Court File and Parties

COURT FILE NO.: CR-16-10000689 DATE: 20190917 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: HER MAJESTY THE QUEEN – and – STEVEN NOWACK

Counsel: Renna Weinberg, for the Crown Paul Slansky, for Steven Nowack

HEARD: March 29, 2019

R.F. GOLDSTEIN J.

Reasons for Judgment on Directed Verdict Application

[1] Mr. Nowack was charged with 13 counts of fraud. Mr. Slansky, on behalf of Mr. Nowack, brought a directed verdict motion at the close of the Crown’s case. He argued that there was no evidence upon which a properly instructed jury could convict on four of the counts on the indictment.

[2] The Crown theory was that Mr. Nowack knowingly made misrepresentations to multiple investors. Those investors provided funds to Mr. Nowack to put into currency trading. Mr. Nowack allegedly diverted some of the funds to his personal use. He allegedly deceived the investors about how he invested the funds. He has never, allegedly, provided an accounting of the funds. The total loss to the investors is alleged to be about $15 million.

[3] At the time the application was brought, I dismissed it with reasons to follow. The jury has since rendered its verdict. Mr. Nowack was convicted of 12 counts of fraud (the Crown chose not to proceed on a 13th count). These are my reasons for dismissing the application.

Background

[4] Commencing in 2009, Mr. Nowack held himself out as a knowledgeable and skilled currency trader. Mr. Nowack opened multiple trading accounts in London using a currency platform provided by a company called FXCM.

[5] Several investors transferred funds to Mr. Nowack between Nov. 3, 2009 and July 1, 2013. Mr. Nowack was to trade currency. Most of the investors signed an agreement with Mr. Nowack. Some investors did not. The forensic evidence established that about US$19.6 million was transferred to FXCM accounts in the U.K. from Mr. Nowack’s accounts in Canada. A total of about US$1.9 million was returned from FXCM accounts to Mr. Nowack’s accounts in Canada. Some of the investor funds were used to pay out earlier investors. Some investor funds were used to pay Mr. Nowack’s personal expenses. Combined trading losses in the FXCM accounts amounted to about US$18.4 million for the period. The accounts were left in a deficit position of just over US$854,000 in June 2013 when FXCM shut down Mr. Nowack’s accounts.

[6] Multiple investors watched Mr. Nowack conduct currency trading on his computer or mobile phone. These investors noted that Mr. Nowack seemed to be doing very well, although some investors saw him lose money from time to time. Mr. Nowack himself represented to various investors that he was making millions of dollars in profits. He also represented that his investment fund had tens of millions of dollars in it, eventually over $146 million.

[7] The Crown theory was that most of the trading screens shown to the investors constituted demonstration accounts. A demonstration account, or demo account, is an account where a person does not trade “real” money. Instead, the trader uses “virtual” currency. The forensic accounting evidence indicated that the highest ending balance on any day in Mr. Nowack’s FXCM accounts was US$5.75 million on June 16, 2010. One investor testified that Mr. Nowack confessed to him that he had shown him a dummy account.

Analysis

[8] The test for a directed verdict is well-known. It is this: whether there is some evidence upon which a reasonable jury, properly instructed, could return a verdict of guilty: United States of America v. Sheppard, [1977] 2 S.C.R. 1067; R. v. Charemski, [1998] 1 S.C.R. 679. Given that this is primarily a circumstantial case, I must conduct a limited weighing of the evidence. That weighing is conducted for the purpose of determining whether the evidence is reasonably capable of supporting the inferences that the Crown wishes the jury to draw: R. v. Arcuri, 2001 SCC 54, at para. 23.

[9] The elements of the offence of fraud are also well-known. As Dickson J. noted in R. v. Olan, [1978] 2 S.C.R. 1175:

The offence has two elements: dishonest act and deprivation; the dishonest act is established by proof of deceit, falsehood or "other fraudulent means"; the element of deprivation is established by proof of detriment, prejudice, or risk of prejudice to the economic interests of the victim, caused by the dishonest act.

[10] There are thirteen counts on the indictment. The defence asks that I dismiss four of them. One of those counts relates to Dr. Joseph Greenberg. Three of the counts relate to Minton Trading Limited (Count 4), Sinomec Finance Limited (Count 5), and Lee Sui Fun (Count 6). The only witness in relation to Minton, Sinomec, and Fun was Stephen Chan.

[11] I will start with Dr. Greenberg:

(a) Is there evidence upon which a jury could convict Mr. Nowack in relation to Dr. Greenberg?

[12] Mr. Nowack took US$4.1 million from Dr. Greenberg’s accounts at CIBC Wood Gundy. The money went into joint accounts that Mr. Nowack opened up with Dr. Greenberg. Mr. Nowack then caused US$3.5 million to be sent to his accounts at FXCM. Mr. Nowack used US$385,000 for his own personal expenses, such as rent on his home and Visa payments. He also used US$140,000 for legal fees. Mr. Nowack agreed to a judgment for the full amount and paid back about $500,000 to Dr. Greenberg. He used money from other investors to pay back Dr. Greenberg, rather than the proceeds or profits of trading.

[13] Mr. Slansky argued that Mr. Nowack had permission from Dr. Greenberg to take his funds and trade them. He also argued that the fact that the money was not returned did not mean that there was a prima facie case of fraud: Washington v. Johnston, [1988] 1 S.C.R. 327. He further argued that Mr. Nowack disclosed losses to Dr. Greenberg and Frank Scolaro. Mr. Scolaro was Dr. Greenberg’s accountant. There were no further investments after the disclosure of the losses. Thus, the failure to report the losses was not material. Finally, there was no written agreement between Dr. Greenberg and Mr. Nowack. There was no evidence that Mr. Nowack was not entitled to use the funds deposited into the joint account for his own personal use.

[14] I respectfully disagree. In my view, there were at least three different ways that a jury could have found that Mr. Nowack defrauded Dr. Greenberg: first, through material misrepresentations about his trading as set out in his account statements and comments to Dr. Greenberg; second, through Mr. Nowack’s misappropriation of funds that were meant to be sent to FXCM accounts for trading; and third, by misleading Dr. Greenberg’s accountant about the status of Dr. Greenberg’s funds.

[15] Dr. Greenberg was deceased at the time of the trial. He gave two ante-mortem statements to the police. He also testified at the preliminary inquiry. His police statements and preliminary inquiry testimony were admitted into evidence on consent.

[16] Dr. Greenberg’s evidence was that sometime prior to 2010 Mr. Nowack told him that he traded currency, or “money securities” or securities. He and Mr. Nowack opened a joint account together in order to facilitate trading. He gave Mr. Nowack between $3 and $4 million to trade. The money came from his Wood Gundy investment account.

[17] There were some important differences between the evidence Dr. Greenberg gave to the police and his testimony at the preliminary inquiry. Dr. Greenberg stated in his police statements that Mr. Nowack sent him statements in the mail. At the preliminary inquiry Dr. Greenberg testified that he kept asking Mr Nowack for a statement of account but that Mr. Nowack never supplied one. In his police statements Dr. Greenberg stated that Mr. Nowack told him that he was always making money. Mr. Nowack did tell him in 2010 or 2011 that he had lost a million dollars or more. At the preliminary inquiry Dr. Greenberg testified that Mr. Nowack did not tell him about any losses from trading. He was surprised to find out that there was no money in the account because Mr. Nowack had always told him he was doing well.

[18] I will deal first with the material misrepresentations about trading: in my view, a jury could have found that Mr. Nowack materially misrepresented the fact that he was successful in his trading Dr. Greenberg’s money. Lori Toledano, the Crown’s forensic accountant, compared statements produced by FXCM to the investment statements provided by Mr. Nowack to Mr. Scolaro in relation to the Greenbergs. Ms. Toledano indicated in her accounting exhibit that the investment statements provided by Mr. Nowack showed total profits of US$105,000 made by the Greenbergs. She indicated in the exhibit that the FXCM statements showed total losses of US$1.97 million during the same time frame. In fact, Mr. Nowack lost all of the money that was provided by the investors to him for trading purposes. Ms. Toledano examined the FXCM statements for the period between November 3, 2009 and July 1, 2013 for all of Mr. Nowack’s accounts. A total of about US$19.6 million was transferred to FXCM accounts from Mr. Nowack’s accounts in Canada. A total of about US$1.9 million was returned from FXCM accounts to Mr. Nowack’s accounts in Canada. Combined trading losses in the FXCM accounts amounted to about US$18.4 million. The accounts were left in a deficit position of just over US$854,000 when FXCM accounts were closed in June 2013. A jury could also find that Mr. Nowack lied when he told Dr. Greenberg that he was doing well in his trading. It was open to a jury to find that Mr. Nowack’s lies caused Dr. Greenberg to continue to invest, thus putting Dr. Greenberg’s economic interests at risk.

[19] The second misrepresentations concerned the misappropriation of funds. Dr. Greenberg testified at the preliminary inquiry that he gave Mr. Nowack permission to trade securities. He did not give Mr. Nowack permission to send the money anywhere else. The Crown called forensic accounting evidence regarding the allocation of funds from Dr. Greenberg’s accounts, as I have mentioned. In my view, a jury could have found that Mr. Nowack diverted Dr. Greenberg’s funds to his own use without Dr. Greenberg’s permission, and without informing Dr. Greenberg.

[20] The third misrepresentation concerned Mr. Scolaro. Mr. Scolaro testified that in March 2010 Dr. Greenberg gave him the 2009 documents to prepare his tax returns. Dr. Greenberg advised Mr. Scolaro to speak to Mr. Nowack about the 2009 trading. Mr. Nowack told Mr. Scolaro that all trading activity commenced in 2010, meaning that there was no income or loss to report. In fact, as the forensic accounting evidence makes clear, the trading, and the losses, commenced in 2009. In 2011, Mr. Nowack kept promising documentation to Mr. Scolaro for 2010 so that the accountant could complete Dr. Greenberg’s taxes. Mr. Nowack eventually informed Mr. Scolaro that Dr. Greenberg had a $1.2 million trading loss. He provided a “combined account statement” that Mr. Scolaro did not consider to be a proper document for the purposes of reporting to the Canada Revenue Agency. In 2012 Mr. Nowack provided no documents whatsoever in relation to 2011, despite promising to do so. In my view, a jury could find that Mr. Nowack’s misrepresentations about the status of Dr. Greenberg’s funds put him at risk of loss. A jury could also find that Mr. Nowack’s continuing misrepresentations to Mr. Scolaro induced Dr. Greenberg to continue to inquire, or at least not to inquire into the underlying status of the investment.

[21] I disagree with the argument that the Crown also fails on causation and materiality. Mr. Slansky argues that even if there were misrepresentations, they did not cause the losses. That is because Mr. Nowack disclosed losses and Dr. Greenberg did not invest after that disclosure. Thus, any misrepresentations could not have caused the losses and were not material.

[22] The Crown is not required to prove that the misrepresentations were material to the losses. It is enough that the misrepresentation placed the economic interests of the victim at risk: R. v. Drabinsky and Gottlieb, 2011 ONCA 582. In that case, the promoters of a company inflated the balance sheet for the purposes of inducing investors to buy shares of an initial public offering. The Court of Appeal noted that it was not essential to show that any particular investor was induced to invest, only that investors could have been induced by the misrepresentation.

[23] Mr. Slansky relies on R. v. Riesberry, 2015 SCC 65, at para. 26 for the proposition that there must be a direct causal relationship between the deprivation and that dishonesty:

There is a direct causal relationship between Mr. Riesberry's dishonest acts and the risk of financial deprivation to the betting public. Simply put, a rigged race creates a risk of prejudice to the economic interests of bettors. Provided that a causal link exists, the absence of inducement or reliance is irrelevant. I agree with the Court of Appeal that Mr. Riesberry's reliance on R. c. Côté, [1986] 1 S.C.R. 2, is misplaced. That case made it clear that

[f]raud consists of being dishonest for the purpose of obtaining an advantage and which results in prejudice or a risk of prejudice to someone's 'property, money or valuable security'. There is no need to target a victim ... and the victim may not be ascertained.

[24] Again, I must disagree with the defence argument. As Justice Cromwell made clear in Riesberry, the Crown is not required to show that the victim actually relied on the fraudulent conduct but rather that the fraudulent conduct caused a risk to the economic interests of the victim. In other words, the fraud must be a cause of the risk of deprivation. As Justice Cromwell stated at para. 22:

Contrary to Mr. Riesberry's contention, proof of fraud does not always depend on showing that the alleged victim relied on the fraudulent conduct or was induced by it to act to his or her detriment. What is required in all cases is proof that there is a sufficient causal connection between the fraudulent act and the victim's risk of deprivation. In some cases, this causal link may be established by showing that the victim of the fraud acted to his or her detriment as a result of relying on or being induced to act by the accused's fraudulent conduct. But this is not the only way the causal link may be established.

[25] To accept the defence argument would be to accept the following proposition: a financial adviser could accept money from an investor, lose it in speculative investments, and then lie to the investor about what happened. That would not be a fraud, the argument goes, because the investor was not induced to invest based on misrepresentations. The misrepresentations came after the loss. Thus the misrepresentations are not material.

[26] With respect, that is not the law. That assumes the misrepresentation must cause the deprivation. In fact, the causal connection must be between the misrepresentation and the risk to the investor’s economic interests. The failure to disclose is arguably a type of dishonest conduct: R. v. Zlatic, [1993] 2 S.C.R. 29. Mr. Nowack may have honestly believed that he would not lose money trading currency, but a jury could find that he dishonestly failed to account for the losses.

[27] Here, a jury could find that Mr. Nowack misrepresented the true state of affairs of the investment. A jury could also find that Mr. Nowack opened accounts in London but told Dr. Greenberg that the accounts were in New York. A jury could find that those were acts of dishonesty. A jury could find that Dr. Greenberg was placed at risk of deprivation because he (or his advisors) would have had no idea that in fact all the money had been lost through trading losses. Dr. Greenberg would not have been in a position to take steps to recover the money because he would not have known it was lost. Even if he did take steps, he would have been looking for his money in New York instead of London. Moreover, a jury could find that Mr. Nowack did not disclose that the repayments to Dr. Greenberg came from other investors. That was also dishonest. That would have also led Dr. Greenberg (or his advisors) to assume, wrongly, that the funds were repaid through trading profits. That would have been another lost opportunity for Dr. Greenberg to attempt to recover his funds. It is true that the language of Riesberry speaks of a victim acting to his or her detriment. A failure to act because of a misrepresentation amounts to the same thing.

[28] Thus, a jury could conclude that Mr. Nowack’s misrepresentations caused Dr. Greenberg’s economic interests to be placed at risk. The application to dismiss Count 1 on the indictment is dismissed.

(b) Is there evidence upon which a jury could convict in relation to Minton Trading Limited, Sinomec Finance Limited, and Lee Sui Fun?

[29] Minton Trading Limited invested C$500,000 in two tranches in February 2012. Stephen Chan did all of the negotiating with Mr. Nowack and signed the documents as a signing officer of Minton Trading. Minton Trading was Mr. Chan’s wife’s company but Mr. Chan used it as an investment vehicle. Sinomec Investments Limited was Mr. Chan’s father-in-law’s company. It was a Hong Kong company. Sinomec invested C$500,000 in March 2012 and a further $1 million in May 2012. Again, Mr. Chan did all of the negotiating with Mr. Nowack on behalf of Sinomec. Mr. Chan signed the agreements with Mr. Nowack as an authorized signing officer of Sinomec.

[30] Later in 2012 Mr. Nowack told Mr. Chan that he had lost money on trades and that he needed further investments. Mr. Chan understood that because of the high amount of leverage they could be cut out of the market if the currency only dropped a small amount. Mr. Chan therefore agreed to put more money into the fund in order to protect the position. He asked his aunt, Lee Sui Fun, to invest. She put money in. The investment began with US$1 million in June 2012. There were further investments of US$1 million in July 2012 and US$1 million in August 2012. Mr. Chan brought the agreement to Ms. Fun to sign.

[31] Sinomec, Minton, and Ms. Fun never received any of their investment back. Throughout the whole time period Mr. Nowack represented that the fund was doing well and making millions of dollars in profits.

[32] Mr. Slansky argued that there was no evidence that Mr. Chan had any authority to act on behalf of Minton, Sinomec, or Ms. Fun. There was no evidence that any misrepresentations were communicated by Mr. Chan to any of the principals of Minton or Sinomec, or to Ms. Fun. Finally, Mr. Slansky argued that there is evidence that the funds came from Mr. Chan, rather than any of Sinomec, Minton, or Ms. Fun. Thus, the economic interests of those entities or person were never placed at risk.

[33] Again, I respectfully disagree. As Mr. Slansky conceded, there was evidence that Mr. Nowack made misrepresentations to Mr. Chan. The Crown’s forensic accountant compared the FXCM statements to the investment statements provided by Mr. Nowack regarding the Minton and Sinomec investments. On the statements he called the investor “Stephen Chan”. The investment statements provided by Mr. Nowack to Mr. Chan showed total profits of US$22.67 million. The FXCM statements showed total losses were US$5.4 million. Mr. Chan watched Mr. Nowack trade using the FXCM platform on a laptop computer. Mr. Chan testified that the account showed $18-20 million. Mr. Chan also testified that Mr. Nowack later confessed to him that he showed Mr. Chan a demonstration account.

[34] There was also evidence that Mr. Nowack did not disclose to Mr. Chan what he did with the investment funds. The Crown’s forensic evidence indicated that of the $2 million invested by Sinomec and Minton, only $1.9 million was invested in currency trading. The rest of the money was paid to Mr. Nowack’s personal expenses or other investors. The Crown’s forensic evidence also indicated that of the US$3 million invested by Ms. Fun about US$2.8 million was invested in currency trading. The rest was also used to pay Mr. Nowack’s personal expenses and other investors.

[35] The law is very clear that there need not be any kind of personal relationship between the fraudster and the victim. The principle was set out in R. v. Kirkwood (1983), 42 O.R. (2d) 65. Justice LaCourciere stated at para. 15 of that case:

In the Olan case, the Supreme Court of Canada referred with approval to the following two decisions which make it clear, in my view, that there need be no personal nexus between the fraudsman and his victim. The House of Lords in Scott v. Metro. Police Commr., [1975] A.C. 819, [1974] 3 All E.R. 1032, held that deceit is not a necessary ingredient of the common law offence of conspiracy to defraud. The argument put forward by counsel for the appellant in that case was that, by virtue of the historical development of the offence, there could be no fraud without deceit, and that to be fraud there must be some act which operates on the mind of the victim, who acts or abstains from acting because of it to his detriment (p. 824). In that landmark decision, the court rejected that argument and found that it was not necessary to establish a nexus between the conspirator and the victim whereby the former's false representations operated on the mind of the victim. Lord Diplock, agreeing with the speech of Viscount Dilhorne, puts forward at p. 841 the following proposition as being established:

Where the intended victim of a 'conspiracy to defraud' is a private individual the purpose of the conspirators must be to cause the victim economic loss by depriving him of some property or right corporeal or incorporeal, to which he is or would or might become entitled. The intended means by which the purpose is to be achieved must be dishonest. They need not involve fraudulent misrepresentation such as is needed to constitute the civil tort of deceit. Dishonesty of any kind is enough.

[36] The Newfoundland Court of Appeal dealt with a similar argument in R. v. Warren, 2010 NLCA 29. The fraudster induced investors to invest in laser technology. In fact there was no technology to invest in. The fraudster converted the funds to his own use. One of the victims was David Squires. David Squires invested and lost all his money. David’s brother Marty Squires also invested and lost all his money. Marty never dealt directly with the fraudster. He dealt with the fraudster through his brother, David. The trial judge acquitted the fraudster. In overturning the acquittal and entering a conviction, the Court of Appeal stated:

The dishonest act was carried out through the innocent medium of David Squires. Marty Squires knew where the money was supposed to go when he gave it to David Squires to pass on to Mr. Warren. It was for investment in advanced laser technology as fraudulently promoted by Mr. Warren.

Logic does not imply that an accused person ascertain who he is defrauding. Most significantly, the law does not require it (s. 380(1)(a) of the Criminal Code) or make it necessary to establish a direct connection between the accused and a particular complainant, as stated by Lamer J., in R. v. Côté, [1986] 1 S.C.R. 2, at para. 33:

Fraud consists of being dishonest for the purpose of obtaining an advantage and which results in prejudice or a risk of prejudice to someone's "property, money or valuable security". There is no need to target a victim to commit fraud, and the victim may not be ascertained.

[37] It is irrelevant whether or not Mr. Chan had the authority to act on behalf of Minton, Sinomec, or Ms. Fun. The identity of the victim is not an element of the offence of fraud. The focus of the jury’s inquiry should not be on Mr. Chan’s authority. The focus should be on whether Mr. Nowack’s misrepresentations placed the economic interests of the victims at risk. In my view, a jury could certainly make that finding.

[38] I must also disagree with the notion that the funds might have come from Mr. Chan, and, therefore, that the economic interests of the victims named in the indictment were not placed at risk. There was ample evidence in the form of bank transfers that the funds came from Hong Kong in the case of Sinomec and Ms. Fun. Indeed, the bank documents show that these were the originating entities of the funds. The banking documents also show that Minton sent funds to Mr. Nowack to invest. It is a competing inference that Mr. Chan actually loaned the money to Minton or to his aunt. At this stage, competing inferences must be drawn in favour of the Crown.

[39] Accordingly, I find that there is evidence upon which a jury could convict Mr. Nowack on these three counts.

Conclusion

[40] As I noted, the application is dismissed.

R.F. Goldstein J.

Released: September 17, 2019