COURT FILE NO.: CV 13 1288
DATE: 20140423 CORRIGENDA: 20140424
SECOND CORRIGENDA: 20150305
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Attorney General of Ontario
Plaintiff
– and –
$4,067,685.10 In Canadian Currency (In Rem)
Defendant
J. McKeachie and L. Will, for the Plaintiff
B. Greenspan and N. Lutes, for Fercan Developments Inc.
W. Friedman and P. Bakos, for Vince DeRosa
HEARD: December 20, 2013 and February 7, 2014
REVISED REASONS FOR DECISION
The text of the original reasons has been corrected with the text of corrigendum
(released today’s date)
Cases Cited:
R. v. Fercan Developments Inc. and GRVN Group Inc. (25 November 2013), 11-04550/11-04549
Trial Transcript, United States of America v. George Georgiou, E.D. Pa. (2010) (No. 09-88-1).
Toronto (City) v. C.U.P.E., Local 79, [2003] 3 S.C.R. 64
Ontario v. Ontario Public Service Employees Union (O.P.S.E.U.), 2003 SCC 64, [2003] 3 S.C.R. 149
R. v. Storrey, 1990 125 (SCC), [1990] 1 S.C.R. 241
R. v. Logiacco (1994) 1994 126 (SCC), 1 S.C.R. 601
Ontario (Attorney General) v. 8477 Darlington Crescent et al., [2001] O.J. No. 2122 (C.A.)
Ontario (Attorney General) v. $61,686.12 in Canadian currency (In Rem), [2009] O.J. No. 3874 (S.C.J.)
Ontario (Attorney General) v. $51,000 in Canadian Currency (In Rem), [2012] O.J. No. 4294 (S.C.J.)
Statutes Cited:
Civil Remedies Act, 2001, S.O. 2001 C. 28
Controlled Drugs and Substances Act 1996 c.19
VALLEE j.:
[1] Many people who live in the Barrie area will recall the day when Molson Breweries announced that it was closing the Barrie plant located at 1 Big Bay Point Road. They will also recall the day in 2004 when the police discovered one of Canada’s largest and best concealed marijuana grow operations inside the plant. The event was the subject of national news coverage.
[2] In general terms, this motion concerns the use of the property, 1 Big Bay Point Road, as a marijuana grow operation, whether the funds from the sale of marijuana were used by the owner to acquire equity in the property and whether the property was subsequently used as part of a stock fraud scheme perpetrated in the United States. Ultimately, the property was sold to a third party purchaser in accordance with power of sale proceedings on September 19, 2013
[3] This motion is brought by the Attorney General of Ontario (“AG”) for an order to preserve $4,067,685.10 which is currently held by the Seized Property Management Directorate (a directorate of the Federal Department of Public Works and Government Services). These funds are the sale proceeds of the property after payment of certain fees and a mortgage held by First Ontario Credit Union. The AG asserts that an order ought to be made to preserve the funds pending a future forfeiture hearing because the property is proceeds of an unlawful activity and was used as an instrument of unlawful activity. The meaning of these terms is set out in the Civil Remedies Act (“CRA”).
[4] The Issues
(a) The Public Prosecution Service of Canada (the Federal Crown) prosecuted a number of people who were involved in the grow operation pursuant to the Controlled Drugs and Substances Act (“CDSA”) and obtained convictions. The Federal Crown also brought previous proceedings against Fercan Developments Inc., the company that owned the property, under the same legislation. It was unsuccessful in proving that Mr. DeRosa, the principal of Fercan, was complicit in the marijuana grow operation. Do the principles of issue estoppel, collateral attack or abuse of process apply to preclude AG from bringing this motion pursuant to the CRA?
(b) Are there reasonable grounds to believe that Fercan used rent money paid by Barrie Good Fish and Ontario Pallet, the tenants that were growing marijuana in the premises, or rent paid by Northern Ethanol, the tenant whose shares were involved in a stock fraud, to make mortgage payments such that the property itself is proceeds of unlawful activity?
(c) After the marijuana grow operation was dismantled, Fercan leased the building to a company, Northern Ethanol. The lease was listed as an asset in Northern Ethanol’s prospectus which was filed with the United States Securities and Exchange Commission. Its shares were traded as part of a complex stock fraud which is described below. As a result, are there reasonable grounds to believe that the property was likely used as an instrument of unlawful activity to show that the company was a legitimate business and encourage investors to buy shares?
(d) Are there reasonable grounds to believe that the property was used as an instrument of unlawful activity because the property housed the marijuana grow operation and was used to facilitate the acquisition of other property, being the money from the sale of the marijuana?
[5] If the answer to (b), (c) or (d) is yes, would an order preserving the property clearly not be in the interest of justice?
(a) Do the principles of issue estoppel, collateral attack or abuse of process apply to preclude AG from bringing this motion?
[6] After Molson finished its operations at the plant, the property was listed for sale. Vicar Properties purchased it for $8,000,000.00 in 2001. The company subsequently amalgamated with Fercan Investments Inc. The principal of Fercan was and continues to be Vince DeRosa. As noted above, on September 19, 2013, the property was sold to a third party pursuant to power of sale proceedings brought by a mortgagee, First Ontario Credit Union. After payment of the First Ontario mortgage and other fees, $4,067,685.10 remains.
[7] The Federal Crown brought an application in the Ontario Court of Justice pursuant to section 19(3) of the CDSA against Fercan and another party for an order that the sale funds be forfeited to the Crown. This matter proceeded to a seven week trial before Justice West in the Ontario Court of Justice in October and November, 2013. To obtain a forfeiture order under the CDSA, the Federal Crown was required to prove that Fercan was complicit in the unlawful activity that took place on the property.
[8] In the trial before Justice West, Mr. DeRosa gave evidence that Fercan purchased the property for several legitimate reasons. Mr. DeRosa is in the leasing business. Through his various companies, he owns a significant number of large rental properties. He saw the property as a real estate opportunity. He thought he could lease the space in the building to commercial tenants. He also thought he could sell the brewery equipment at a significant profit as an appraisal had determined it to be worth between $3,000,000 and $10,000,000. Furthermore, the Formosa Spring well is located on the property. Mr. DeRosa also thought that he could purchase other equipment and operate a water bottling company inside the building. The name of this company was to be Aurora Beverages.
[9] In his evidence at the trial, Mr. DeRosa explained that he employs a number of property managers to oversee his various rental properties in Ontario and to negotiate contracts with tenants. Mr. DeRosa hired his brother Robert DeRosa to be the property manager for Mr. DeRosa’s Barrie area properties including this property in issue.
[10] A number of legitimate commercial tenants leased space in the building. Mr. DeRosa visited the building on weekends to check on the progress of the water bottling operation, primarily the installation of the equipment. The other tenants carried on business in their leased spaces. Amazingly enough, Mr. DeRosa and the other tenants did not know that in the space leased by Barrie Good Fish and Ontario Pallet, a huge marijuana grow operation was underway. It has been described as one of the largest grow operations in Canadian history. The enterprise was cleverly hidden. For example, the leased area contained residential space for the “gardeners” to minimize the number of people that could be seen coming and going from the premises. The gardeners were allowed to leave the building only at night. The services for the mechanical and electrical systems were installed at night in the building’s ceilings and were practically undetectable. All doorways that connected the grow operation space to the remainder of the building were sealed off. The water and hydro use was not abnormal, given the size of the building. The other tenants were told that fellow tenants Barrie Good Fish and Ontario Pallet were operating a fish farm which was highly susceptible to contamination. Accordingly, nobody was permitted to enter the area. The marijuana grow operation carried on in the building undetected for approximately two years.
[11] Eventually, a bylaw enforcement officer noticed unusual drainage on the property. The police began an investigation. On January 10, 2004, the police executed a search warrant at the property and found the grow operation. It contained a large number of plants that were capable of generating $8,000,000 in sales per year. As a result of the search and investigation, seven people were arrested. All of them were found guilty of criminal offences including Robert DeRosa who is the brother of Vince DeRosa. Robert had arranged the leases for the building and facilitated the grow operation. It should be noted that although Vince DeRosa and Fercan were investigated extensively by the police, including reviews of their bank accounts, no charges were ever laid against them.
[12] On September 21, 2010, before the criminal charges were laid, the Federal Crown obtained an order to restrain the property so that it could not be sold or encumbered. This order was not registered immediately on title to avoid alerting the people involved that a further police investigation was underway. Just before the restraint order was registered, Mr. DeRosa lent Fercan $5,000,000 by way of shareholder advances and Fercan provided him with a mortgage on the property as security. It was registered on October 5, 2010. At that time, another mortgage was already registered on title in favour of First Ontario. It had been registered in 2007. The restraint order was subsequently registered on October 13, 2010.
[13] The Federal Crown was unsuccessful at trial in the proceedings against Fercan. The trial judge, Justice West, found that the evidence was overwhelming that Mr. DeRosa had no knowledge of the illegal activities occurring in the building and that neither he nor Fercan participated in them. Accordingly, there was no basis for an order that the property be forfeited to the Crown.
Issue Estoppel
[14] In this matter, Fercan argues that in the proceedings brought by the Federal Crown, Justice West has already determined that Mr. DeRosa and Fercan had no knowledge of the illegal activity in the building and that there was no basis for a forfeiture order. Accordingly, this proceeding brought by the AG of Ontario is an attempt to re-litigate a matter that has already been decided. It is a collateral attack on Justice West’s decision. This constitutes an abuse of process. Fercan states that the principle of issue estoppel applies and accordingly, this motion is precluded from proceeding.
[15] In order for issue estoppel to apply, three pre-conditions must be met: the two proceedings must deal with the same issue, the prior decision must be final and the parties must be the same or their privies. (See Toronto (City) v. Canadian Union of Postal Employees (C.U.P.E) Local 79 (S.C.C.) par 23.)
(i) Is the issue in this proceeding the same as the issue in the proceeding brought by the Federal Crown pursuant to the CDSA?
[16] Fercan argues that these proceedings are an attempt to re-litigate the same issue. Generally stated, in both proceedings, the Crown may obtain an order that the property be forfeited; however, the Federal and Provincial legislation have different requirements. The CDSA requires proof that the owner participated in the illegal activity whereas the CRA requires an examination of how the property was paid for or used. Evidence of the owner’s participation in the unlawful activity is not required. When making a preservation order pending a forfeiture hearing under the CRA, the court must be satisfied that there are only “reasonable grounds to believe” that the property is proceeds of an unlawful activity or was used as an instrument of unlawful activity. This test is lower than the “balance of probabilities” test in most civil proceedings.
[17] I conclude that the issues in both proceedings are sufficiently different from each other that the first pre-condition of issue estoppel has not been met. Accordingly, the AG is not precluded from bringing this motion. In case I have erred, I will go on to consider the two other pre-conditions.
(ii) Is the prior decision final?
[18] The Federal Crown did not appeal Justice West’s decision. The AG did not have the ability to appeal the decision as it was not a party in the proceedings. Accordingly, Justice West’s decision is final. This pre-condition for the operation of issue estoppel has been met.
(iii) Are the parties the same or their privies?
[19] Fercan argues that the parties are the same. Two branches of the same government have each brought proceedings. In Ontario v. Ontario Public Service Employees Union (O.P.S.E.U.)(S.C.C.), the court considered a case in which two employees were convicted of criminal offences related to their conduct as employees. They were fired and then grieved the terminations. The question was whether the parties were the same such that issue estoppel applied. In the criminal proceeding, the parties were the Crown acting as prosecutor and the employees. In the second proceeding, which was before the Grievance Board, the parties were the Union and the Crown acting as employer. The court held that the Crown, acting as prosecutor in the criminal case was not a privy of the Crown acting as an employer. This supports the AG’s position.
[20] The AG states that it had no control over the forum in which the Federal Crown brought its proceedings. The Federal proceedings were brought in the Ontario Court of Justice whereas these proceedings must be brought in the Superior Court of Justice. The AG did not participate in the proceedings brought by the Federal Crown.
[21] I conclude that the Federal Crown and the Provincial Crown are separate entities and are not privies. Accordingly, this pre-condition for the operation of issue estoppel has not been met.
(iv) Does this motion constitute an abuse of process?
[22] Fercan argues that this motion does constitute an abuse of process. The AG argues that it should not be deprived of its right to bring proceedings under the CRA simply because the Federal Crown proceeded under the CDSA and was unsuccessful. There is new evidence to be considered in this motion relating to the stock fraud which was not before Justice West.
[23] The doctrine of abuse of process has been applied to preclude re-litigation in circumstances where the strict tests for issue estoppel are not met, but where allowing litigation to proceed would compromise judicial consistency, finality of decisions and the integrity of the administration of justice.
[24] It should be noted that pursuant to the CRA, if the court finds that the property is an instrument of illegal activity and an interested party to the proceeding proves that he is a “responsible owner,” the court shall make an order that it considers necessary to protect the responsible owner’s interest in the property. (See section 8(3) of the CRA) A responsible owner is a person who has done all that reasonably can be done to prevent the property from being used to engage in unlawful activity. This includes promptly notifying law enforcement agencies when the person knew or should have known that the property had been or was likely to be used for an unlawful activity. A responsible owner would withdraw any permission granted to another person to use the property if he knew or ought to have known that the person was likely to facilitate the property’s being used for unlawful activity. (See section 7(1) of the CRA)
[25] Fercan argues that Mr. DeRosa should not have to wait and go through this proceeding only to prove again that he knew nothing of the unlawful activities and that he was a responsible owner. Since Justice West has already found that Mr. DeRosa was completely unaware of the unlawful activities that took place on the property, it is hard to imagine what he could have done to prevent the property’s being used for unlawful activity.
[26] One of the differences in these proceedings is that the AG alleges that the property was used as an instrument of unlawful activity to further a stock fraud scheme. The stock fraud issue was not before Justice West. It is also not set out in the AG’s Notice of Motion as a ground for the motion. Counsel for the AG advises that he only recently received the transcripts from the American stock fraud trial.
[27] The AG alleges that there are reasonable grounds to believe that the property was used as an instrument of unlawful activity and that this is shown in Northern Ethanol’s corporate prospectus, which was filed with the United States Securities Exchange Commission. Therefore, the property should be preserved. I conclude that the AG is entitled to have the court determine this issue. Accordingly, this motion does not constitute an abuse of process.
(b) Are there reasonable grounds to believe that the property is proceeds of unlawful activity?
[28] Fercan states that the test for “reasonable grounds to believe” in the CRA is the same as it is in the criminal context. In R. v. Storrey (S.C.C.), par 17, the court considered the test for reasonable and probable grounds and commented that an arresting officer, “must subjectively have reasonable and probable grounds on which to base the arrest. Those grounds must, in addition, be justifiable from an objective point of view.” The AG did not dispute this.
Proceeds of Unlawful Activity
[29] In section 2 of the CRA, proceeds of unlawful activity is defined as property acquired, directly or indirectly, in whole or in part as a result of unlawful activity. Accordingly, the question is whether the property was acquired, as described above, as a result of the marijuana grow operation. A property may be proceeds of unlawful activity if the mortgage on the property was paid down using money from the unlawful activity. (see Ontario (Attorney General) v. 8477 Darlington Crescent pars 38 – 41)
[30] The tenants, Barrie Good Fish and Ontario Pallet, in whose premises the unlawful activity took place, paid rent to Fercan in the amount of $75,000 per month. Also, Northern Ethanol, the tenant whose shares were involved in a stock fraud, paid the same rent to Fercan. The AG argues that the rent funds were generated by the unlawful activity of these three tenants. Fercan either used these tainted funds to make mortgage payments or comingled these funds with its other funds and then used the other funds to make mortgage payments. Accordingly, it is reasonable to believe that the property was proceeds of unlawful activity.
[31] Fercan states that Mr. DeRosa, through his various companies including Fercan, has millions of dollars in assets. Many of them are large, commercial buildings located across Ontario which are rented to tenants. Given the number of tenants and the total monthly income generated by the rent, the rent paid by the three tenants would have been a very small percentage of that rental income. The AG has not produced any records or evidence of any kind to show that the rent received by Fercan from the three tenants was used for mortgage payments.
[32] The AG has raised only an “innuendo of suspicion” a phrase coined by Justice Cory in R. v. Logiacco p. 382. As noted above, a reasonable belief cannot be based on innuendo or suspicion. There must be both subjective and objective grounds for one to believe that an event occurred. Some evidence of Fercan’s financial structure and cash flow would be required before there could be any reasonable grounds to believe that it used the rent money from the three tenants to make mortgage payments. Fercan’s bank records have not been produced. The AG has produced no evidence to show that Fercan received the rent money and how it was spent. As noted above, Mr. DeRosa has millions of dollars in assets. It is just as likely that the rent received from the three tenants was invested or used for other purposes as it is that the funds were used for the property’s mortgage payments. The court can only speculate as to how the rent might have been spent. Speculation does not provide a foundation for reasonable grounds to believe that something occurred. I conclude that there is no evidence to support a belief based reasonable grounds that the rent money from Barrie Good Fish, Ontario Pallet or Northern Ethanol was used by Fercan to make mortgage payments. Accordingly, there are no reasonable grounds to believe that the property is proceeds of crime.
(c) Are there reasonable grounds to believe that the property was used as an instrument of unlawful activity with respect to the stock fraud?
[33] Section 7(1) of the CRA describes an instrument of unlawful activity in rather convoluted terms. It is property that is likely to be used to engage in unlawful activity that in turn would be likely to or is intended to result in the acquisition of other property. Section 7(2) discusses the evidentiary requirements. Proof that the property was used to engage in unlawful activity that in turn resulted in the acquisition of other property is proof, in the absence of evidence to the contrary, that the property is likely to be used to engage in an unlawful activity, that in turn would be likely to result in the acquisition of other property.
[34] The question is, are there reasonable grounds to believe that the description of Northern Ethanol’s lease of the property in its corporate prospectus was likely to be used to give Northern Ethanol an air of legitimacy such that investors would be induced to buy shares in the company which were traded in a stock fraud scheme.
Northern Ethanol
[35] In 2004, a company known as Upper Canada Malt (“UCM”) was interested in leasing space in the building. Mark Hamelin was a principal of the company. It made food and beverage sweeteners and was also interested in producing ethanol fuel. It needed premises for the ethanol production. Mr. Hamelin believed that ethanol could be produced in the building at the property. He spoke with Mr. DeRosa, signed a lease for space in the building for the amount of $75,000 per month and made an offer to purchase some of the brewery equipment.
[36] Mr. Hamelin was looking for another investor for his company. Through business acquaintances, he was introduced to George Georgiou, who was the operating mind behind a company known as 401 Capital Partners Inc. Mr. Hamlin and Mr. Georgiou, entered into a partnership. Subsequently, Mr. Hamelin learned that a $15,000,000 mortgage had been registered on title to the property. Mr. Georgiou told Mr. Hamelin that he had assisted Mr. DeRosa in obtaining this mortgage. Mr. Hamelin considered it to be a risk to UCM’s tenancy because if the mortgage went into default, the mortgagee could sell the property. When he learned this, Mr. Hamelin wanted out of the lease. As a result of certain conversations that he had with Mr. Georgiou and Mr. DeRosa, Mr. Hamlin concluded that they were in a partnership whose purpose was to take over UCM Fuels and force him out of the company. Subsequently, Mr. Hamelin ended his relationship with Mr. Georgiou and Mr. DeRosa. On February 16, 2006, Mr. Hamelin brought a motion to petition UCM into bankruptcy.
[37] A new company, Northern Ethanol Inc. was incorporated. It leased space in the building. Ostensibly, its purpose was to produce ethanol fuel at the property. Before production could start, extensive renovations were required inside the building among other things. Northern Ethanol filed a prospectus with the USA Securities and Exchange Commission. This document indicated that the company had signed a 25 year lease on a 35 acre property in Barrie with a related party. It stated that certain renovations were required for the building so that it could be used for ethanol production. It commented that the property was the perfect location on which to operate an ethanol plant and was a very good investment. Northern Ethanol’s head office was shown to be 193 King Street East, Toronto. This is the same location as Fercan’s head office. The AG states that the property referred to in Northern Ethanol’s prospectus was 1 Big Bay Point Road in Barrie. There is no disagreement on this.
The Stock Fraud
[38] The shares of Northern Ethanol and another company, Avicena Group, were traded as part of a stock fraud to artificially increase Northern Ethanol’s stock value and obtain funds from unwitting investors who were willing to buy stocks. The reason why the stock fraud is relevant to this matter is because it shows that Northern Ethanol’s shares were being traded for an unlawful purpose. The AG’s position is that unwitting investors were being induced to purchase shares in Northern Ethanol. The leased was described in Northern Ethanol’s prospectus. The AG argues that the lease was used to give Northern Ethanol an air of legitimacy and induce investors to purchases shares. Accordingly, the property was used as an instrument of unlawful activity.
[39] In order to understand how the stock fraud operated and to determine the people involved, a review of some of the shareholders of both Avicena Group and Northern Ethanol is necessary.
Avicena Group
[40] With respect to Avicena Group, the following companies and people were some of the shareholders:
(a) 401 Capital owned 150,000 shares. This was Mr. Georgiou’s company; however, Mr. Georgiou was prohibited from acting as a stock broker in Canada. His name does not appear on any of 401 Capital’s documents. The company was held by a third party beneficial owner;
(b) Starport Landing owned 1,785,000 shares. Starport Landing was originally one of Mr. DeRosa’s companies. It was transferred to Mr. Zoran Bakich;
(c) Mr. Richard Brezzi owned 1,785,000 shares. He was Fercan’s corporate controller;
(d) Ms. Cathy Underhill owned 1,785,000 shares. She worked for Fercan and was also Robert DeRosa’s chauffeur as his driver’s licence had been revoked;
(e) GAB Capital owned 250,000 shares. Carmelina Biamonte was a beneficial owner of GAB Capital. She is Mr. DeRosa’s wife;
(f) Vandor Realty Corporation owned 2,350,000 shares. Mr. DeRosa was the beneficial owner of Vandor Realty;
(g) Mr. James Hayes owned 1,785,000 shares. At one point, he occupied the security gate house on the property; and
(h) Karen Georgiou owned 4,900,000 shares. She is Mr. Georgiou’s wife and held the largest number of shares.
Northern Ethanol
[41] With respect to Northern Ethanol, the following companies and people were some of the shareholders:
(a) 1019562 Ontario Ltd., which operated as “GVN,” owned 10,000,000 shares. The principal of this company was Mr. Nick DeRosa, Vince DeRosa’s brother. The head office address of GVN is the same as Fercan’s head office address;
(b) Ronald Wylies owned 10,000,000 shares;
(c) Karen Georgiou owned 10,000,000 shares;
(d) Mr. Brezzi owned 10,000,000 shares; and
(e) Rosten Investments owned 10,000 shares. Mr. DeRosa was the principal of this company. Its head office was located at the same address as Fercan’s head office.
[42] Some of the companies that held shares in both Avicena Group and Northern Ethanol were owned by Mr. DeRosa and his relatives. Some of the people who held shares were affiliated with him and Mr. Georgiou. Because of the common ownership of the two companies, they could trade shares between them in a tightly controlled fashion. It is interesting that Mr. DeRosa’s company Fercan owned the property that Northern Ethanol leased and that companies owned by Nick DeRosa and Vince DeRosa held a significant number of shares in Northern Ethanol. Even though the AG referred to evidence from an American trial, described below, that appears to link Mr. DeRosa to the stock fraud, the question of whether Mr. DeRosa was personally involved in the stock fraud is not relevant to the issues before me and is not a question for me to decide on this application.
[43] In simple terms, according to the AG, the companies agreed to trade Northern Ethanol’s low priced, speculative stock between themselves at a higher value. The rising stock price was meant to attract the attention of third party investors who would then be interested in purchasing stock. Those investors would then purchase the stock at the inflated price without realizing the stock had little value. The sellers of the stock profited from this fraudulent scheme. Mr. Georgiou was actively involved in this fraud which is described as a “pump and dump” scheme. He traded the stocks in the United States because, as noted above, he was prohibited from acting as a stock broker in Canada.
[44] At one point, a third party was introduced to Mr. Georgiou. His role was to purchase stock on a trial run. This was to ensure that the sale could be tightly controlled. A small trade was to be done with a kickback to the purchaser. Unbeknownst to Mr. Georgiou, the purchaser was an undercover FBI agent. He completed the trade and was entitled to a $5,000 kickback. It was paid through Starport Landing, a company that Mr. DeRosa had incorporated and subsequently transferred to Mr. Rotstein. After this trade occurred, Mr. Georgiou was arrested in the United States. After a lengthy trial there, he was convicted of manipulating the stock of four companies including Avicena and Northern Ethanol. He was sentenced to 25 years in prison. The transcript of the trial is part of the application record in these proceedings.
Analysis
[45] The AG argues that it is reasonable to believe that the property was used as an instrument of unlawful activity because the lease between Northern Ethanol and Fercan was held out in Northern Ethanol’s corporate prospectus to show that Northern Ethanol was a legitimate business. This was to encourage investors to purchase shares in the company.
[46] Fercan argues that Northern Ethanol was not a sham company. It did not have to rely on a lease to sell shares. Its management group was comprised of people with good reputations. For example, Gordon Laschinger, who held the largest number of shares, 1,250,000, was the CEO, president and chairman of the Board. He is a prominent Canadian executive. He was VP of Investments at JJ Barnicke Ltd. He was also the chairman of the William Osler Health Centre. Frank Klees was a director of Northern Ethanol. He was a Provincial cabinet minister in 1999.
[47] An example of a situation which gave rise to reasonable grounds to believe that money was proceeds or instruments of unlawful activity is found in Ontario (Attorney General) v. $61,686.12. Police searched an outlaw motorcycle gang member’s home and found $61,686.12 in cash. The court commented that keeping this amount of cash in a home would be highly unusual. Accordingly, there were reasonable grounds to believe that the money was proceeds or instruments of unlawful activity.
[48] The preliminary prospectus that Northern Ethanol filed with the Securities and Exchange Commission in Washington D.C. is 69 pages long and is included in the motion record. On the first page of the prospectus is the following statement: “Investing in these securities involves significant risks. Investors should not buy these securities unless they can afford to lose their entire investment.”
[49] The leased property is described in the prospectus summary in several different locations. The description is written in an even-handed manner as it includes both positive and negative comments about the property. When considering whether the lease was used as an instrument of unlawful activity, the court must consider both the positive and negative text.
[50] On page 3, the summary states that on April 20, 2006, Northern Ethanol executed a 25 year lease, with two ten year renewal options on a 35 acre property located in Barrie, Canada with a related party. The Barrie plant location would require the conversion of the existing site’s servicing infrastructure from a former brewery to an ethanol production facility. The summary goes on to state that the Barrie site had been the focus of an earlier 2005 engineering study which had concluded it was a feasible site for a major ethanol plant. On page 41 of the prospectus, the lease is mentioned again. In addition to the above-noted statements, the prospectus goes on to state that the site is well suited to ethanol production due to its close proximity to Toronto’s gasoline markets. It has excellent rail and road transportation, is within close driving distance of a Great Lakes terminal and has ready available water, electricity and natural gas. The lease allows Northern Ethanol to utilize all existing site infrastructure and to demolish or modify existing structures to optimize plant operations.
[51] On page 35 of the prospectus, a paragraph is devoted to the specific, serious limitations of the property as follows:
The buildings under capital lease at the Barrie site cannot currently be used to carry out the business of the Company without extensive renovation and construction activities. As such, we consider that the assets are not available for their intended use. Specifically, we expect to make substantial renovations to portions of the existing building to provide the space needed to construct an ethanol processing facility. The portion of the building that will eventually serve as the administrative offices requires extensive renovation in order to bring it up to standard for occupation. Our examination of the infrastructure items has indicated that substantial additional expenditures will be required to ensure that rail lines are serviceable and in correct locations and that the gas and water lines can be expanded to provide the required capacity for the plant operations. (Emphasis added)
[52] In addition to the comments about the site, the summary also identifies 35 risk factors associated with the proposed business plan and describes them in detail for 13 pages. Some of the risks are set out as follows:
● We have incurred losses in the past and expect to incur greater losses until our ethanol production begins
● Carbon dioxide is a co-product of ethanol production. It is believed to contribute to global warming. Future government regulations to reduce carbon dioxide emissions may impact our ability to produce ethanol.
● In order to complete the construction of our planned ethanol production facilities, we will require the infusion of significant additional debt and equity funding. We will need to raise approximately $454,000,000 in equity investment and or debt financing.
● Holders of our common stock may suffer significant dilution in the future.
● We will be competing with other established ethanol production and marketing companies who have greater experience and resources than we currently have.
● We will be dependent on a small number of customers because there are a finite number of petroleum refiners and mixers in North America.
● We will need to obtain various construction permits relating to our proposed ethanol plants and there can be no assurance that we will be able to obtain these permits or that we will not incur significant delay in obtaining them. Any significant increase in the final construction costs of our proposed facilities will adversely affect our capital resources.
● There is no trading market for our securities and there can be no assurance that such a market will develop in the future.
● We do not anticipate payment of dividends and investors will be wholly dependent upon the market for the common stock to realize economic benefit from their investment.
● We cannot predict whether we will successfully effectuate our current business plan.
[53] The prospectus also states that each prospective purchaser is encouraged to carefully analyze the risks and merits of an investment in our common stock and should take into consideration when make such analysis, among other, the risk factors discussed above.
[54] The prospectus also notes on page 7 that for the period from inception, being November 29, 2004, through June 30, 2007, Northern Ethanol had suffered a net loss of $5,340,348.
[55] Even though the lease on the property is mentioned in the prospectus, the text clearly states that the property is not available for its intended use without significant renovations. Furthermore, substantial additional expenses will have to be incurred to ensure that rail lines are functional and in correct locations and that the gas and water lines can be expanded to provide the required capacity for the plant operations. A reasonable person reading the prospectus would conclude that even though Northern Ethanol had leased premises for its future operations, the premises were not suitable for the company at that time. A huge amount of money would be required to convert the building into an ethanol producing facility. When considered together, the positive and negative comments about the leased property would not necessarily give a potential investor any comfort about the legitimacy of the business. As to whether the lease was an inducement for investors, I conclude that it was neutral at best. Including a description of a company’s headquarters or property in a prospectus is common enough. Furthermore, any interested person who read the prospectus and noted the references to the lease would have also noted the extensive cautions and statements of significant risks associated with investing in Northern Ethanol.
[56] At the time of filing the prospectus, the most that could be said about Northern Ethanol was that it was a fledgling company that had a business plan for producing ethanol. As noted above, the warning on page one of the prospectus which stated, “Investing in these securities involves significant risks. Investors should not buy these securities unless they can afford to lose their entire investment” was entirely appropriate. Accordingly, I conclude that Northern Ethanol’s reference to the lease in the prospectus did not constitute using the property as an instrument of unlawful activity.
[57] The AG also argues that Fercan and Mr. DeRosa profited from the stock manipulations and therefore it is reasonable to believe that some of these profits were used for mortgage payments. With respect to the funds for the $5,000,000 loan given by Mr. DeRosa to Fercan, which was secured by a mortgage on the property, it is also reasonable to believe that the money for this loan came from stock manipulations profits. Therefore, the property is proceeds of unlawful activity. Further, the property was used as an instrument because the property was used to facilitate the acquisition of other property being the money from the sale of marijuana
[58] As noted above, there is no evidence before this court of Mr. DeRosa and Fercan’s financial affairs. There is no evidence that Mr. DeRosa received funds from the stock manipulation and used them to pay the mortgage or finance the $5,000,000 loan. To say that this occurred is speculation at best. Absent any financial evidence, there are no reasonable grounds to believe that the property was proceeds of unlawful activity in this regard.
(d) Are there reasonable grounds to believe that the property was used as an instrument of unlawful activity because it housed the marijuana grow operation and accordingly was used to facilitate the acquisition of other property, being the money from the sale of marijuana?
[59] The AG states that if the property was used for the unlawful activity, it is clearly an instrument of unlawful activity. Furthermore, the property was used as an instrument because it was used to facilitate the acquisition of other property, being the money from the sale of marijuana. As noted above, section 7(2) of the CRA provides authority for this position. Obviously, in this context, the property was used for an unlawful activity. The AG is correct in this respect. There are reasonable grounds to believe that the property was used as an instrument of unlawful activity in this regard.
(e) Would an order preserving the property clearly not be in the interest of justice?
[60] The AG argued that on a preservation motion, the court cannot consider whether an order preserving the property clearly would not be in the interest of justice. The AG stated that this factor could only be applied at a forfeiture hearing. This “interest of justice” clause is found in section 9(2) of the CRA whereas the test to be met for a preservation order is set out in section 4(2). I disagree. The “interests of justice” clause is also set out in section 4(2). Furthermore, in Ontario (Attorney General) v. $51,000, par 25, the Court found that a two part test had to be met before a preservation order would be granted. The first part is that there must be reasonable grounds to believe that the property is a proceed or instrument of unlawful activity. The second part is that where such grounds exist, the court shall make the order unless it is clearly not in the interest of justice to do so.
[61] I also note that in the AG’s Notice of Motion, the second ground for the motion states, “Pursuant to sections 4(2) and 9(2) of the Civil Remedies Act, 2001, except where it would clearly not be in the interests of justice, the Court shall make an order for the preservation of the property…” I will therefore consider whether an order to preserve this property would clearly not be in the interests of justice.
[62] In Ontario (Attorney General) v. 8477 Darlington Crescent (C.A.) an owner did not know about the unlawful activity before the police raided the premises. At paragraphs 84 and 85, the court commented that the “clearly not in the interests of justice” exception is very narrow. It should be granted only where the respondent has shown that forfeiture would be manifestly harsh or draconian. Furthermore, in par 96, the court stated that the phrase is broad and includes maintaining confidence in the civil justice system. Orders should be made in accordance with the community’s sense of fairness.
[63] In Ontario (Attorney General) v. $51,000 par 38, the court commented that at the preservation stage, because the court is only being asked to protect the property pending a later forfeiture hearing, the exception should even more narrowly applied.
[64] As previously noted, through Fercan, Mr. DeRosa owns many large rental properties. He uses property managers to deal with leasing arrangements and the operation of the buildings as they are too numerous for him to do all this work personally. It is understandable that Mr. DeRosa would not be inspecting his leased premises on a regular basis. In fact, a typical commercial tenancy lease would likely give him the right to do so in only very limited circumstances. There is no evidence before me to show that Mr. DeRosa had any knowledge of or participation in the marijuana grow operation. In fact, Justice West’s conclusion was unequivocal that Mr. DeRosa had no knowledge of it whatsoever. Justice West heard viva voce evidence for seven weeks in the proceedings under the CDSA and was in the best position to determine this issue. Furthermore, Mr. DeRosa and Fercan were thoroughly investigated by the police. No charges were ever laid against Mr. DeRosa.
[65] The United States never sought Mr. DeRosa’s extradition in connection with the stock fraud. With respect to any evidence that Mr. Georgiou gave at his trial suggesting that Mr. DeRosa was complicit in the stock fraud, the US prosecutor stated at the sentencing hearing that, “the testimony of this defendant was probably about as ugly a perjury as I am personally aware of, and that within our office we have ever seen.” (Trial Transcript of United States of America v. George Georgiou, November 19, 2010 p. 7 lines 11 – 13). In response, Justice Kelly stated, “I was awestruck by it.” (Georgiou, November 19, 2010 Transcript at p. 8, line 13) Justice Kelly further stated that the prosecution’s request for, “the enhancement [with respect to sentencing] for perjury will stay in.” (Georgiou, November 19, 2010 Transcript at p. 8 line 25). The U.S. court found that Mr. Georgiou’s evidence was unreliable. Regardless of this, the question of whether Mr. DeRosa knew about or participated in the stock fraud is not for me to decide.
[66] The AG requests an order that the property be preserved pending a future forfeiture hearing. It is clear that the property was used to house the marijuana grow operation and was used to acquire other property. Therefore, it is an instrument of unlawful activity; however, Mr. DeRosa knew nothing about it.
[67] At a forfeiture hearing, the court may make an order to preserve the interests of the owner if he can demonstrate that he was a responsible owner. (See section 8(a) of the CRA) As noted earlier, counsel for Fercan argues that a preservation order should not be granted because Mr. DeRosa should not have to go through another forfeiture hearing just to prove again that he knew nothing of the marijuana grow operation and that he was a responsible owner. The issue of whether Mr. DeRosa was a responsible owner is not relevant at the preservation stage and is not before me. The AG has not had an opportunity to argue that issue in this motion. Accordingly, Mr. DeRosa cannot rely on this to argue that a preservation order should not be made.
[68] Nevertheless, preserving this property would continue to deprive Mr. DeRosa of $4,067,685.10. The property has been restrained since 2010. To date, no credible evidence of wrong-doing on Mr. DeRosa’s part has been provided in a Canadian court. As noted earlier, Mr. Georgiou gave evidence in the 2010 U.S. trial that implicated Mr. DeRosa; however, the court found that his evidence was unreliable. After a seven week trial, Justice West was completely satisfied that Mr. DeRosa had no knowledge of the marijuana operation. Bearing in mind that the “not in the interests of justice” exception should be applied even more narrowly at the preservation stage, I conclude that Mr. DeRosa and Fercan have clearly shown that an order to preserve the property would be manifestly harsh and draconian in the circumstances. I find that an order to preserve the property would offend the community’s sense of fairness. Based on the record before me, I conclude that the interests of justice would not be served by preserving the funds from the sale of the property.
[69] The motion is dismissed. The sum of $4,067,685.10 currently held by the Seized Property Management Directorate shall be returned to Fercan Investments Inc. within 14 days of the release date of this decision.
[70] If costs are an issue between the parties, they may appear before me and make submissions. Brief written materials, not to exceed five pages of text exclusive of a bill of costs, shall be served and filed not later than two weeks prior to the appearance date. A date may be obtained through the trial co-ordinator.
Justice M.E. Vallee
Released: March 5, 2015
CORRIGENDA
The citation at the top of page 1 has been corrected from AG to read: Ontario (Attorney General).