine was out of proportion both to the revenue from SB's offence and to his level of responsibility for the entire enterprise. However, while SB's participation was at a lower level than that of AB and EB, his culpability was more than minimal. A fine of $35,000 was appropriate.
APPEAL by three defendants from the sentence imposed by Molloy J. of the Superior Court of Justice, dated October 1, 2004, following conviction by a jury on April 23, 2004, for misleading advertising.
Cases referred to R. v. Browning Arms Co. of Canada, 1974 1612 (ON CA), [1974] O.J. No. 502, 18 C.C.C. (2d) 298, 15 C.P.R. (2d) 97 (C.A.); R. v. Hudson's Bay Co., 1977 1933 (ON CA), [1977] O.J. No. 411, 35 C.C.C. (2d) 61, 33 C.P.R. (2d) 131 (C.A.); R. v. Simpsons Ltd., 1989 10358 (ON SC), [1989] O.J. No. 72, 25 C.P.R. (3d) 43 (Dist. Ct.); R. v. Tobe, 1978 4081 (ON SC), [1978] O.J. No. 2598, 43 C.P.R. (2d) 51 (Co. Ct.); R. v. Wholesale Travel Group Inc., 1991 39 (SCC), [1991] 3 S.C.R. 154, [1991] S.C.J. No. 79, 4 O.R. (3d) 799n, 49 O.A.C. 161, 84 D.L.R. (4th) 161, 130 N.R. 1, 7 C.R.R. (2d) 36, 67 C.C.C. (3d) 193, 38 C.P.R. (3d) 451, 8 C.R. (4th) 145 Statutes referred to Bill C-13, An Act to Amend the Criminal Code (Capital Markets Fraud and Evidence Gathering), 3rd. Sess., 37th Parl., 2004 (assented to 29 March 2004), S.C. 2004, c. 3. Canada Post Corporation Act, R.S.C. 1985, c. C-10, s. 43 Canadian Charter of Rights and Freedoms, ss. 7, 11(d) Combines Investigation Act, S.C. 1974-75-76, c. 76, s. 36 [page442] Competition Act, R.S.C. 1985, c. C-34, ss. 34(1) [as am.], 35(1), 52, 52(1), 52(5) [as am.] Criminal Code, R.S.C. 1985, c. C-46, ss. 724(2)(b), 734.7 Authorities referred to Goldman, Calvin S., Q.C., and J.D. Bodrug, Competition Law of Canada, looseleaf (New York: Juris Publishing, 2005) Competition Bureau, Information Bulletin"Misleading Representations and Deceptive Marketing Practices: Choice of Criminal or Civil Track under the Competition Act" (September 22, 1999). House of Commons Debates, 074 (March 16, 1998) at 1300 (Hon. John Manley). MacKay, Robin, and Margaret Smith, Canada, Parliament"Bill C- 13: An Act to Amend the Criminal Code (Capital Markets Fraud and Evidence Gathering)", by Legislative Summary 468-E (February 16, 2004)
Lorne Sabsay, for appellants. Bradley Reitz and Jim Marshall, for respondent.
The judgment of the court was delivered by
[1] FELDMAN J.A.: -- The appellants operated a mail fraud scheme that involved sending invoices to thousands of businesses and non-profit organizations in Canada purporting to be for the renewal of a listing in an Internet Yellow Pages business directory. The problem was that the recipients were not existing customers of the directory, which had just been started, but were misled into paying for the "renewal" of the listing by threats of late payment charges and by the assertion that these were in fact renewals, when they were not. The revenues generated by five mailings between May and December 2000 exceeded $1.1 million. Following a 22-day jury trial, the appellants were found guilty of misleading advertising, contrary to s. 52(1) of the Competition Act, R.S.C. 1985, c. C- 34, s. 52, as am. by S.C. 1999, c. 2, s. 12. This appeal involves their sentences of a lengthy jail term as well as a significant fine.
Facts
[2] The appellants are brothers. Alan and Elliot Benlolo were principals in the Internet business directories called yellowbusinesspages.com and yellowbusinessdirectory.com. On May 25, 2000, they sent out their first mailing of invoices to approximately 50,000 businesses and non-profit organizations. The [page443] invoice was sent to recipients who had no relationship with the new business, yet the invoice did not describe the product in any way. Each mailing bore a striking similarity to a Bell Canada invoice, with almost the identical format, font and layout, including a two-sided format and detachable lower portion. It also contained a close facsimile of the Yellow Pages walking fingers logo. The amount due was stated to be $25.52, payable on receipt, with a late payment charge if payment was received after June 24, 2000.
[3] After the May mailing, Victor Serfaty became involved. He was charged jointly with the Benlolos but did not appeal his conviction or sentence. On July 6, 2000, the Competition Bureau sent a warning letter to Mr. Serfaty that the May mailing raised concerns regarding misleading representations and deceptive practices in contravention of the Competition Act. Additionally, shortly after the first mailing took place, solicitors for Telus Pages in British Columbia wrote yellowbusinesspages.com to demand that the latter cease using a reversed version of the walking fingers logo on its invoices.
[4] On July 25, 2000, the second mailing was sent to 100,000 businesses and non-profit organizations in Canada. The second mailing was a somewhat modified version of the May mailing. Although it no longer contained the walking fingers logo associated with the Yellow Pages directory, it included the fact that there was no charge for the initial listing and set- up and continued to refer to a balance forward, account number and other references that suggested to the recipient that it was a renewal notice. The word "bill" remained on the form.
[5] The third mailing on August 24, 2000 was sent out to 222,691 businesses and non-profit organizations, and the fourth on September 24, 2000 was sent to 288,015 such recipients.
[6] As a result of this continued activity by the appellants and Mr. Serfaty in the face of a warning from the Competition Bureau, together with a record number of consumer complaints (over 4,400 in total), the Competition Bureau as well as Canada Post took enforcement action. On October 24 and 25, 2000, the Competition Bureau executed nine search warrants at locations associated with the appellants and their companies, and on November 24, 2000, Alan and Elliot Benlolo and Victor Serfaty and their companies were charged with violations of the Competition Act in relation to the May, July, August and September 2000 mailings. On December 6, 2000, the Canada Post Corporation issued an interim prohibitory order under s. 43 of the Canada Post Corporation Act, R.S.C. 1985, c. C-10, prohibiting Alan and Elliot Benlolo and Victor Serfaty and their company from [page444] sending or receiving mail from specified addresses associated with their Internet business directory. [See Note 1 below]
[7] After these charges and the prohibitory order were made, the fifth mailing was sent out on December 15, 2000. The appellant Simon Benlolo, a third brother, had worked in the office of yellowbusinesspages.com since at least July 2000. On November 2, 2000, eight days after the search warrants were executed, he incorporated a "clean" Ontario numbered corporation to carry on the directory's activities. At that time, he also opened two bank accounts as the president and secretary of the new company. The December mailing was a bilingual bill similar in content to the previous mailings, but the price was raised to $37.40 and it was sent out only in Québec to 225,331 businesses and non-profit organizations. Alan and Elliot Benlolo and Victor Serfaty were charged in connection with this last mailing and eventually Simon Benlolo was charged in connection with all five mailings.
[8] On April 23, 2004, following a 22-day jury trial at which the appellants did not testify, Alan and Elliot Benlolo were convicted of two counts of misleading advertising in relation to each of the five mailings, that is of "knowingly or recklessly" making a representation to the public that was false or misleading in a material way, contrary to s. 52(1) of the Competition Act. Simon Benlolo was convicted of two counts of misleading advertising in relation to the December 15, 2000 mailing only. Victor Serfaty was convicted of two counts in connection with each of the July, August, September and December mailings. The matter was put over for sentencing until July 22, 2004.
[9] On that date, the appellants Alan and Elliot Benlolo pled guilty before the same trial judge to another very serious offence of conspiracy to commit fraud on the public and a joint sentence [page445] submission was made and accepted in respect of that offence. The two appellants were principals in an international telemarketing stock swap scheme between September 10, 1997 and September 27, 2000, overlapping the same period when they were also engaged in this misleading advertising Yellow Pages invoice scam. The scheme was carried out through a two-stage operation. In the first stage, people in many countries were contacted and convinced to buy shares in a number of small capital companies, the values of which had been artificially inflated. The investors were led to believe they had dealt with a legitimate brokerage firm, which later went out of business after the shares fell in value. In the second stage, the appellants and co-conspirators approached the same investors in the guise of other bona fide brokerages and told them that the small capital companies now wished to privatize and that the brokerages would repurchase the stock at a premium if the victims purchased blue chip stocks from them at below market value. The victims sent the difference in value to the conspirators. The victims never received the stock they bought. More than two hundred victims lost several million dollars.
[10] On July 22 and 23, counsel made their sentence submissions with respect to the Competition Act convictions and the matter was put over for sentencing until October 1, 2004. In conjunction with the guilty pleas on the fraud, counsel for the appellants and for the Crown agreed on a joint submission for sentence of 42 months in jail for each of Alan and Elliot Benlolo together with a joint restitution order in the full amount of $1,498,000 on condition that $920,000 would be paid into court on October 1, 2004. Both Alan and Elliot Benlolo had criminal records. Elliot Benlolo had been convicted of trafficking in a significant quantity of cocaine in 1993 and received a sentence of two years less a day. Alan Benlolo had no Canadian record, but in 1998 he was convicted in the United States of conspiracy to commit wire and mail fraud. He was sentenced to a period of 18 months in jail that was reduced to six months, and to a $400,000 restitution order that has not been paid.
[11] In his sentence submissions at trial, the position of counsel for the appellants was that the penalty should be a fine only. The Crown asked for three years in prison together with a fine of $400,000 for each of Alan and Elliot Benlolo, with the sentence to be served concurrently with the 42 months on the fraud charges. For Simon Benlolo, the Crown asked for a conditional sentence of one year and a fine of $100,000.
[12] Alan and Elliot Benlolo were each sentenced to 34 months imprisonment, after credit for two months pre-trial custody, together with a $400,000 fine. The term of imprisonment was to [page446] be served concurrently with the 42-month term for conspiracy to commit fraud in relation to the stock swap scheme. On those charges, Molloy J. acceded to the joint submission of counsel for a sentence of 42 months together with a joint restitution order of $1.498 million, with the 42 months to be served concurrently with the sentence imposed for the Competition Act convictions. The appellants were given six years to pay the fine with an additional year in default of payment. [See Note 2 below] There were also prohibition orders made under ss. 34(1) and 35(1) of the Competition Act.
[13] Simon Benlolo was sentenced to a nine-month conditional sentence of imprisonment and a $100,000 fine. He was given three years to pay, with the issue of time in default to be dealt with if the fine was not paid.
Issues
(1) Did the trial judge err by imposing a penitentiary or any jail sentence for Alan and Elliot Benlolo and a conditional sentence of imprisonment for Simon Benlolo for the crime of misleading advertising?
(2) Did the trial judge err by also imposing significant fines that were not limited to the profits of the impugned business?
(3) Did the trial judge err by failing to make a sufficient inquiry into the appellants' ability to pay the fines?
(4) Did the trial judge err by imposing a disproportionate fine upon Simon Benlolo?
Analysis
Issue 1: The propriety of imposing significant jail sentences for misleading advertising
[14] The appellants submit that the trial judge erred in law by imposing significant jail sentences that are outside the range for the offence of misleading advertising. The appellants rely on case law under the former misleading advertising offence in s. 36 of the Combines Investigation Act, S.C. 1974-75-76, c. 76, and s. 52 of the Competition Act, R.S.C. 1985, c. C-34, before it was amended in [page447] 1999. At that time Parliament made two significant changes to the Act: (1) it changed the misleading advertising offence from a strict liability offence to a full mens rea offence, and (2) it added provisions that could be used by the Competition Bureau for civil enforcement to stop misleading advertising business practices without the need to resort to the criminal law. In proceedings before Parliament when the legislative changes were made, the Minister articulated the purpose of the changes as follows:
The changes before us will create a combination criminal/ civil regime to address misleading advertising and deceptive marketing practices. They will foster quick and efficient compliance through a series of measures that allow a great deal of flexibility. This flexibility will enable the Competition Bureau to tailor its approach and to use the tools that are most effective for each different situation. Criminal sanctions will remain in place, but only for the most serious cases of misleading advertising. [See Note 3 below]
[15] Sections 52(1) and (5)(a)-(b) of the Competition Act provide:
52(1) No person shall, for the purpose of promoting directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, knowingly or recklessly make a representation to the public that is false or misleading in a material respect. . . . . .
(5) Any person who contravenes subsection (1) is guilty of an offence and liable
(a) on conviction on indictment, to a fine in the discretion of the court or to imprisonment for a term not exceeding five years or to both; or
(b) on summary conviction, to a fine not exceeding $200,000 or to imprisonment for a term not exceeding one year, or to both.
[16] Prior to the March 11, 1999 amendments, the section did not include the mens rea requirement that the representation be made "knowingly or recklessly". Instead, a due diligence defence applied. The available penalties if the offence was prosecuted by indictment were not changed, but in the case of a summary conviction offence, the maximum fine was raised from $25,000 to $200,000 with the maximum one year in jail remaining unchanged.
[17] Prior to the amendments, misleading advertising was regarded and treated as a regulatory offence. In R. v. Wholesale Travel Group Inc., 1991 39 (SCC), [1991] 3 S.C.R. 154, [1991] S.C.J. No. 79, 67 C.C.C. (3d) 193, at p. 219 S.C.R., p. 238 C.C.C., Cory J. stated:
The objective of regulatory legislation is to protect the public or broad segments of the public (such as employees, consumers and motorists, to name but a few) from the potentially adverse effects of otherwise lawful activity. [page448]
Although a sentence of incarceration was available under the former provision, courts tended to impose fines rather than custodial sentences for this and other offences under the Competition Act. Obviously when the charged entity is a corporation, the only penalty available is a fine with distress of property in default. Many of the older cases involved corporations only. See, for example, R. v. Simpsons Ltd., 1989 10358 (ON SC), [1989] O.J. No. 72, 25 C.P.R. (3d) 43 (Dist. Ct.), R. v. Browning Arms Co. of Canada, 1974 1612 (ON CA), [1974] O.J. No. 502, 18 C.C.C. (2d) 298 (C.A.), R. v. Hudson's Bay Co., 1977 1933 (ON CA), [1977] O.J. No. 411, 35 C.C.C. (2d) 61 (C.A.). However, in the case of R. v. Tobe, 1978 4081 (ON SC), [1978] O.J. No. 2598, 43 C.P.R. (2d) 51 (Co. Ct.), where the accused was an individual, a fine was imposed with one year in jail in the event of default. In other words, although a fine was the imposed penalty, in parity with the cases involving corporations, the court viewed an order of incarceration in default as appropriate.
[18] In this case, by charging by indictment the individuals who opened the bank accounts, incorporated the operating corporations, designed the mailings and arranged for them to be distributed to the public, the Crown sought to fix responsibility and therefore potential liability for both available penalties on those individuals.
[19] In deciding that a substantial sentence of incarceration was warranted and appropriate in this case, the trial judge distinguished the pre-1999 case law. She concluded that in making the amendments, Parliament intended that serious, egregious cases that had the hallmarks of fraud would be treated as criminal matters, while the cases that were more akin to sharp practice could be processed through the new civil stream. I agree with the trial judge that the 1999 amendments constitute a watershed in the treatment and approach to misleading advertising and that the pre-1999 case law must therefore be viewed with caution.
[20] As this was a jury trial, the trial judge was entitled to make findings based on the jury's verdict that were necessary for the purpose of sentencing under s. 724(2)(b) of the Criminal Code. The trial judge found that "this entire enterprise was a scam designed to bilk unsuspecting recipients of these fake invoices". Although a web site with business listings did exist, the trial judge viewed it as a ruse to provide a cover for the fraudulent activity, which was tricking unsuspecting recipients of the "invoice" or "bill" into thinking that their business or non-profit corporation was a subscriber of the Yellow Pages Internet directory and that they were therefore obliged to pay for that subscription. The fake invoices constituted the sole income stream of this business. In light of these conclusions, the trial judge rejected the suggestion that the appellants' conduct was just an example of a legitimate business [page449] overreaching, similar to the earlier cases such as the Simpsons case. Rather, the conduct was "much further along the continuum towards criminal fraud", making the election by the Competition Bureau to proceed by way of indictment completely appropriate in order to engage the higher available penalties. The fact that the invoiced amount in each case was small likely contributed to the success of the operation, causing the clerks who received the invoices to give them less scrutiny. The magnitude of the crime is measured both in the hundreds of thousands of mailings and in the revenue generated of over $1 million.
[21] The trial judge concluded that a significant sentence was required in order to denounce this kind of conduct and to demonstrate that this type of misleading advertising on a large scale is not merely unethical, but criminal. It undermines the Canadian economy that operates on the premise and understanding that consumer business dealings entered into in good faith are legitimate.
[22] In this context the trial judge found that each of the four accused required a custodial sentence. The trial judge considered the issue of disparity that was raised by the recent disposition of two cases involving Peter Kuryliw and James Tetaka. These two had purchased the Yellow Pages Internet business from the appellants and had continued to operate it in the same misleading way after December 2000. Each pled guilty and, on a joint submission, received a fine. Without commenting on the propriety of those sentences, they were based on guilty pleas and a joint submission. In fact, in the Tetaka case, the trial judge was faced with the precedent of the Kuryliw case and felt bound to honour the disparity principle. I agree with the trial judge that the result in cases where there is a guilty plea and a joint submission cannot be taken as precedential. The trial judge also pointed out that Kuryliw and Tetaka were not the originators of the fraudulent scheme. Although this is not a significant difference, the trial judge was entitled to take it into account.
[23] The trial judge also referred to Alan and Elliot Benlolos' other criminal activity. Alan Benlolo had a record in the U.S. for mail fraud and was barely out of jail when he began both this offence and the stock swap fraud. Contrary to the evidence given by the character witnesses on his behalf, the trial judge observed that Alan Benlolo was not interested in "making an honest living". Elliot Benlolo had a somewhat dated record for conspiracy to traffic in a large amount of cocaine for which he had received a sentence of two years less a day. In his case, he was out of prison for only a few years when he became engaged in planning this criminal activity and the stock swap. The trial judge concluded that although Elliot Benlolo's record was less relevant than Alan Benlolo's, they acted together in this crime and deserved the same sentence. [page450]
[24] The Crown asked for a penitentiary sentence of three years to be served concurrently with the 42-month sentence for fraud as well as a fine of $400,000 for both Alan and Elliot Benlolo. I will deal with the propriety of the fine later in these reasons. The trial judge agreed that a significant term of imprisonment was required in order to meet the objectives of specific and general deterrence as well as denunciation. She observed that this was not the worst case warranting the maximum five-year sentence, but as it was at the upper end of the scale, three years was appropriate.
[25] Both Mr. Serfaty and Simon Benlolo also received custodial sentences but they were to be served in the community. The trial judge explained that the seriousness of the crime and the need for specific and general deterrence to demonstrate how seriously the court views such offences made a fine an inadequate sentence for these crimes in these egregious circumstances. The deliberate flouting of the law by proceeding in December in the face of search warrants executed and charges already laid in respect of the earlier mailings significantly contributed to this conclusion.
[26] Simon Benlolo received a nine-month conditional sentence. He was 32 years old and had no criminal record. Although he was involved with his older brother Alan in the mail fraud scheme in the United States, he was very young at the time and was diverted from the criminal law system. In this case the trial judge treated him as a first offender. Because of his more limited involvement in the business directory venture as found by the jury, the trial judge was satisfied that although a custodial sentence was required, a sentence of nine months to be served in the community was appropriate together with a fine of $100,000.
[27] In my view, the trial judge made no error in imposing custodial sentences on all three appellants, nor did she err in imposing three-year penitentiary sentences on Alan and Elliot Benlolo. She considered all of the aggravating and mitigating circumstances as well as the good character evidence called by the appellants on sentencing.
[28] Most importantly, the trial judge made no error in principle in imposing significant custodial sentences for the offence of misleading advertising. Prior to the 1999 amendments, the same five-year maximum jail term was available as a penalty. However, because the offence was viewed as regulatory rather than fully criminal, and because many of the significant prosecutions were against corporations, jail sentences were not traditionally imposed. Another significant factor was that generally the crimes that came before the court involved legitimate businesses that stepped over the line in promoting their products and were most often limited to a particular advertising campaign. [page451]
[29] In 1999, Parliament amended the legislation to give the Competition Bureau more tools to use and more flexibility in its choice of enforcement mechanisms to combat new forms of misleading advertising including large-scale fraudulent schemes. It now had civil remedies that were more easily obtainable to deal with persons whose activities could be curbed and regulated through directives that would protect the public without the need to engage in the acrimonious, time- consuming and onerous criminal prosecution process. On the other hand, the criminal offence was changed from a strict liability offence to one of full mens rea, that is, where the deception is done knowingly or with reckless disregard of the consequences. In the text Competition Law of Canada, the authors discuss the new criminal provision at para. 6.02[3]:
. . . the option of criminal prosecution has been preserved for particularly egregious acts of misleading representation where there is clear and compelling evidence of mens rea and a criminal prosecution would be in the public interest. As a result of the recent amendments, s. 52(1) requires proof that the misleading advertising occurred knowingly or recklessly. To determine whether a criminal prosecution would be in the public interest, the Commissioner may consider several factors including:
-- whether there was substantial harm to consumers or competitors which could not be adequately dealt with by available civil remedies;
-- whether the deceptive practices were targeted or took unfair advantage of vulnerable groups such as children or the elderly;
-- whether there was a failure to make timely and effective attempts to remedy the adverse effects of the conduct;
-- whether the persons involved failed to comply with a previous undertaking, a promised voluntary corrective action or a prohibition order;
-- any mitigating factors such as whether the consequences of a prosecution or conviction would be disproportionately harsh or oppressive; and
-- whether the company or entity has in place an effective compliance program. [See Note 4 below]
[30] These factors, which are quoted from an Information Bulletin issued by the Competition Bureau in September 1999, [See Note 5 below] continue to focus on legitimate businesses that may engage in deceptive practices and the circumstances when that may arise. [page452] Obviously, even more egregious is the situation where the entire business is a cover for deception of the public through misleading information deliberately provided.
[31] Although the maximum jail sentence was not increased when the amendments were made, as the criminal track was now to be used only in the very serious cases involving traditional criminality, it can be inferred that Parliament intended that the penalties imposed upon conviction be significantly increased, where appropriate, to reflect the new legislative scheme.
[32] The reality of the threat of jail sentences for general deterrence of individuals and corporate executives who commit "white-collar" crimes has become an effective and apparently necessary tool in the arsenal of law enforcement agencies. There has been an upsurge in corporate crime for which individual directors and officers, notably in the United States, have been held accountable with custodial sentences. In 2004, Parliament took steps to address this developing problem by enacting Bill C-13, S.C. 2004, c. 3, amendments to the Criminal Code that strengthen the government's ability to prosecute for fraud-based capital markets offences as well as providing for enhanced penalties for individual and corporate offenders. [See Note 6 below] [page453]
[33] In the 1999 amendments to s. 52 of the Competition Act, Parliament had already recognized misleading advertising that can be used to target thousands of businesses and non-profit corporations as one of the crimes against the public that will be treated very seriously by the courts.
[34] In the past, courts have repeated the concern that a fine not be seen just as a licence fee or cost of doing business. However, for some offenders any fine without personal penalty may be viewed as just that.
[35] Obviously, not every case will require a custodial sentence. As with all sentencing decisions, the facts and circumstances of the offence and of the offender will have to be examined. The circumstances of the offence will include the extent and impact of the misleading material, the magnitude of the offence including the time period and geographic penetration of the dissemination of the material and the economic impact on the public, on the competitors of the offenders and the financial benefit to the offenders. However, in appropriate cases, significant jail sentences will not only be warranted, but required in order to meet the objectives of general deterrence and denunciation for this type of crime that some may still mistakenly view as relatively harmless.
[36] In this case, the trial judge made no error in concluding that significant custodial sentences were available for this offence and [page454] that they were required in this case. This was a deliberate scheme conceived and executed to defraud the public. The appellants made use of a nationally recognized name and initially a logo in order to enhance the veracity of the invoices or bills that they sent. They proceeded in the face of not only warnings from the Competition Bureau and from Telus, but even after search warrants had been executed, charges laid and Canada Post restrictions ordered. The targets of this activity were not only unsuspecting businesses, but non-profit organizations as well.
[37] I note as a matter of interest that the four circumstances that have since been identified by Parliament in Bill C-13 as aggravating factors for sentencing in respect of its new corporate crime initiative [See Note 7 below] are present in this case: (1) the amount involved exceeds $1 million; (2) the nature of the misleading invoice scheme forces business people to scrutinize every invoice for fraud, undermining consumer and business confidence in the marketplace; (3) there were hundreds of thousands of victims; (4) the appellants traded on a known brand, although the deceit was compounded because the brand was not their own.
[38] The trial judge was concerned about the Crown's position that Alan and Elliot Benlolos' sentences should be concurrent to the sentences for the stock-swap convictions in light of the fact that the offences were separate and unrelated. However, she accepted the position on two bases: (1) because it formed part of the joint submission on the stock-swap fraud charges and was a component of the agreement that resulted in the guilty pleas on those charges; and (2) because of the totality principle. Again, I see no error in the approach taken by the trial judge.
Issue 2: The propriety of the significant fines
[39] The trial judge imposed substantial fines along with the jail terms discussed above. As the appellants Alan and Elliot Benlolo were already out on parole, counsel's emphasis was on reducing their fines.
[40] The appellants submitted that the trial judge erred in imposing fines that exceeded the profit of the unlawful enterprise. They further submitted that it was an error for the trial judge to impose two significant punitive components of one sentence, a jail term and a fine. [page455]
[41] One purpose of a fine as part of a sentence for an economic crime is to ensure that the offender does not retain the proceeds from the crime once the sentence is served. Also, a fine must be significant enough that it constitutes more than an effective licence fee or part of the cost of doing business.
[42] I see no error in the trial judge's approach to sentencing in this case. Having found that the appellants' entire business was a scam, any issue of what portion of its revenue constituted the profit from the business became not only illusive but irrelevant. The trial judge was entitled to view this offence and these offenders as requiring a significant fine in order to achieve the objectives of general and specific deterrence as well as denunciation.
[43] The appellants engaged in a deliberate scheme to mislead the business and non-profit sector into paying for a service for which they had not contracted. They did this in the face of warnings and after conducting other fraudulent activity involving the public for which they had been prosecuted in the United States. Alan Benlolo has a criminal record for a related offence of dishonesty, while Elliot Benlolo has a record for drug trafficking in cocaine. In all the circumstances, the trial judge chose a sentence that is within the range and I would not interfere with it.
Issue 3: The appellants' ability to pay
[44] The trial judge was cognizant of the requirement in s. 734(2) of the Criminal Code that the offender have the ability to pay the fine so that it does not become a further sentence of imprisonment. The trial judge heard extensive evidence regarding the circumstances of the appellants on a pre-trial motion under ss. 7 and 11(d) of the Canadian Charter of Rights and Freedoms, including evidence regarding the financial circumstances and lifestyles of Alan and Elliot Benlolo. She took into account the lavish conditions in which they live as well as the fact that they were able to deposit in excess of $900,000 as part of the restitution order on the fraud charges. The trial judge was aware that the offenders' homes were not in their own names and that Alan Benlolo had declared bankruptcy. However, she was satisfied, based on all the evidence, that these two appellants had the ability to pay the fines imposed.
[45] Finally, the trial judge allowed the appellants six years to pay the fines with one year in default of payment. The extra year in default of payment is not inordinate, and, under s. 734.7 of the Code, can be imposed only after a further hearing.
Issue 4: The propriety of the fine for Simon Benlolo
[46] Having said that, in my view, the trial judge erred in imposing a fine of $100,000 on Simon Benlolo together with the [page456] custodial sentence. Although he had worked in the office of yellowbusinesspages.com from July 2000, he was acquitted on four out of the five mailings. The evidence was that no more than $1,000 of revenue was attributed to the December mailing, which was the only one for which Simon Benlolo was convicted by the jury.
[47] Although the trial judge satisfied herself that based on his earnings in the family business, Simon Benlolo would be able to pay his fine within three years, the amount of the fine is out of proportion both to the revenue from his offence as well as to his level of responsibility for the entire enterprise. On the other hand, days after the execution of search warrants in connection with the earlier mailings, Simon Benlolo incorporated a new company and opened new bank accounts to facilitate the misleading scheme. Although his participation was at a lower level, his culpability is more than minimal. In my view, in all the circumstances, the amount of his fine should be reduced to $35,000.
Conclusion
[48] I would therefore grant leave to appeal sentence but dismiss the appeals of Alan and Elliot Benlolo. I would grant leave to appeal sentence and allow the appeal of Simon Benlolo, in part, by reducing his fine to $35,000.
Appeal by two defendants dismissed; appeal by third defendant allowed in part.
Notes
Note 1: Section 43(1) states, in part:
Where the Minister believes on reasonable grounds that any person:
(a) is, by means of mail,
(i) committing or attempting to commit an offence, or
(ii) aiding, abetting, counselling or procuring any other person to commit an offence,
(b) with intent to commit an offence, is using mail to accomplish his object, ...
the Minister may make an order (in this section and in sections 44 to 47 called an "interim prohibitory order") prohibiting the delivery, without the consent of the Minister, of mail addressed to or posted by that person (in this section and in sections 44 to 47 called the "person affected").
Note 2: Before being sent to prison for failure to pay their fines, the appellants would have the benefit of a hearing under s. 734.7 of the Criminal Code, r.s.c. 1985, c. C-46, to ensure that less intrusive measures were not appropriate in the circumstances and that there was no reasonable excuse for failing to pay or discharge the fine.
Note 3: House of Commons Debates, 074 (March 16, 1998) at 1300 (Hon. John Manley).
Note 4: Calvin S. Goldman, Q.C. and J.D. Bodrug, Competition Law of Canada, looseleaf (New York: Juris Publishing, 2005).
Note 5: Competition Bureau, Information Bulletin"Misleading Representations and Deceptive Marketing Practices: Choice of Criminal or Civil Track under the Competition Act" (September 22, 1999).
Note 6: A legislative summary accompanying Bill C-13 reads:
Bill C-13 is part of the federal government's response to the recent spate of corporate scandals that have plagued the United States and weakened investor confidence in capital markets around the world. Scandals associated with companies such as Enron, WorldCom, Tyco and ImClone have precipitated calls to strengthen corporate governance standards and better enforce laws governing capital markets activities.
B. Increasing Penalties for Existing Fraud Offences Clause 2 increases the maximum prison sentences for the existing offences of fraud and fraud affecting the public market under section 380 of the Criminal Code from 10 to 14 years.
Under clause 4, the maximum term of imprisonment for market manipulation offences is increased from 5 to 10 years. Covered in section 382 of the Code, market manipulation involves practices that create a market for securities that has little or no bearing on their actual value. It includes activities such as wash sales, where there are a purchase and sale but no change in the beneficial ownership of a security; and matched orders, where a purchase order and a sale order for a security, of substantially the same size and at substantially the same time and same price, are entered by either the same person or two different persons.
New section 380.1 (clause 3) establishes four aggravating circumstances that a court can consider when imposing a sentence for market fraud offences. These are as follows:
-- the amount involved in the fraud exceeded $1 million;
-- the offence adversely affected (or had the potential to adversely affect) the stability of the Canadian economy or financial system or any financial market in Canada or investor confidence in such a market;
-- large numbers of victims were involved; and
-- the perpetrator took advantage of his or her elevated status or reputation in the community in committing the offence.
The presence of these factors will enable a court to impose tougher penalties.
(Canada, Parliament"Bill C-13: An Act to Amend the Criminal Code (Capital Markets Fraud and Evidence Gathering)" by Robin MacKay and Margaret Smith, Legislative Summary 468-E (February 16, 2004) at 2-4).
Note 7: The factors are described above in footnote 6.