The United States of America et al. v. Yemec et al. [Indexed as: United States of America v. Yemec]

75 O.R. (3d) 52

[2005] O.J. No. 1165

Court File No. 35/04

Ontario Superior Court of Justice

Divisional Court

Carnwath, Jarvis and Swinton JJ.

March 24, 2005

Injunctions -- Mareva injunction -- Anton Piller order -- Defendants purchasing tickets in Canadian lotteries on behalf of United States residents -- United States Federal Trade Commission and U.S.A. commencing action in Ontario for damages for fraud -- U.S.A. and Federal Trade Commission obtaining ex parte Mareva injunction and Anton Piller order -- Injunction dissolved -- Plaintiffs failing to make out prima facie case of fraud and failing to demonstrate that defendants were likely to dissipate their assets.

For over 20 years, George Yemec and the Yemec defendants had operated a telemarketing scheme from Toronto, Ontario, in which they solicited customers in the United States to buy tickets in Canadian lotteries. In October 2002, alleging that the defendants had engaged in the tort of fraudulent misrepresentation and that they had caused damage to United States citizens, the United States of America ("U.S.A.") and the United States Federal Trade Commission ("FTC") moved ex parte before Nordheimer J. and were granted a Mareva injunction and an Anton Piller Order. In September 2003, on a motion to dissolve the orders of Nordheimer J., Gans J. concluded that the orders should be set aside because: the plaintiffs lacked standing; they had failed to make full and frank disclosure; they had failed to establish a strong prima facie case that the conduct of the defendants was fraudulent; and they had failed to establish that there was a risk of dissipation of assets. Leave to appeal having been granted, the U.S.A. and the FTC appealed to the Divisional Court.

Held, the appeal should be dismissed.

The standard of review of a judge's decision on a question of law is correctness. An appellate court must not interfere with a judge's findings of fact unless there is a palpable and overriding error. Matters of mixed fact and law lie along a spectrum, but where the issue on appeal involves the judge's interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error. This appeal should be dismissed because the appellants failed to show that Gans J. had erred in his conclusions with respect to the strength of the case and the risk of dissipation of assets. It had not been demonstrated that Gans J. had made any palpable and overriding error in assessing the evidence and making his findings of fact. Given the extraordinary and drastic nature of a Mareva injunction, he made no error in concluding that the evidence did not establish a risk that assets would [page53 ]be dissipated or removed from the jurisdiction and this was a further reason for setting aside the Mareva injunction. It was not necessary to deal with the standing issue in determining the appeal or the issue about full disclosure although, given the large quantity of material in the ex parte hearing, there was an increased responsibility to set out fairly what was to be established by it, and that duty may not have been met.

APPEAL from an order of Gans J., reported at (2003), 2003 ONSC 23436, 67 O.R. (3d) 394, [2003] O.J. No. 3863(S.C.J.), setting aside a Mareva injunction and an Anton Piller order.

Cases referred to 663309 Ontario Inc. v. Bauman, 2000 ONSC 22640, [2000] O.J. No. 2674, 190 D.L.R. (4th) 491 (S.C.J.) [Leave to appeal dismissed [2001] O.J. No. 1213 (Div. Ct.)]; Aetna Financial Services Ltd. V. Feigelman, 1985 SCC 55, [1985] 1 S.C.R. 2, [1985] S.C.J. No. 1, 32 Man. R. (2d) 241, 15 D.L.R. (4th) 161, 56 N.R. 241, [1985] 2 W.W.R. 97, 29 B.L.R. 5, 55 C.B.R. (N.S.) 1, 4 C.P.R. (3d) 145; Derry v. Peek (1889), 14 App. Cas. 337, 37 Ch. D. 541, 57 L.J. Ch. 347, 59 L.T. 78, 36 W.R. 899, 4 T.L.R. 84 (C.A.); Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 219 Sask. R. 1, 211 D.L.R. (4th) 577, 286 N.R. 1, 272 W.A.C. 1, [2002] 7 W.W.R. 1, 30 M.P.L.R. (3d) 1, 10 C.C.L.T. (3d) 157; United States of America v. Friedland, [1996] O.J. 4399 (Gen. Div.); United States of America v. Levy (1999), 1999 ONSC 14817, 45 O.R. (3d) 129, [1999] O.J. No. 1204 (S.C.J.) Statutes referred to Competition Act, R.S.C. 1985, c. C-34, s. 52.1 Federal Trade Commission Act, U.S.C 15 "Commerce and Trade" Telemarketing Sales Rule, 16 C.F.R. Part 310 Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 21

Malcolm N. Ruby and Frances Roy, for plaintiffs/appellants. David E. Wires and Teresa Cheung, for Yemec defendants/respondents. H. James Marin and Wendy Cole, for defendants/respondents Bungaro, Bunting and Jackpots & Prizes.

[1] BY THE COURT: -- This is an appeal by the United States of America and the Federal Trade Commission ("FTC") from an order of Gans J. dated October 21, 2003 (reasons dated October 3, 2003), in which he set aside orders of Nordheimer J. granting a Mareva injunction and an Anton Piller order. These orders were first made on October 3, 2002 on an ex parte basis and applied to further parties on an ex parte basis on October 10, 2002 and continued on October 15 and 21, 2002. Leave to appeal from the decision of Gans J. was granted by McCombs J. on March 15, 2004.

[2] The issue to be decided in this appeal is whether Gans J. (the "motions judge") made a palpable and overriding error by deciding not to continue the orders of Nordheimer J. [page54 ]

The Background Facts

[3] The Yemec respondents operated a telemarketing scheme from Toronto, Ontario in which they solicited customers in the United States, seeking to persuade them to buy packages or groups of tickets in Canadian lotteries. The motions judge described the business in the following words, which the appellants quoted in their factum in this appeal.

[3] For the past 20 years, George Yemec and the Yemec defendants have, for a significant service fee, purchased lottery tickets in Canada for residents of the United States. Basically, from phone banks in offices in Toronto, the Yemec defendants' employees annually call tens of thousands of individuals in most of the U.S. offering them packages or groupings of tickets in at least two Canadian lotteries, namely Lotto 6/49 and Lotto Super 7. Once a sale is concluded, a computer operated by the Yemec Defendants generates a ticket number in some fashion not explained in evidence. This information is then transmitted electronically to an authorized dealer in P.E.I., whereupon tickets are issued to one of the Yemec defendant companies located in P.E.I. The U.S. customer is then furnished with a receipt by mail, by one or other of the Yemec defendants, indicating among other things, the ticket number or numbers. If the player is fortunate enough to win, a cheque for the winnings is sent, again by mail, to the customer through one of the many accounts operated by these defendants.

[4] On October 3, 2002, the appellants moved ex parte before Nordheimer J., seeking a Mareva injunction and an Anton Piller order. Earlier in the year, in mid-June, they had obtained an ex parte Norwich Pharmacal order from him in respect of nine financial institutions in which the Yemec respondents were alleged to have accounts. As a result of this order, the appellants were entitled to, and did, examine bank accounts and related banking documents of the Yemec respondents.

[5] In the ex parte motion, the appellants rested their request for relief on the claim that the respondents had engaged in the tort of fraudulent misrepresentation and thus caused damage to United States citizens. The flavour of the appellants' case can be gleaned from a reading of the factum on the motion. Paragraph 8 reads:

Since approximately 1987, the corporate defendants carrying on business as Express Marketing Service ("EMS"), Canadian Catalogue Service ("CCS"), Canadian Express Club, Express Sales, Faby Games, Cash & Prizes, Inc., First Telegroup Marketing, and under other names, most recently as Canadian Subscription Services, as revealed in the declarations and transcripts (referred to collectively as "the telemarketers"), have through representatives and employees contacted consumers throughout the United States by telephone and mail to perpetrate an illegal lottery scheme whereby the telemarketers:

(i) solicit the consumers to participate in foreign lotteries (i.e. non U.S. based) by purchasing packages which included lottery tickets and/or interests in lottery tickets. [page55 ]

(ii) inform the consumers that they were winners of foreign lotteries or sweepstakes and that in order to collect they must pay several hundred or thousands of dollars in advance, for example, to the Canadian Government for custom, duties, and/or taxes, before they could collect their winnings.

The reference for this paragraph is para. 13 of the affidavit of Alan Krause, although it is in para. 14 where he states that "based on the various victim declarations, consumer complaints, transcripts, tapes and other evidence that I have reviewed", the telemarketers "perpetrated the scheme against victims" primarily by soliciting participation in foreign lottery schemes and asking for up front fees.

[6] In his endorsement granting the motion, Nordheimer J. made the following statement (at para. 2):

This telemarketing scheme is operated out of two locations in Toronto. In essence, the scheme entices senior citizens in the United States to purchase packages of tickets in foreign lotteries. Subsequently, those individuals who do purchase such tickets are told that they have won a prize. However, they are then told that they must pay hundreds or thousands of dollars in advance of receiving their prize on the pretext that it is necessary to pay government duties, taxes or the like.

He went on to find that a strong prima facie case of fraud had been made out. He then said (at para. 5):

There is every reason to believe that, by the nature of the conduct in which these corporations and individuals are engaged, they would seek to spirit away their assets if they are alerted in advance of the relief being sought by the plaintiffs. The defendants have ties to foreign jurisdictions. They are also involved in activities which they must know are illegal since they have previously been the subject of proceedings in the United States regarding similar activities.

[7] The order of Nordheimer J. provided that the terms of the order would remain in force until varied or discharged by a further order of the court. The motion to dissolve or set aside the orders of Nordheimer J. came before Gans J. in early September 2003. He heard submissions over the course of five days, and received voluminous materials from both parties. He concluded that the orders of Nordheimer J. should be set aside for a number of reasons: the lack of standing of the plaintiffs, the failure of the plaintiffs to make full and frank disclosure to Nordheimer J., the failure to establish a strong prima facie case that the conduct of the defendants was fraudulent, and the failure to establish that there was a risk of dissipation of assets.

[8] With leave, the appellants have appealed, arguing that the motions judge erred on all four grounds. In our view, the appeal should be dismissed, as the appellants have failed to show that [page56 ]the motions judge erred in his conclusions with respect to the strength of their case and the risk of dissipation of assets.

The Standard of Review

[9] An appellate court must not interfere with a lower court's findings of fact unless there is a palpable and overriding error. However, the standard of review of a trial judge's decision on a question of law is correctness (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, at paras. 8 and 10). Matters of mixed fact and law have been said to lie along a spectrum, but "where the issue on appeal involves the trial judge's interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error" (ibid., at para. 36).

A Strong Prima Facie Case

[10] When the motion came on before Gans J., it was his task to determine, on the basis of all the information put before him by both parties, whether the Mareva injunction and Anton Piller orders should be continued or whether they should be set aside. The hearing before him was the first opportunity for a judge to consider evidence from the defendants in response to the material filed by the plaintiffs on the ex parte motion, and he heard submissions from both parties over the course of five days. On this appeal, it is our role to determine whether he made any palpable and overriding error in his assessment of the evidence or any error of law in reaching his conclusion.

[11] A Mareva injunction is a drastic and extraordinary remedy. In order to obtain such relief, the moving party must demonstrate that it has a strong prima facie case. In the ex parte motion, the appellants submitted that they had established a strong prima facie case of fraud. The Case Management Motion Form filed for the motion stated the following grounds for the Mareva injunction:

1. Certain of the defendants obtained property in Ontario through fraud;

2. The plaintiffs have established a strong prima facie case of fraud; ...

Nordheimer J. concluded that was the case, after mentioning the targeting of seniors and the demand for up front payments.

[12] In order to prove fraud at common law, the plaintiff must show that the defendant has intentionally made a false representation that has been relied upon by the plaintiff to his or her detriment (Derry v. Peek (1889), 14 App. Cas. 337, 37 Ch. D. 541 (C.A.)). In this case, the appellants described the fraudulent scheme in para. 35 of the Amended Statement of Claim as one in [page57 ]which the defendants solicited individuals in the U.S. to buy packages of Canadian lottery tickets and demanded an up front fee. In para. 36, they alleged that the representations to victims included the need to pay up front fees to collect winnings, as well as the statement that the sale is under federal and provincial laws and is lawful.

[13] After considering the massive amount of material before him and the submissions of both parties, the motions judge concluded that the appellants had failed to establish a strong prima facie case that the respondents' conduct was fraudulent (at para. 44 of his reasons). In reaching that conclusion, he stated that high pressure sales tactics had been practised by employees of the Yemec respondents, especially in sales to senior citizens; that there were misleading, if not false statements by some employees; and that some sales were made to purchasers in states where the purchase was prohibited by law. However, he went on to state that the evidence of up front fee fraud, which had seemed so important to Nordheimer J., was traversed, if not neutralized by the evidence of Mr. Yemec. He also observed that the FTC had no evidence to contradict Mr. Yemec on this issue.

[14] The motions judge also made reference to the monitoring of employees by the respondents, which showed that the respondents were making efforts to deal with miscreant behaviour. Ultimately, he concluded that the appellants had succeeded in showing only a "pittance of allegations", compared to the number of transactions by the respondent companies in the three years leading up to the seizure, let alone in all the years of their operations (at para. 48). As well, given Mr. Yemec's evidence and the financial documentation of the companies, the motions judge concluded that the number of interrelated companies, intercorporate transfers and bank accounts gave rise, at best, to a substantial issue to be tried, but did not go so far as to establish a strong prima facie case of fraud.

[15] The appellants argued that the motions judge made an error in law when he referred to sections of the Competition Act, R.S.C. 1985, c. C-34 in his discussion of a strong prima facie case ù namely, s. 52.1(3)(b), dealing with "up front fee" fraud, and s. 52.1(8), dealing with the defence of due diligence. In our view, he did not rest his conclusion with respect to the strength of the prima facie case on the provisions of the Competition Act. Rather his analysis turned on whether the appellants had established a strong prima facie case in fraud under the common law.

[16] In our view, the appellants have failed to demonstrate any error of law on the part of the motions judge. He applied the correct principles in determining whether a Mareva injunction should be granted. [page58]

[17] Nor have they demonstrated that he made any palpable and overriding error in assessing the evidence and making his findings of fact. We agree with his conclusion that the up front fee demand was a central concern in Nordheimer J.'s reasons. It was also highlighted in the Amended Statement of Claim and the factum on the ex parte motion. In the defence affidavits submitted for the motion to vary, Mr. Yemec gave evidence that his companies did not demand an up front fee, and that the victims who spoke of such a demand were dealing with telemarketers in British Columbia and Quebec who were not affiliated with his companies.

[18] In the affidavit of Mr. Krause, used in both the ex parte hearing and the hearing before Gans J., reference is made to 22 victim declarations, which are appended as exhibits. In fact, these declarations related to 18 actual victims, as four of the declarations were from children of the victims. When one reads these declarations, one finds that the demands for up front fees have come from businesses or individuals located in British Columbia or Quebec who are not defendants, and the connection is not made to the Yemec respondents in the affidavit. For example, one complaint is about a company called KMS in British Columbia, and several complain of a Tony Ellingham, who is not a defendant. Another victim complains of a demand for money for unpaid taxes from a man in Buffalo. Moreover, a reading of the declarations reveals that only some of the "victims" received such a demand, and some of the "victims" received refunds from the respondents through a complaint resolution process before this action commenced. Other "victims" did not purchase from the respondents. Finally, while the respondents did not disclose the illegality of the sale of foreign lottery tickets under U.S. law, the evidence does not disclose widespread representations about the legality of the sales. Given the Yemec evidence and the exhibits attached to Mr. Krause's affidavit, the motions judge reasonably concluded that there is, at most, a triable issue with respect to the up front fee issue and the Yemec respondents' role in demanding such a fee.

[19] Moreover, based on the evidence before him, the motions judge could reasonably conclude that efforts were made by the respondents to prevent misleading calls by employees; that there were efforts to investigate and respond to complaints; and that a number of "victims" did not suffer loss as a result of misrepresentations by the respondents.

[20] The appellants have also argued that the motions judge should have considered the illegality of the respondents' conduct [page59 ]under U.S. law, given the findings in a District Court decision by Judge St. Eves dated March 1, 2004 with respect to the violation of the Federal Trade Commission Act, U.S.C. 15 and the Telemarketing Sales Rule, 16 C.F.R. Part 310. However, the cause of action on which the appellants relied in seeking this injunctive relief was not U.S. law, but rather common law (see the original factum and the Amended Statement of Claim). Therefore, the motions judge did not err in considering only whether there was a strong prima facie case of fraud made out at common law.

[21] At the end of his reasons, the motions judge stated (at para. 51):

Assuming this action is to continue in this format, a matter upon which I need not pass at this moment in time, in my opinion the plaintiffs will be called upon to do more than they have done to date in attempting to establish a strong prima facie case for fraud in order to prove the matter on a balance of probabilities.

The appellants have failed to show that the motions judge made any error in law, and there was ample evidence to support his conclusion that there was not a strong prima facie case of fraud. Therefore, the appeal should be dismissed for this reason alone, as the appellants have failed to show any palpable and overriding error by the motions judge.

Risk of Dissipation of Assets

[22] In order to obtain a Mareva injunction, the moving party must show that there is a real risk that the defendant is about to remove his assets from the jurisdiction to avoid a judgment, or that the defendant is dealing with his assets in a manner outside the ordinary course of business or living, in order to avoid a judgment (Aetna Financial Services Ltd. v. Feigelman, 1985 SCC 55, [1985] 1 S.C.R. 2, [1985] S.C.J. No. 1, 15 D.L.R. (4th) 161, at p. 27 S.C.R., p. 178 D.L.R.).

[23] In 663309 Ontario Inc. v. Bauman, 2000 ONSC 22640, [2000] O.J. No. 2674, 190 D.L.R. (4th) 491 (S.C.J.), Cullity J. stated that a court can infer from the defendant's fraudulent conduct a sufficient risk of the dissipation of assets or removal from the jurisdiction (at para. 41). He noted that this was particularly the case where there is a strong prima facie case of fraudulent misappropriation, although he went on to say, "Even in such a case, the question must still, in my opinion, be whether such an inference can reasonably be drawn from the facts." However, he went on to conclude, based on the totality of the evidence, that the plaintiff had not established a real risk of dissipation or hiding of assets. On appeal, [page60 ]the Divisional Court held that he made no error in his findings on the evidence in the case ([2001] O.J. No. 1213 (Div. Ct.)).

[24] Here, the motions judge concluded that even if there was evidence of "illegal" activity that was not adequately traversed by the respondents, this was not an appropriate case in which to infer a risk of dissipation of assets because of the nature of the fraudulent activity alleged (at para. 50). Rather, he concluded that the appellants were required to satisfy him, on the evidence, that there was a risk that assets were being dissipated or removed from the jurisdiction. He observed that there was no evidence before Nordheimer J. that the respondents had moved assets out of the jurisdiction, as had been asserted. He was also of the view that Mr. Yemec had adequately explained his connection to the Philippines or other countries.

[25] Given the motions judge's conclusion that there was not a strong prima facie case of fraud, he properly concluded that it would be improper here to infer a risk of dissipation of assets. Moreover, the evidence before him and before Nordheimer J. with respect to dissipation of assets or a risk of dissipation of assets was thin. At the ex parte hearing, the appellants had pointed to communications between Mr. Yemec and an individual in the Philippines, but those communications were with respect to the establishment of a business for lottery ticket sales in that country. There is no evidence that Mr. Yemec sought to hide assets outside the country, and he has longstanding ties to the Toronto community. At best, there was an anonymous letter in 1999 stating that some of the respondent companies maintain bank accounts outside Canada.

[26] Moreover, the evidence with respect to other individual respondents such as Julia Bungaro shows that they have strong ties to the community, and there is no indication that they are trying to dispose of assets.

[27] Given the extraordinary and drastic nature of a Mareva injunction, the motions judge made no error in concluding that the evidence did not establish a risk that assets would be dissipated or removed from the jurisdiction by the respondents, and that this was a further reason for setting aside the Mareva injunction.

The Standing Issue

[28] The motions judge also held that the respondents lacked standing to obtain the relief sought. However, when his order was appealed to the Court of Appeal, the majority held that the motions judge had not finally disposed of the issue of standing. [page61 ] They observed that the moving parties had brought a second motion with respect to standing under Rule 21 [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194], which had not yet been resolved (File C40832, unreported, January 16, 2004).

[29] The standing issue was raised by the motions judge at the hearing. It had not been raised as an issue by the respondents in their factum. Given our conclusions with respect to the other issues in this appeal, and given the outstanding motion on standing, we need not deal with the standing issue in determining this appeal.

The Failure to Make Full and Frank Disclosure

[30] The moving party in an ex parte motion to obtain injunctive relief has an obligation to make full and frank disclosure of all material facts to the judge hearing the motion. As well, counsel has an obligation to disclose any points of law known to him or her which favour the other party (United States of America v. Friedland, [1996] O.J. No. 4399 (Gen. Div.), at para. 28). Failure to do so may result in the dissolution of any injunction obtained.

[31] The motions judge concluded that there was a failure to make full and frank disclosure on the ex parte motion. The counsel who appeared on the ex parte motion and the motion before him were not the counsel appearing for the appellants on this appeal. At para. 37 of his reasons, the motions judge stated:

From my reading of his endorsement, it would appear that the representations made to Nordheimer J. in the form of conclusory statements, which were repeated often before me, were more hyperbolic than they were fair, let alone factual.

[32] For the most part, the matters about which he voiced concern are questions of law:

(1) The instant proceeding was a "stand alone" proceeding and, therefore, distinguishable from the decision of United States of America v. Levy (1999), 1999 ONSC 14817, 45 O.R. (3d) 129, [1999] O.J. No. 1204 (S.C.J.), a case in which the motions judge ordered a Mareva injunction against telemarketers in Canada who were targeting consumers in the United States.

(2) The appellants should have disclosed that because of amendments to the Competition Act, R.S.C. 1985, c. C-34, "the field in respect of the prosecution of the present action, both in respect of a claim for injunctive relief and damages, might arguably be occupied". [page62]

(3) The appellants failed to disclose that others at the Federal Trade Commission may have viewed changes to the Competition Act differently from the FTC office in Chicago, which was apparently spearheading the current action.

(4) The appellants failed to bring the details of the United States-Canada agreement concerning the application of each country's competition and deceptive marketing laws to the attention of Nordheimer J., and, in particular, Article VII.

(5) The appellants did not seek the assistance of the federal Competition Bureau when they decided to prosecute the instant action.

(6) The appellants overstated American and Canadian law by asserting that the activity of the Yemec respondents was illegal per se.

[33] We might not have come to the same conclusion as the motions judge with respect to the issue of the failure to disclose material and relevant legal issues. However, there is no need for us to do so: his findings that the appellants failed to establish a strong prima facie case of fraud and failed to establish a real risk of dissipation of assets are sufficient grounds to deny the continuation of the injunction. Nevertheless, we agree with him that there was a failure to disclose material facts about Mr. Yemec's ties to the community.

[34] The motions judge did not examine, in detail, the material before Nordheimer J. to determine whether there was a failure to disclose other material facts. We agree with his observation that counsel should have made a greater effort to bring relevant material to the judge's attention in the ex parte hearing. Gans J. aptly observed that even if there was material in the voluminous record which disclosed some of the matters of which the appellants complained, "they were not highlighted and clearly brought to the attention of the court and such conduct should not be encouraged" (at para. 38). The large quantity of material before the judge in the ex parte hearing increased the responsibility of counsel to set out fairly what was to be established by it, and we fear that the duty was not met here.

Conclusion

[35] In our view, the appellants have not demonstrated that the motions judge erred when he concluded that they had failed to [page63 ]establish a strong prima facie case of common law fraud or a risk of dissipation or removal of assets. Given his findings on the evidence before him, he properly held that the Mareva injunction should be set aside.

[36] Unfortunately, the motions judge's reasons failed to address the continuation of the Anton Piller order. However, a party seeking an Anton Piller order must show an extremely strong prima facie case. The motions judge determined that the appellants failed to show a strong prima facie case when he was considering the Mareva injunction. Given that conclusion, he properly decided that the Anton Piller order should also be set aside.

[37] For these reasons, the appeal is dismissed. If the parties can not agree with respect to costs, they may make brief written submissions within 21 days of the release of this decision.

Appeal dismissed.