ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 52/09
DATE: 2013-01-15
BETWEEN:
John Wardrope and Linda Wardrope
Plaintiffs
– and –
Shane Smith and Synergy Group 2000 Inc.
Defendants
Michael Semple, for the Plaintiffs
Joseph Michael Sereda, for the Defendants
HEARD: December 4 and 5, 2012
GUNSOLUS, J.
[1] This matter was originally scheduled to be heard during the May 2012 sittings of this court. The defendants’ first counsel had removed himself from the record and the defendants did not appear for trial at that time. The matter was put over for a number of court dates, finally to be placed on the November 2012 sittings, peremptory upon the defendants.
[2] The defendants’ second counsel removed himself from the record and at the commencement of trial, new counsel appeared, advising the court that he was ready to proceed to trial. No request for an adjournment was made. Discovery had already taken place. This matter was never pre-tried, as the defendants failed to appear at the scheduled time.
[3] The matter proceeded to trial without objection.
Request to Admit
[4] After the commencement of trial, the defendants acknowledged the following to be true as a result of the plaintiffs’ Request to Admit, dated September 12, 2012. The following facts are admitted and adopted by the court:
(1) Shane Smith presented an investment opportunity to the Wardropes at their home.
(2) Jeff Haber was the North American representative for the Sabourin and Sun Investment.
(3) Smith advised the Wardropes that the investment guaranteed a return of 17.52% and both principal and return were guaranteed.
(4) The Wardropes agreed to invest $150,000 after meeting with Smith in July, 2005 (the additional $150,000 was allegedly invested without the involvement of Mr. Smith.)
(5) Smith was aware that Sabourin and Sun was under investigation by the Ontario Securities Commission when he met with the Wardrope’s, but did not disclose this knowledge to them.
(6) Smith was interviewed by the Ontario Securities Commission in March of 2005 in relation to the Sabourin and Sun investment and did not disclose this to the Wardrope's.
(7) Smith continued to sell the investment after being interviewed by the Ontario Securities Commission.
(8) A “Cease Trade” order was issued against Smith by the Ontario Securities Commission in December, 2006 in connection with the Sabourin and Sun investment.
(9) Smith has admitted that he violated the Securities Act in connection with his involvement with the Sabourin and Sun investment.
(10) The Wardrope's have lost their entire investment of $300,000, as well as the guaranteed return.
(11) Smith has indicated that he intends to pay back his clients, including the Wardropes, out of his own funds, but has not done so. Smith told the Wardropes’ daughter Melinda that he intended to pay her parents back.
(12) Smith earned substantial commissions at the rate of 5% from the sale of the investment to some 20 clients, with investments totalling over $3 million.
(13) Smith has refused to disclose the commissions earned or to produce a copy of his agreement with Jeff Haver, on the basis that he had an oral agreement and not an agreement in writing.
(14) The Ontario Securities Commission has estimated that the total investments were in excess of $15 million, including investments sold by Smith’s agents, and that Smith was paid commissions of at least 5% on 3 million dollars, over the period of his involvement with Sabourin and Sun.
Evidence of John Wardrope
[5] The plaintiff John Wardrope is 77 years of age, a grade 12 graduate and is a retired real estate broker. He gave evidence that his investment experience was limited to Registered Retirement Savings Plans and that otherwise, he had no knowledge concerning investments.
[6] He was introduced to Shane Smith through his daughter who, along with her husband, was friends with Shane Smith and his wife. Shane Smith had suggested to the Wardrope’s daughter that she should borrow $50,000 from her parents in order to invest with him. The plaintiffs did not lend money to their daughter but suggested that they would like to know more about the investment. Arrangements were made for Mr. Smith to attend at their residence in July of 2005. He made the presentation and the plaintiffs believed as a result of that presentation that the investment was involving European banks and would, amongst other things, provide them with a guaranteed return on their investment of 17.52% and further believed it to be a fully secured, guaranteed investment.
[7] Mr. Wardrope gave evidence that he sought such an investment because he wanted a guarantee for his wife, who is 12 years younger than him. He believed the investment “looked good on paper”.
[8] During his presentation, Mr. Smith provided a sketch explaining the nature and workings of the investment. From it, this witness understood that he would be guaranteed a return on the investment and also receive profit sharing of 0.5%. He believed that Mr. Smith recommended the investment to him, saying it would be a good investment, have a term of 28 months at which time, he could either take out his capital and interest out or re-invest it.
[9] He further believed, as a result of the presentation, that the investment was secured by a “one hundred and ten percent collateral guarantee”, and this is set out clearly under the subheading “Security” on the sketch provided by Mr. Smith to the plaintiffs.
[10] The plaintiff gave evidence that Mr. Smith did not speak of any risks in relation to the investment, nor did he discuss risks generally in relation to investing money. Further, this plaintiff confirmed that Mr. Smith did not question him about his investment experience; his risk tolerance in relation to investing money nor about his income or net worth.
[11] Mr. Wardrope did not recall Mr. Smith discussing his investment expertise with him, or the fact that he had been the subject of an Ontario Securities Commission investigation. He learned of the OSC investigation sometime after he had invested money with Mr. Smith.
[12] Mr. Wardrope identified for the court the Investment Application, which was completed in the handwriting of Mr. Smith, and directed to Camdeton Trading S.A., which he and his wife Linda signed on the 28th of July, 2005. That document confirmed an investment of $150,000; that the Wardrope’s were referred to Camdeton Trading S.A. by the defendant, Synergy Group; that a 17.52% rate of return was guaranteed and that the investment would commence July 29th, 2005 and mature on the 29th of November, 2007.
[13] On Page 2 of that document, it was acknowledged that the plaintiffs, John and Linda Wardrope had no trading experience in securities, options, futures or currencies in the OTC markets.
[14] Mr. Wardrope noted that the document stated that his annual income was $70,000 and that his net worth was $750,000. He indicated this appears to be in Mr. Smith’s handwriting and was not accurate. He had no idea where Mr. Smith “came up with these numbers”. He advised the court that Mr. Smith told him it didn’t matter; it would simply look good for him in relation to the investment of his money.
[15] Mr. Wardrope also identified the Application for Services document, which he and his wife signed, and which identified the investment structure as follows: “Asset Protection Trust inception date: July 29, 2005. Maturity Date: November 29th, 2007. Return on Investment: 17.52% guaranteed.”
[16] Mr. Wardrope confirmed that he and his wife invested a total of $300,000 through the services of Mr. Smith. He advised that he was directed to make the bank drafts for the investment payable to Camdeton Trading Limited, explaining that Mr. Smith had told him that Camdeton was the parent company in relation to the investment. He confirmed that he had no contact with anyone else other than Mr. Smith in relation to the investment and he believed Mr. Smith to be working with Camdeton.
[17] In the end, he and his wife received no investment return on their money and further, did not receive back any of their original investment.
[18] He advised that when they became concerned in relation to their investment and began calling Mr. Smith, they were advised he would not take their calls “on advice of his lawyer”.
[19] Mr. Wardrope confirmed that he had been interviewed by the Ontario Provincial Police. From this, he learned that their funds had never been invested off-shore in Europe, contrary to what Mr. Smith had told them. As Mr. Wardrope put it, “That was it, it disappeared”.
[20] Mr. Wardrope was upset when he learned that Mr. Smith took their money to invest at a time when he knew he was being investigated by the Ontario Securities Commission and knew, as Mr. Wardrope put it, “It was a Ponzi scheme”. He advised the court that had he known about the OSC involvement, he would never have invested the money that he did. He believed Mr. Smith was acting on behalf of he and his wife as their financial advisor and they trusted him. Mr Smith’s own evidence confirmed that he never told them he was not a financial advisor, although he believed that he did not give financial advice to them. I do not accept his evidence on this point, as he had put many, many people into this investment and certainly held himself out to these plaintiffs as a person with special expertise in investing. While Mr. Smith denied that the plaintiffs were his clients and that he was only acting as an agent for others, this indeed goes to the root of his conduct. He indeed was acting as an agent for others and was receiving commissions that he never disclosed to these plaintiffs.
[21] He further told the court that Mr. Smith never advised them that he was no longer an investment advisor but did understand that Mr. Smith would be taking a commission, and did not think that odd, as he was selling the investment to them.
[22] As a result of the loss of their investment and their own subsequent investigations, they determined that Mr. Smith and/or his associates had been involved in court actions, police investigations and/or Ontario Securities Commissions investigations.
[23] Mr. Wardrope advised that he was never told about any of this by Mr. Smith at the time of the investment transactions.
[24] In cross-examination, Mr. Wardrope confirmed that in addition to being a real estate broker, he had once been an airplane technician in the air force; drove truck; drove ambulance and at one time, with a partner, owned a 2100 square foot industrial investment property, which was rented out to numerous tenants. He acknowledged that he received a profit when that property was sold. Part of the monies he invested with Mr. Smith came from those profits.
[25] This witness believed Mr. Smith to be a licensed financial advisor, although he acknowledged that he never received a business card from Mr. Smith or anything on paper. He said that he and his wife trusted Mr. Smith because their daughter was working for Mr. Smith at the time.
[26] Although this witness acknowledged that he and his wife began receiving what he described as standard form letters from Mr. Haver, of Camdeton Trading Limited, he advised that he did not become concerned as he believed these to be form letters. His evidence was that he and his wife had dealt exclusively with Mr. Smith and that these letters basically “meant nothing” to him.
[27] When he received, in November 2006, a letter indicating that Camdeton would no longer be able to trade in the off-shore Sabourin & Sun Investment, he knew their money was already invested and the fact that further investment could not occur, did not affect his investment. He acknowledged that he and his wife were very concerned, but believed that they had to wait until the maturity date of their investment before taking action. He acknowledged that he and his wife were praying that at the end of the 28 months, they would get their money out. He noted that the correspondence they received indicated that there would be a settlement of their investment, the date of which changed from time to time. The information they were in receipt of always confirmed that they would receive their investment.
[28] He did note that at one time they were asked for an additional $5000 to open an off-shore bank account in the British Virgin Islands. He understood this to be where the investment was going to be paid and that they would have to travel there to receive their funds. This never materialized.
[29] As to when Mr. Wardrope and his wife finally understood that they would not be getting their money back, he could not pinpoint a specific date but believed that it was perhaps sometime in 2007.
[30] He noted that the arrangement Shane Smith made for the return of their principal and payment of interest was such that it would be paid out all at one time (so that they would, in effect, get compounded interest) on the November 29, 2007 maturity date.
Evidence of Linda Wardrope
[31] Linda Wardrope is 65 years of age, having retired in 2002 from the Federal Government. She worked through a series of file clerk jobs until she became a Level 1 Agent with Employment Insurance. She attained Grade 10 and pointed out that she had very little investment experience, save and except Registered Retirement Savings.
[32] She confirmed Mr. Smith’s wife was a very close friend of their daughter Melinda and Melinda’s request for money to invest with Mr. Smith.
[33] She told the court that she believed that Mr. Jeff Haver and Mr. Shane Smith were partners in the investment business that their daughter worked for. As she pointed out, when she did some cleaning for them, it appeared that Mr. Smith was set up at one end of the front room and Mr. Haver at the other end.
[34] She confirmed that when Melinda asked to borrow money to invest with Mr. Smith, they did not agree to do so, as they did not feel that she was in a financial position to borrow money. In the end, it was agreed that they themselves would meet with Mr. Smith, in their home, to hear his presentation in relation to the proposed investment.
[35] Mrs. Wardrope confirmed that she and her husband were told by Mr. Smith that they would not lose anything. She described the collateral guarantees through different banks that Mr. Smith advised them of. She gave evidence that Mr. Smith assured them that he had done his due diligence and that he most definitely recommended that they make the investment in question. She said that Mr. Smith assured them it would “double their money”. She said they felt so sure about their investment that they even began discussing what they were going to do with the money when the investment became due, including a trust fund for their grandchildren.
[36] She also advised the court that Mr. Smith did not discuss any risks in relation to this investment or investments generally. She confirmed that Mr. Smith did not discuss their investment experience, investment risk tolerance or net worth.
[37] She said that she and her husband advised Mr. Smith that what he had filled out on their investment forms indicating an income of $70,000 and investments of $750,000 was not accurate. Rather, she told Mr. Smith their income was about $30,000 but he replied “that did not matter”. She agreed that there was no disclosure by Mr. Smith in relation to the Ontario Securities Commission investigation.
[38] Mrs. Wardrope said they invested $150,000 on the 28th of July, 2005 and explained that they invested the second portion of their investment of $150,000 on the 18th of August, 2005, as they were waiting for funds to come from the sale of the commercial property in which her husband had held a half interest.
[39] It was her evidence, that on the 28th of July, 2005, Mr. Smith attended at their home to pick up the $150,000 cheque and again attended at their home on the 18th of August, 2005 to pick up the second $150,000 cheque.
[40] There was no question in her mind that she and Mr. Wardrope believed that Mr. Smith was a financial advisor who was advising them in relation to what he told them would be a good investment for them.
[41] She acknowledged that she and her husband began getting letters from Mr. Haver of Camdeton Trading Limited, but that they never gave up hope that they would get their money back, as this correspondence, while indicating that repayment would be delayed, led them to believe that they would receive their money.
[42] She agreed that Mr. Smith told them he intended to pay them back, but he could not speak to them, based upon advice he said he had received from his own lawyer.
[43] She confirmed they later learned that Mr. Smith was found to have contravened the Ontario Securities Act. The Ontario Security Commission’s reasons and decision, dated March 20th, 2009 was filed.
[44] In that document, it was disclosed:
(1) That Smith and others had contravened the Act and acted “contrary to the public interest and in a manner harmful to the integrity of Ontario capital markets.”
(2) At para 373 of that document, Smith, along with others, was found to have solicited clients to invest, met with clients to provide promotional material and explained the investment schemes, helped clients complete the required paperwork and received client investment cheques.
(3) Mr. Smith and the others terminated their registrations with the Securities Commission so that they would be able to sell the investment schemes, and continued to sell them even after being interviewed by the Commission.
(4) Mr. Smith was paid commissions of at least $1 million.
[45] The Ontario Securities Commission decision of June 4, 2010, in relation to sanctions and costs against Smith and others disclosed that Smith was ordered to disgorge $1 million dollars.
[46] Upon further questioning, Mrs. Wardrope recalled Mr. Smith discussing with them the fact that “some people” even remortgaged their home, and that he told them that they were foolish not to do so, in order to get a return of 17.52%. She said he also raised the possibility of cashing in their RRSPs. She felt he was clearly trying to get them to invest more money in the investment scheme that he recommended and sold to them.
[47] She gave clear evidence that at no time did Mr. Smith tell them that he was not a financial advisor, that he was simply assisting and filling out forms for them or that he was not an agent for Jeff Haver, or Camdeton Trading Limited. She too believed and understood that he would be earning a commission, but was never made aware of what that commission would be.
[48] In sum, her evidence was that they trusted Mr. Smith. Their daughter worked first for Mr. Haver of Camdeton Trading Limited, and later for Mr. Smith, of Synergy Group (2000) Inc. She knew that Mr. Smith’s wife was her daughter’s best friend, at the time, and she had no reason not to trust Mr. Smith.
[49] She confirmed to the court that had she known about Mr. Smith’s involvement with the Securities commission and the prior court cases involving this “Ponzi scheme”, she would never have invested money with Mr. Smith.
... (continues verbatim in the same format through paragraph [184] and the footnotes exactly as in the source) ...