COURT FILE NO.: CV-11-430975
DATE: February 21, 2013
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
T&E VENTURES LTD.
Plaintiff
– and –
QUADREXX ASSET MANAGEMENT INC., QUADREXX HEDGE CAPITAL MANAGEMENT INC., MIKLOS NAGY, TONY SANFELICE, TERRY KROTOWSKI, FINANCIAL DYNAMICS INC., MURRAY GREENBERG, HJF FINANCIAL INC., HARRY FIGOV, M. WAINBERG CONSULTING INC., MARK WAINBERG, PETER FILICE, VANESSA FILICE, ALESSANDRA FILICE, LARISSA FILICE, DANIELA FILICE, JOHN FILICE, CSABA KOKUTI, JOESEPH HRNCIRIK, SIEGMUND KOHRING, SAMI YEHIA AND 6626548 CANADA INC.
Defendants
Harjinder Mann for the Plaintiff
Ryder Gilliland and Nicole Henderson for the Defendants Quadrexx Asset Management Inc., Quadrexx Hedge Capital Management Ltd., Miklos Nagy, Tony Sanfelice, Terry Krotowski, Financial Dynamics Inc., M. Wainberg Consulting Inc., Mark Weinberg, Peter Filice, Daniela Filice, John Filice, Csaba Kokuti, Joseph Hrncirik, Siegmund Kohring, Sami Yehia and 6626548 Canada Inc.
Michael E. Girard for the Defendants HJF Financial Inc. and Harry Figov
HEARD: February 13, 2013
REASONS FOR DECISION
PERELL, J.
A. INTRODUCTION
[1] The Plaintiff, T&E Ventures Ltd., purchased units in a limited partnership, Diversified Assets Limited Partnership (“DALP”), which limited partnership had purchased the shares of a private corporation known as Canadian Hedge Watch Inc. (“Hedge Watch”).
[2] The Plaintiff’s investment in DALP turned out to be a bad investment, and the Plaintiff sues the promoters, managers, and marketers of the investment. The Plaintiff also sues the former majority and minority shareholders of Hedge Watch and an evaluator who appraised the value of the Hedge Watch shares.
[3] The Plaintiffs’ action against the minority shareholders of Hedge Watch was discontinued (apparently on grounds of expediency) with the exception of one minority shareholder, Csaba Kokuti. Mr. Kokuti brings a motion for summary judgment to have the action dismissed against him.
[4] The evaluator, HJF Financial, and its principal Harry Figov, who is a chartered accountant and certified business valuator, also bring a motion for summary judgment dismissing the Plaintiffs action as against them.
[5] For the reasons that follow, I grant the motions for summary judgment.
B. FACTUAL BACKGROUND
[6] The Plaintiff, T&E Ventures Ltd., is a company incorporated pursuant to the laws of Alberta. Its principals are Thomas and Emmy Droog and Myles Hamilton.
[7] In January 2002, Canadian Hedge Watch Inc. (“Hedge Watch”) was incorporated as a private corporation. Messrs. Nagy, Sanfelice and Krowtowski were directors and majority shareholders. Mr. Kokuti was an officer, employee, and a minority shareholder.
[8] Hedge Watch provided news, data, and reports about the Canadian hedge fund market and about the alternative investment marketplaces. It hosted an investment conference, published a monthly publication and operated a website, www.canadianhedgewatch.com.
[9] As an employee of Hedge Watch, Mr. Kokuti was not paid a salary, but he received 17,500 common shares of Hedge Watch, which had a paid up value of $17.50 and which represented 17.5% of the outstanding and issued shares of Hedge Watch. These common shares were compensation for providing website content and website maintenance for approximately two years. During those two years, he worked approximately ten hours per week. Thus, the common shares were payment for about 1,000 hours of work.
[10] In 2003, Mr. Kokuki resigned as a director of Hedge Watch, and he sold the bulk of his common shares to Messrs. Sanfelice, Nagy, and Krotowski for $22,500.00 and he converted his remaining common shares to 5,000 Class “A” non-voting preferred shares.
[11] More particularly, on January 17, 2003, Mr. Kokuti resigned as a director of Hedge Watch, and pursuant to a purchase agreement, he sold 10,400 of his common shares to Messrs. Sanfelice and Nagy. The shares were transferred among the directors. Mr. Kokuti converted his remaining 5000 common shares into 5000 Class “A” Preferred (non-voting) shares.
[12] In the 2003 transaction, there was a call option in favour of a third party buyer. The agreement stated:
The Vendor [Kokuti] shall agree that should any third party purchase all and not less than all of the outstanding shares in the capital of the Corporation [Hedge Watch], such third party shall have the right and option, exercisable at the time of purchase of all the issued and outstanding common shares to purchase the 5,000 Class A preferred shares held by the Vendor for a purchase price per share equal to the price paid by such third party for each common share, and the vendor shall be compelled to sell the Class A preferred shares to such party at that price.
[13] After January 2003, Mr. Kokuti was not involved in the day-to-day operations of Hedge Watch and he did not attend any shareholders’ meetings.
[14] As a shareholder of Hedge Watch, between 2002 and 2008, Mr. Kokuti received $26,149.74 in bonus payments and dividends.
[15] On June 13, 2008, Messrs. Nagy and Sanfelice, established Diversified Assets Limited Partnership (“DALP”) under the Limited Partnerships Act, R.S.O. 1990, c. L.16.
[16] Quadrexx Hedge Capital Management Ltd., which is controlled by Messrs. Nagy and Sanfelice, was the general partner of DALP.
[17] Also on June 13, 2008, the General Partner entered into an Advisory Agreement with Quadrexx Asset Management to provide investment and management advice. Quadrexx Asset Management also acted as the promoter of the sale of units in DALP.
[18] Quadrexx Asset Management is incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44. It is owned by Mr. Nagy (40%), Mr. Sanfelice (40%), and Mr. Wainberg and Mr. Yehia (together 20%, through their respective holding companies).
[19] Wainberg Consulting entered into an agreement with Quadrexx Asset Management to market units of Diversified Assets Limited Partnership, which were sold at $5,000 per unit.
[20] In the autumn of 2008, Mr. Nagy approached Mr. Kokuti and offered to purchase his 5,000 Class “A” preferred shares for $50,000.00. Mr. Kokuti was told that Hedge Watch was going to be sold to investors through a limited partnership.
[21] Mr. Kokuti did not care about who the buyer of his shares would be, and he testified that he reluctantly felt obliged to sell his 5,000 Class “A” preferred shares because of the provision in his 2003 agreement. Mr. Kokuti said that the price was too low. The Plaintiff, however, suggests that Mr. Kokuti’s testimony is disingenuous and designed to remove Mr. Kokuti from having participated in the alleged conspiratorial activities associated with the promotion of DALP.
[22] In any event, Mr. Kokuti rejected the $50,000 offer, but a few days later, Mr. Nagy upped the offer to $100,000, and Mr. Kokuti agreed to sell his preference shares.
[23] The only persons Mr. Kokuti met with respect to the sale of his shares were Messrs. Nagy and Sanfelice.
[24] On November 30, 2008, Mr. Kokuti signed a share purchase agreement to sell his 5000 Class “A” Preferred shares to the general partner of DALP, for a total purchase price of $100,000.
[25] All the shareholders of Hedge agreed to sell their shares. They signed short sale agreements under which they made no representations or warranties.
[26] The Plaintiff alleges that the limited partnership overpaid for the shares of Hedge Watch and that DALP’s general partner performed no due diligence and there was no due diligence by: (a) the investment advisor, Quadrexx Asset Management Inc.; (b) the valuators, JF Financial Inc. and Mr. Figov; (c) or any member in good standing of the Law Society of Upper Canada.
[27] The Plaintiff alleges that the general partner was negligent and not acting in the best interests of DALP in purchasing the shares of Hedge Watch.
[28] Meanwhile, in December 2008 and January 2009, there was a series of meetings in De Winton, Alberta. The Plaintiffs were represented by Tom Droog, Emily Droog, and Myles Hamilton. (Mr. Hamilton swore an affidavit in response to the summary judgment motions.) In attendance at the meetings variously were the Defendants Greenberg, Nagy, and Wainberg.
[29] At the meetings, Mr. Wainberg provided the Plaintiff with a tri-fold brochure and a subscription agreement. There is a dispute between the parties about whether the Plaintiff also received an offering memorandum. The Plaintiff’s position is that it did not see the offering memorandum until much later.
[30] The subscription agreement indicated, among other things, that: (a) the investment was not registered with a securities commission; (b) it was risky; (c) an investor might lose all the money invested; and (d) DALP intended to purchase the shares of a company in which the principals of Quadrexx Asset Management and Quadrexx Asset Management GP had a significant ownership interest.
[31] The offering memorandum, among other things, indicated that: (a) the first investment of DALP was the investment in Hedge Watch; (b) Messrs. Nagy and Sanfelice were majority owners of Hedge Watch and would receive proceeds from the sale to DALP; and (c) they were officers, directors and shareholders of Quadrexx Asset Management and Quadrexx Asset Management GP.
[32] The Offering Memorandum also indicated that if Hedge Watch was acquired an independent third party valuator would be retained to ascertain its fair market value and the ongoing operations of Hedge Watch would be funded by DALP up to $4.35 million.
[33] On December 30, 2008, the Plaintiff signed the subscription agreement. The agreement was signed by Emmy Droog, who was at that time the Plaintiff’s President.
[34] In making its investment, the Plaintiff did not rely on the offering memorandum, which it denies receiving until nine months later. It based its investment decision upon the representations made by Messrs. Nagy, Sanfelice, Wainberg, and Greenburg.
[35] On or about January 9, 2009, the Plaintiff delivered a cheque for $3 million payable to Quadrexx Asset Management. Three days later, Mr. Kokuti was paid for his preference shares. It may be noted that Mr. Kokuti had already agreed to sell his shares in November 2008, which was before any sales pitch to the Plaintiff.
[36] The Plaintiff alleges that because Mr. Kokuti knew that his shares were part of a package that was going to be sold to investors, he breached a duty to ensure that his participation in the share transaction was lawful. The Plaintiff submits that in breach of his duty of care to future purchasers of units in DALP, Mr. Kokuti simply pocketed $100,000 without any regard for the actual worth of his shares or the unfortunate investor.
[37] On February 10, 2009, Messrs. Nagy and Sanfelice and Hedge Watch hired HJF Financial and Mr. Figov to prepare a valuation of the fair market value of the Hedge Watch shares.
[38] It may be noted that HJF’s involvement occurs after the Plaintiff had paid for its units in DALP and long before the Plaintiff knew about the existence of plans to obtain a valuation. It may be noted that the Plaintiff never had any direct dealings with HJF Financial and Mr. Figov. The Plaintiff first saw the valuation report in January 2011, when its lawyer reviewed the matter, more than three years after the Plaintiff acquired its units in DALP.
[39] Hedge Watch provided Mr. Figov with audited financial statements, the business plan, forecasts, and copies of contracts with clients. On February 27, 2009, Mr. Figov delivered a valuation as of October 31, 2008 of $2,536,388.
[40] I note that the valuation report was never incorporated into any offering document, and it was not included in the offering memorandum, although that document does mention plans to obtain a valuation. In any event, as already noted above, the Plaintiff denies receiving the offering memorandum until nine months after it made its investment in DALP.
[41] The Plaintiff alleges that Mr. Figov prepared the valuation knowing that it would be relied upon and used by DALP to establish the price of the shares. The Plaintiff alleges that the valuation was negligently prepared and that it grossly inflated the value of the shares of Hedge Watch. For the purposes of this motion for summary judgment, I am prepared to assume that the valuation was negligently prepared.
[42] The Plaintiff alleges that the Defendants conspired to enrich themselves by unlawfully and illegally selling the Hedge Watch shares to DALP.
C. DISCUSSION
1. Introduction – The Motions for Summary Judgment
[43] Pursuant to the full appreciation test of Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, in my opinion, as against the Defendants Kokuti, HJF Financial and Mr. Figov, this is an appropriate case for summary judgments. There is more than an adequate evidentiary record to decide the merits of the Plaintiff’s claims against these Defendants.
[44] The record is more than sufficient for me to make to make dispositive findings on the substantive issues. I can achieve a full appreciation of the evidence, and I can achieve a full appreciation of the issues without a trial.
2. The Claim against Mr. Kokuti
[45] In my opinion, there is no genuine issue requiring a trial of the claim against Mr. Kokuti. As a matter of law, there is no tenable claim against him, and as a matter of fact, there is no evidence of a tenable claim.
[46] Assuming that his co-defendants were engaged in a conspiracy as alleged, there is no evidence at all that Mr. Kokuti agreed to be a party to that conspiracy. He did not know about DALP or the Plaintiff until he was sued by the Plaintiff. There is no evidence that he planned anything, and his only connection to the Plaintiff, who was stranger until it sued him, is the reedy allegation that he knew that his preference shares were to be sold to a business that was, in turn, being sold to unnamed third party investors.
[47] Mr. Kokuti had no involvement in most of the acts said to comprise the conspiracy. He had already entered into an agreement to sell his preference shares before the Plaintiff arrived on the scene. There is no evidence that Mr. Kokuti was party to any agreement to cause injury to the Plaintiff or that he did anything unlawful. There was no evidence that he knew or was indifferent to the likelihood of injuring the Plaintiff, or anyone else for that matter.
[48] Mr. Kokuti did not sell his shares to the Plaintiff. He had nothing to do with the promotion and marketing of DALP, and he had nothing to do with the valuation of his preference shares.
[49] There is nothing wrong in making a profit from owning shares that were not a gift but earned in payment for services rendered. Provided he broke no law, which he did not, Mr. Kokuti had the normal entitlements to pursue his own economic self-interest and to secure the best price he could for his own property.
[50] The Plaintiff’s submissions that Mr. Kokuti breached the Ontario Securities Act, R.S.O. 1990, c. S.5 as a minority shareholder of a private company selling his shares to a limited partnership and that he had a duty of care to sell his preference shares so that they were not overpriced are devoid of any merit.
[51] Without any supporting authority, the Plaintiff submits that Mr. Kokuti breached sections 25 (1) and 53 (1) of the Ontario Securities Act, which state:
25 (1) Unless a person or company is exempt under Ontario securities law from the requirement to comply with this subsection, the person or company shall not engage in or hold himself, herself or itself out as engaging in the business of trading in securities unless the person or company,
(a) is registered in accordance with Ontario securities law as a dealer; or
(b) is a representative registered in accordance with Ontario securities law as a dealing representative of a registered dealer and is acting on behalf of the registered dealer.
53 (1) No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director
[52] Section 25 (1) does not apply because Mr. Kokuti did not engage in or hold himself as engaging in the business of trading in securities. He was not a dealer. He, as a minority shareholder, simply sold his own preference shares.
[53] Section 53 (1) does not apply because there was no “distribution” of Mr. Kokuti’s shares. Distribution is defined in s. 1 of the Act as follows:
“distribution”, where used in relation to trading in securities, means,
(a) a trade in securities of an issuer that have not been previously issued,
(b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer,
(c) a trade in previously issued securities of an issuer from the holdings of any control person,
(d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, prior to the 15th day of September, 1979 if those securities continued on that date to be owned by or for that underwriter, so acting,
(e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, within eighteen months after the 15th day of September, 1979, if the trade took place during that eighteen months, and
(f) any trade that is a distribution under the regulations,
and on and after the 15th day of March, 1981, includes a distribution as referred to in subsections 72 (4), (5), (6) and (7), and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution and “distribute”, “distributed” and “distributing” have a corresponding meaning.
[54] There is no legal or evidentiary basis for any claim by the Plaintiff against Mr. Kokuti, and his motion for summary judgment should be granted.
3. The Claim against HJF Financial and Mr. Figov
[55] In my opinion, there are no genuine issues requiring a trial of the claims against HJF Financial and Mr. Figov. As a matter of law, there is no tenable claim against them, and as a matter of fact, there is no evidence of a tenable claim against them.
[56] The Plaintiff had no contractual relationship with HJF Financial and Mr. Figov. The Plaintiff purchased its units in DALP before HJF Financial and Mr. Figov were retained to prepare a valuation of Hedge Watch, and the Plaintiff did not know about the involvement of these Defendants until shortly before the commencement of the action. The Plaintiff did not even know about the valuation report until it was disclosed by the Plaintiff’s lawyer engaged to review the circumstances of the Plaintiff’s investment in DALP.
[57] Nevertheless, the Plaintiff asserts the following actions against HJF Financial and Mr. Figov: (1) breach of contract; (2) breach of fiduciary duty; (3) breach of the Ontario Securities Act, the Alberta Securities Act, R.S.A. 2000, c. SA, and National Instrument 45-160; (4) fraud, fraudulent misrepresentation, deceit, and negligent misrepresentation; (5) unjust enrichment; and (6) conspiracy.
[58] There is no genuine issue requiring a trial with respect to the claims of breach of contract and breach of fiduciary duty, because there was no contractual or fiduciary relationship between the Plaintiff and HJF Financial and Mr. Figov.
[59] There is no genuine issue requiring a trial regarding the claims of breach of securities legislation because HJF Financial and Mr. Figov engaged in no activity within the scope of the securities legislation.
[60] To establish civil fraud, fraudulent misrepresentation, and deceit, it must be shown that the defendant had the intent to deceive the plaintiff. In the case at bar, there is no evidence that HJF Financial and Mr. Figov had any intent to deceive the Plaintiff.
[61] To establish civil fraud, fraudulent misrepresentation, deceit, and negligent misrepresentation, it must be shown that the plaintiff relied on the false information. In the case at bar, the Plaintiff obviously did not rely on HJF Financial and Mr. Figov’s report, which it did not even know about until years after it was released.
[62] To establish a claim in negligence, it must be established that the defendant owed the plaintiff a duty of care. In the case at bar, HJF Financial and Mr. Figov had a duty of care to those who commissioned the report. The Plaintiff submits that HJF Financial and Mr. Figov also owed it a duty a care.
[63] The Supreme Court of Canada’s decision in Hercules Management Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165 dealt with whether accountants engaged by a corporation to prepare its financial statements had a duty of care to those who might invest in the corporation. The Hercules judgment would suggest that HJF Financial and Mr. Figov did not have a duty of care to the Plaintiff. However, I need not decide the duty of care point, because assuming there was a duty of care and a breach of it, the Plaintiff cannot establish the other elements of the tort of negligent misrepresentation. The plaintiff did not rely on the report, and it cannot show that its losses from a bad investment in DALP were caused by HJF Financial and Mr. Figov. The injuries caused by the negligent valuation were suffered by DALP not by the unit holders of DALP.
[64] Assuming that the valuation was negligently prepared and overstated the value of the shares in Hedge Watch, the victim of the negligence or breach of contract to prepare the valuation was DALP and not the unit holders of DALP.
[65] A shareholder of a corporation, or, in the case at bar, a unit holder in a limited partnership, has no personal cause of action for wrong suffered by the corporation or limited partnership. This is just the venerable principle from Foss v. Harbottle (1843), 2 Hare 460, 67 E.R. 189. In Hercules Managements Ltd. v. Ernst & Young, supra at para. 59, Justice La Forest, described the principle from Foss v. Harbottle as follows:
- The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action. The legal rationale behind the rule was eloquently set out by the English Court of Appeal in Prudential Assurance Co. v. Newman Industries Ltd. (No. 2), [1982] 1 All E.R. 354, at p. 367, as follows:
The rule [in Foss v. Harbottle] is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability. The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed on them by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances confer further rights on a shareholder the scope and consequences of such further rights require careful consideration.
To these lucid comments, I would respectfully add that the rule is also sound from a policy perspective, inasmuch as it avoids the procedural hassle of a multiplicity of actions.
[66] In the case at bar, the injuries, if any, caused by HJF Financial and Mr. Figov are damages suffered by DALP, and the Plaintiff has no cause of action in law for any wrongs done to DALP. If an action is to be brought in respect of DALP’s losses, it must be brought either by DALP (through management) or by way of a derivative action.
[67] The Plaintiff has no unjust enrichment claim against HJF Financial and Mr. Figov. The elements of an unjust enrichment claim are: (a) an enrichment of the defendant; (b) a corresponding deprivation of the plaintiff; and (c) no juristic reason for the enrichment. See Garland v. Consumers Gas Co., 2004 SCC 25. In the case at bar, there was no deprivation of the Plaintiff that corresponds to any enrichment of HJF Financial and Mr. Figov.
[68] Finally, as for the claim against HJF Financial and Mr. Figov in conspiracy, assuming that their co-defendants were engaged in a conspiracy as alleged, there is no evidence at all that HJF Financial and Mr. Figov agreed to be a party to that conspiracy. There is no evidence that they planned anything, and even if there was a conspiracy, its purpose insofar as it might have injured the Plaintiff would appear to have been achieved before HJF Financial and Mr. Figov prepared the valuation report.
[69] There is no evidence that HJF Financial and Mr. Figov were parties to any agreement to cause injury to the Plaintiff or that they did anything unlawful apart from preparing a negligent valuation, which was not a wrong for which the Plaintiff has a claim.
[70] There is no legal or evidentiary basis for any claim by the Plaintiff against HJF Financial and Mr. Figov, and their motion for summary judgment should be granted.
D. CONCLUSION
[71] For the above reasons, I grant the motions for summary judgment. The crossclaims against the moving parties should also be dismissed.
[72] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the moving parties’ submissions within 20 days from the release of these Reasons for Decision followed by the Plaintiff’s submissions within a further 20 days.
Perell, J.
Released: February 21, 2013
COURT FILE NO.: CV-11-430975
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
T&E VENTURES LTD.
Plaintiff
‑ and ‑
QUADREXX ASSET MANAGEMENT INC., QUADREXX HEDGE CAPITAL MANAGEMENT INC., MIKLOS NAGY, TONY SANFELICE, TERRY KROTOWSKI, FINANCIAL DYNAMICS INC., MURRAY GREENBERG, HJF FINANCIAL INC., HARRY FIGOV, M. WAINBERG CONSULTING INC., MARK WAINBERG, PETER FILICE, VANESSA FILICE, ALESSANDRA FILICE, LARISSA FILICE, DANIELA FILICE, JOHN FILICE, CSABA KOKUTI, JOESEPH HRNCIRIK, SIEGMUND KOHRING, SAMI YEHIA AND 6626548 CANADA INC.
Defendants
REASONS FOR DECISION
Perell, J.
Released: February 21, 2013.