Court File and Parties

BARRIE COURT FILE NO.: 13-1288

DATE: 20140626

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

ATTORNEY GENERAL OF ONTARIO

Applicant/Moving Party

– and –

$4,067,685.10 IN CANADIAN CURRENCY (IN REM)

Respondent/Responding Party

Counsel: L. Will and S. Nishikawa, for the Applicant/Moving Party B. Greenspan and N. Lutes, counsel for Fercan Developments Inc. W. Friedman and P. Bakos, counsel for Vince DeRosa

HEARD: June 13, 2014

REASONS FOR JUDGMENT

HOWDEN J.:

[1] The Civil Remedies Act, 2001[^1] ("CRA") was enacted to authorize the forfeiture of proceeds of unlawful activity. It creates, in essence, a property-based authority to seize money and other things tainted by crime and then to reallocate the proceeds to compensation of victims and for remediation of the societal effects of criminality. In practical terms, its effect is to take the profit out of crime and deter present and future perpetrators. Chatterjee v. Ontario (Att. Gen.) 2009 SCC 19, [2009] 1 SCR 624, paras. 1 and 23. In a proceeding for forfeiture, the Act provides for interlocutory orders for preservation, management or disposition of the property in question during the time between seizure and the forfeiture hearing.

[2] There are two types of property with which the CRA is concerned: (i) Proceeds of unlawful activity and (ii) Instrument of unlawful activity. Each term is defined and each follows a statutory process toward a forfeiture hearing. In each case, there is provision for an interim preservation order to ensure that if there are reasonable grounds to believe that the property is either proceeds of crime or an instrument of unlawful activity, it will be preserved until the forfeiture hearing can take place.

[3] In this case, the Attorney-General of Ontario ("the Attorney") has brought an application for forfeiture of the Property, in this case $4,067,685.02. In this proceeding, the Attorney moved for an order to preserve the money pending the hearing on forfeiture. The Property is the proceeds from the sale of 1 Big Bay Point Road, Barrie, which comprises the roughly 35-acre site of the former Molson's Brewery. After the brewing company ended its association with the Property, Fercan Developments Inc. ("Fercan") purchased it. The 500,000 sq. ft. building was divided into ten to twelve units and each was rented to a commercial tenant. In the space thought to be occupied by a fish farm with a highly contagious condition –a cover story to keep people from prying into or about it – a large-scale marijuana grow operation was discovered in 2004.Charges were subsequently laid and nine convictions have been registered against nine individuals. Vince DeRosa, the sole shareholder and principal of Fercan, and Fercan itself were not charged with any offences.

[4] The motion for preservation was grounded basically on the assertion that there were reasonable grounds to believe that (i) the Property was the proceeds of unlawful activity, and (ii) it fell within the definition of an instrument of unlawful activity. Following two days of hearing in December 2013 and February 2014, on April 24, 2014 Vallee J. released a 16-page decision dismissing the applicant's motion for preservation. She found that there was no evidence to meet the threshold of reasonable grounds to believe that proceeds from the illegal marijuana grow operation or from Northern Ethanol (of which more later)was used to pay the mortgage and therefore to assist in purchasing the site. Therefore the assertion that the Property was proceeds of crime was found to be groundless. The motion judge also found that no reasonable grounds existed on the evidence before her that the Property was used as an instrument of unlawful activity.

[5] The site and its proceeds of sale, the Attorney's counsel submit, do come within the definition of an "instrument of unlawful activity" because the Property is mentioned in the prospectus filed in 2007 by the company named Northern Ethanol Inc. as one of two potential sites for future ethanol production. Northern Ethanol was one of four start-up companies whose shares were purchased and sold by a convicted fraudster named George Georgiou in what is called a "pump and dump" scheme. Georgiou was convicted of charges relating to this stock fraud which operated between 2004 and 2008.

[6] The applicant Attorney now applies for leave to appeal the decision of Vallee J. The order from which leave to appeal is sought is interlocutory. Therefore, the threshold in the Rules of Civil Procedure, rule 62.02 (4), applies. The applicant has narrowed the grounds on which leave is requested. Sub-rule 62.02(4)(a) is not relied on now. The remaining ground for leave which must be satisfied is sub-rule 62.02(4)(b) which reads:

Leave to appeal shall not be granted unless,

there appears to the judge hearing the motion good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that, in his or her opinion, leave to appeal should be granted.

[7] The following provisions of the CRA are relevant to understanding the reasons for decision.

Section 7(1) "(I)nstrument of unlawful activity" means 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 or in serious bodily harm to any person, and includes any property that is realized from the sale or other disposition of such property;

Section 2 "(P)roceeds of unlawful activity" means property acquired, directly or indirectly, in whole or in part, as a result of unlawful activity, whether the property was acquired before or after this Act came into force, but does not include proceeds of a contract for recounting crime within the meaning of the Prohibiting Profiting from Recounting Crimes Act, 2002.

"(U)nlawful activity" means an act or omission that,

(a) is an offence under an Act of Canada, Ontario or another province or territory of Canada, or

(b) is an offence under an Act of a jurisdiction outside Canada, if a similar act or omission would be an offence under an Act of Canada or Ontario if it were committed in Ontario,

whether the act or omission occurred before or after this Part came into force.

Section 8(1) In a proceeding commenced by the Attorney General, the Superior Court of Justice shall, subject to subsection (3) and except where it would clearly not be in the interests of justice, make an order forfeiting property that is in Ontario to the Crown in right of Ontario if the court finds that the property is an instrument of unlawful activity.

Section 9(1) On motion by the Attorney General in a proceeding or intended proceeding under section 8, the Superior Court of Justice may make any or all of the following interlocutory orders for the preservation, management or disposition of any property that is the subject of the proceeding:

2. An order for the possession, delivery or safekeeping of the property.

Section 9(2) Except where it would clearly not be in the interests of justice, the court shall make an order under subsection (1) if the court is satisfied that there are reasonable grounds to believe that the property is an instrument of unlawful activity.

[8] Counsel for the Attorney no longer submit , as they did before Vallee J., that the plant is offence-derived property within the definition in s. 2 of "proceeds of unlawful activity" relating to the marijuana grow operation. Nor does it allege that the plant was used as an "instrument of unlawful activity" as defined in s. 7(1) in relation to the illegal marijuana operation. Counsel for the applicant confirmed that leave to appeal is sought now because it is submitted that the Property was used as an "instrument of unlawful activity" in relation to a stock fraud prosecution and stock manipulation scheme in which shares of Northern Ethanol and other start-up companies were involved.

[9] On the leave motion before me, the Attorney takes no issue with the findings of the motion judge on the grow-op-related submissions.

[10] It is with the finding of the motion judge on the use of the plant and its location as a future ethanol plant in the prospectus of Northern Ethanol Inc., when placed on the canvas of the 2004-08 stock fraud and share price manipulation case, that the leave to appeal is focused. In particular, the Attorney submits that it is with the interpretation and application by the motion judge of s. 7(1) of the CRA defining "instrument of unlawful activity" and the threshold provision in S.9(2) that the applicant takes issue now. The notice of motion for leave to appeal was amended by the Attorney to remove references to the disposition of the motion based on the seized funds being "proceeds of unlawful activity" from the marijuana-grow operation.

[11] The amended notice for leave to appeal recites, as grounds for the use of s. 7(1) and "instrument of unlawful activity", the American stock scam featuring George Georgiou involving the shares of several companies including Northern Ethanol. This company entered a multi-year lease granted by Fercan of the plant site in Barrie in 2006. It is alleged that Mr. Georgiou used his share ownership position and inside knowledge through associates in other companies to operate a stock - fraud scheme over the years 2004 to 2008. The lease of the plant and its site to this company, the advantages to Northern Ethanol of the accessibility of the Property and the disadvantage of a large risk factor, were the subject of several references to the Barrie plant property in the prospectus filed by Northern Ethanol in 2007.

[12] Georgiou was convicted by Kelly J. of the U.S. District Court for the Eastern District of Pennsylvania in 2010 of securities fraud, conspiracy, and wire fraud. I am told he was sentenced to 25 years imprisonment plus three years supervision and restitution of $55 million.

[13] The extent of the market scam is described in the applicant's factum from the testimony of an undercover FBI agent. Northern Ethanol filed a prospectus in 2007 with the US Securities and Exchange Commission showing the plant in Barrie and the company's lease of the plant site for 25 years plus two ten-year options to renew as one of its principal assets, with a less secure interest in a property in Sarnia and a property in Niagara Falls. The prospectus lists the key management people and their biographies. All appear to be highly respected members of society. They include such well-known names in North American business circles as Gordon Laschinger of JJ Barnicke Ltd., the company's largest shareholder, who is listed as CEO and president, Frank Klees, a former Ontario cabinet minister, and Gordon Langille, former director of commercial operations for Trans-Canada Pipelines.

[14] Northern Ethanol Inc. became one of four companies whose common share prices became the subject of the "pump and dump scheme". Fercan and Northern Ethanol shared the same office address in Toronto, indicating that Vince DeRosa was a player in both and a shareholder. It is alleged that Georgiou would recruit others to gain control of a majority of the shares of some start-up companies. They would start a campaign to market each company to many people through stock reports and news releases and then make "controlled share trades" amongst the partners at higher-spiralling prices. Kickbacks, wash-trading and other questionable techniques were engaged in by Georgiou. When the price reached the peak dictated by market conditions and by Georgiou and his traders, they would sell their shares to the general public at inflated prices and reap their reward before the price descended.

[15] Mr. Greenspan made the point that there was no misrepresentation or exaggerated claim that showed some intent to pump up the company's importance and potential. In fact, the Attorney at no time suggested that the prospectus contained anything untrue; counsel for the Attorney confirmed that to me. The submission for leave is indeed a very narrow and confined concern on a very narrow evidential platform: basically, it is that the existence of the prospectus mentioning the Barrie plant lease lent an air of legitimacy - and thus acted as an inducement - that the applicant relies on.

[16] It is the position of the applicant that Vallee J, in reaching her conclusion, failed to interpret and apply s. 7(1) correctly or in its entirety, in light of the broad purpose of the Act, the role that interim preservation orders play in preserving the property gained by unlawful means, the facilitation of such orders by the mandatory wording of s. 9(2) ("shall make an order"), and the low threshold for the order ("the court is satisfied that there are reasonable grounds to believe"). Counsel for the applicant submits that Vallee J. conflated subsection (1) of s.7 with the presumption in subsection (2) of s.7 and jumped from considering whether property "likely to be used to engage in unlawful activity that, in turn, would be likely to... result in the future acquisition of further property" to the conclusion that the Northern Ethanol prospectus, in referring to the Barrie plant, does "not constitute using the property as an instrument of unlawful activity"(para 56). Counsel for the applicant submits that she failed to consider the second alternative in the definition of instrument of unlawful activity, that is, whether property likely to be "used for unlawful activity that, in turn, is intended to result in the acquisition of other property".

[17] It was the applicant's contention before me that the Northern Ethanol prospectus gives an air of legitimacy to the company. The other principal site mentioned in Sarnia was not yet owned by the company and so it was the Barrie plant lease for a long term that could be used to induce investors to buy Northern Ethanol shares. It was submitted that Vallee J., in entering into a discussion of whether the negative elements in the prospectus balanced the positive assets therein, failed to consider the words "reasonable grounds to believe that the property is an instrument of unlawful activity" which is the threshold for a preservation order. Finally the applicant submits that the proper interpretation of s. 7(1) is a matter of public importance to the development of the law forming around the CRA. It is not simply an issue of significance only to the parties.

[18] I should refer to one aspect of the Attorney's presentation through counsel. There is no prohibition in the CRA against proceeding on a forfeiture matter as, say, proceeds of crime because the owner was never convicted of a criminal offence or there has been no prosecution. Because the burden of proof is less under the CRA, it is quite possible that this kind of situation will arise. In this case, it has manifested itself through the Attorney's counsel referring several times to Vince DeRosa as a partner of Georgiou and that he assisted Georgiou with his stock scam and that they were known associates if not partners. Despite there having been no judicial or even prosecutorial finding against Vince DeRosa indicating reasonable and probable grounds for belief in his guilt of something of a criminal nature, counsel several times referred to him as if he were a co-defendant or close associate of Georgiou. An impression, third-hand from a Mr. Hamelin through the Hayhurst affidavit, was that he was a partner of Georgiou and this is repeated in the factum. And again, in paras. 21 and 28 of the Attorney's factum, DeRosa is described as playing a part with Georgiou "in the commission of fraud in relation to certain publicly traded companies". Or that DeRosa extorted a person to sell shares cheaply with what amounted to a death threat. Throughout there are insinuations against him connected with criminal activity but not one official assertion of even reasonable grounds to believe, in the form of a charge to be answered. There was the attempted forfeiture at the end of the grow-op prosecution but West J. found no evidence whatsoever to implicate Vince DeRosa in that major marijuana production scheme.

[19] This is not an issue before me for decision. But in view of the number of such insinuations against Mr. DeRosa, I should refer to the defence position. In relying on the Hayhurst affidavit, the respondent's counsel states that the Attorney has relied on evidence from a person whose assertions have been found to be erroneous or inaccurate and whose evidence is derived from an earlier affidavit which was rejected by West J. In addition, there is no evidence that Northern Ethanol did anything improper with its shares; the scheme of Georgiou involved his use of his own shares, some being shares in Northern Ethanol. Nor did anything happen at the Fercan building that furthered Georgiou's scheme (Respondent's Factum, para. 29).

[20] While the respondent's counsel remarked on the unreliability of the Attorney's assumption of DeRosa's part in the stock manipulation scheme of Georgiou, the one thing that is not apparently disagreed with is that he has associated with some less than reputable persons; one is now in prison. If Mr. DeRosa wants this cup to pass away, it might be best that he not continue to share it with some of those from his past with criminal records and/or associated criminal connections quite so much. That said, there is nothing unlawful if the activity is merely socializing.

[21] The position of the responding parties, as expounded by Mr. Greenspan and Mr. Friedman, is that there is no evidence of anyone relying on the representations about the Barrie plant in the Northern Ethanol prospectus for anything but the truth, that Justice Vallee used both a past and a future lens of likelihood and intent in reaching her conclusions. The reference to the Barrie plant included the fact that zoning was not in place for an ethanol plant there and that problem would be clear to any investor.

[22] I have taken some time and care in setting out the position of the Attorney because I am conscious of the statute in question being relatively new. Therefore case law that is being decided now forms the building blocks for its use in the future. I understand fully the concern of the Attorney in these circumstances that care be taken particularly over the interpretation and application of the provisions dealing with interim preservation orders. Without the availability and practical usability of the preservation provisions pending forfeiture hearings, the property that is the subject of the forfeiture proceeding will probably not remain available, given that in cases where their use is appropriate in the public interest, the property in question was obtained through unlawful activity or is likely to be used in such activity.

[23] As the factum for the Attorney puts it, at para 64:

The ability of the Attorney-General of Ontario to secure, by court order, preservation of the property at issue in forfeiture proceedings ...is vital to the legislative scheme. Given the subject matter of the litigation under the Act, it cannot be assumed that persons with possession of property which is the subject of a civil forfeiture proceeding will abide by the niceties of the civil process. Given the opportunity, it can be expected that efforts will be made to defeat the purposes of the Act by secreting, wasting, or dissipating assets, both before and after judgment.

[24] One of the five express purposes of the CRA is relevant to this proceeding:

1. The purpose of this Act is to provide civil remedies that will assist in,

(b) preventing persons who engage in unlawful activities and others from keeping property that was acquired as a result of unlawful activities.

[25] The provisions for interim preservation, as with the forfeiture provisions in proper cases, must be interpreted sufficiently broadly to not defeat the purpose of the Act. However it must also be borne in mind that the proper purpose of the CRA is not to simply acquire or keep property from persons or entities where there are no real grounds to believe that it is tainted by crime. It is never the business of government to expropriate property without observing due process, even where officials do not like the person involved or cannot show a nexus between the person or entity who owns or controls it, the property in question, and its likely or intended se for unlawful purposes.

[26] Before I dispose of this motion, I should revisit a point of history in the reasons of Justice Vallee which may not be clear to the reader of this decision. The discovery of a sophisticated and closely disguised drug production operation in this former brewery in Barrie was part of a careful police investigation which did not end with that discovery.

[27] The plant contains 500,000 square feet of space and most of it was leased to legitimate businesses with no connection to crime, organized or otherwise. There is no doubt a great sense of cynicism held by many over the assertion by the owner that he knew nothing of the marijuana operation being carried on in his company's building. It was in evidence before Vallee J. that Mr. DeRosa visited the building on weekends and of course the other tenants were there every day, yet Mr. DeRosa as well as the other tenants maintain that they never knew that the space occupied by a fish-farming business was in reality an unlawful marijuana-grow facility. It was a closed, sealed-off space where no one could leave or enter except at night. To add to the cynicism, the brother of Vince DeRosa was one of those involved in the illicit activity which was kept a closely guarded secret even from his brother, the building's owner. Yet it must be accepted that despite extensive investigation by the police of Vince DeRosa, his bank accounts, and his business affairs, no evidence has been found to warrant any charge against either Fercan or Vince DeRosa. A prior trial of the issue of forfeiture produced overwhelming evidence before a judge that Fercan and Vince DeRosa neither participated in nor had any knowledge of the illegal activity in the building.

[28] I have listened carefully to the applicant's counsel's submissions. I have read equally carefully the reasons and decision of Vallee J. I am mindful that if leave is not granted, then the reasons stand without appellate review.

[29] Vallee J. did an extensive review of the evidence and the submissions of the parties. She posed the question in these terms - are there reasonable grounds to believe that the use and description of the lease of the Barrie plant lease to Northern Ethanol in the company 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? In doing so in these terms, she recognized the Attorney's submission that the prospectus was a means of inducing others to buy shares. However in using those terms, the motion judge perhaps muddied the waters a little. For it is the Attorney's reading of that question and other parts of her reasons , such as where she collapsed the terminology at the end (i.e. that the company's "reference to the lease in the prospectus did not constitute using the property as an instrument of unlawful activity") that has led to a sense that she did not use the entire definition in s. 7(1).

[30] The problem which counsel for the Attorney face is a basic one; it appears to be a case with significant and problematic lacunae where objectively reasonable grounds require something beyond speculation and ungrounded suggestion. The argument of the counsel for the Attorney leaves me with a sense of gaps. On the one hand, we have George Georgiou engaging between 2004 and 2008 with unnamed or unproven associates and shareholders in several start-up penny-stock companies in one corner, sometimes with Mr. DeRosa and often not. We have in another corner Fercan developing a leasing operation out of the old Molson's plant and then, following the closing of the grow-op, leasing the site to Northern Ethanol with local announcements that a new use for a very visible property in Barrie had possibly been found. And then we have the reputable members of Northern Ethanol's Board of Directors approving the filing with the SEC of the corporate prospectus with risk statements, yes, and a fairly upbeat outlook without mincing words about the problems, especially the lack of a stable source of financing and unresolved site issues. But there is not one whit of evidence that I have seen as to the use to which the prospectus was put, which would link it to the Georgiou corner.

[31] The words in s. 7(1) "likely to be used to engage in unlawful activity" does not mean whatever ones imagination can conjure up. It means, looking at evidence of timing, of the prospectus's content, and of actual use of the prospectus by someone for some purpose or accompanied by certain words, is it likely that the Property was being used for some unlawful activity? It was the conspiracy of George Georgiou with others (unnamed) to artificially raise the share price of several start-up companies' shares including shares of Northern Ethanol by trading between related persons and/or associates or nominees, and pocketing the increase before other investors realized the shares were of relatively little value, that formed the fraudulent scheme. I fail to see any evidence of use of the prospectus or the Property from which one could find reasonable grounds to believe that the Property was likely to be used to engage in unlawful activity. The timing was somewhat late for one thing. The stock fraud scheme is said to have occurred from 2004 to 2008 and the prospectus for Northern Ethanol did not get filed with the regulator until August 31, 2007. Beyond the filing and what was in it, there is no evidentiary base from which one could draw the conclusion that the likely use of the plant and its site in the prospectus was for unlawful activity.

[32] Section 7(1) defines an instrument of unlawful activity as (i) property that is likely to be used to engage in unlawful activity (ii) that, in turn, would be likely to or is intended to result in the acquisition of other property. The first element for which reasonable grounds must be found to believe is that the Property (the Barrie plant) is likely being used to engage in unlawful activity related to the stock scam. Only if this first element is met does one proceed to consider whether the resulting unlawful activity in turn would be likely to or is intended to result in the acquisition of other property. Counsel for all parties agreed that addressing successfully the first element in the definition is a condition precedent to consideration of the two branches of the second element. I asked counsel for the Attorney to state the case in the words of the definition of instrument of unlawful activity. She said the following:

We are arguing that the Barrie plant is the instrument of unlawful activity because the plant was likely to be used in a securities fraud scheme that, in turn, would be likely to or is intended to result in investors investing in Northern Ethanol, which is the acquisition of further property. (Transcript, Excerpt of Proceedings, p.2.)

[33] So the first requirement to be an instrument of unlawful activity is said to be that the plant was likely to be used to engage in unlawful activity, i.e. the stock fraud scheme.

[34] As I read the reasons for decision, there was no reason for the motion judge to enter into a consideration of the second element, that is, whether the unlawful activity in which the Property (the Barrie plant) was not likely used, in turn would be likely to or is intended to result in the acquisition of other property. What she concluded after an extensive and perceptive analysis was that there were no reasonable grounds for believing that the Property (the Barrie plant) was likely used as described in the first element to engage in the unlawful activity of which counsel for the Attorney are talking. In finding, as the motion judge put it, that Northern Ethanol's reference in the prospectus to the lease of the Barrie plant did not "constitute using the property (the Barrie plant) as an instrument of unlawful activity", she was in effect finding that the Attorney had failed to show reasonable grounds to believe that the first element in the definition of instrument of unlawful activity was established, either subjectively or objectively.

[35] I find that the concern of the Attorney that the element of intent was missed is groundless. The motion judge simply did not go beyond her finding on the first element of the definition because there was no need for her to do so. There is no nexus between the stock fraud scheme for which Mr. Georgiou was convicted and the reference to the lease of the Property in the prospectus of Northern Ethanol. At most the prospectus could be said to be a source of information for potential investors in engaging in the perfectly legitimate activity of purchasing stock in the company. From what the Attorney's counsel have said, it was the incestuous trading of risky companies' shares to raise the share price that was the inducement to get in on a hot stock.

[36] This decision is very much on its own facts. I see no reason to doubt its correctness. Because the decision of the motion judge does not reach the stage of the need to consider the second element of the definition, there was no ground for the motion judge to get into the two alternative or disjunctive elements of the definition: whether in turn the unlawful activity would be likely to or is intended to bring about further property acquisition. Accordingly there is no ground on which to find that any question or issue of importance to the future development of the law in this area is involved.

[37] For the reasons given, the threshold test to obtain leave according to rule 62.02(4)(b) has not been satisfied and sub-rule (a) was not addressed. Leave to appeal from the order of Vallee J. is denied.

[38] If costs are not agreed, counsel may send brief written submissions to me at the Barrie Court House within 30 days.

HOWDEN J.

Released: June 26, 2014

[^1]: S.O. 2001, c.28