Meyer v. Bayne, 2012 ABQB 659

Court of Queen ’ s Bench of Alberta Citation: Meyer v. Bayne, 2012 ABQB 659 Date: 20121101 Docket: 0903 09686 Registry: Edmonton Between: Richard Meyer and Boris Dwornik Plaintiffs - and - Ross Vincent Bayne and Lloyd Culham Defendants (Parties to the Trial) - and - John S. Morgan, Marian I. Morgan, Morgan European Holdings APS also known as Money Talks, Inc, APS and Eli Heckscher Defendants (Non Parties to the Trial) _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice Sterling Sanderman _______________________________________________________

[ 1 ] John S. Morgan and Marian I. Morgan, a married couple, defendants but non-parties at this trial, languish in jails in the United States of America. Mr. Morgan is serving a sentence of 121 months after having entered guilty pleas to a charge of conspiracy to defraud the United States of America and 16 counts of money laundering. His wife is serving a sentence of 420 months after having been convicted by a jury of 22 counts of illegal activity based on the same circumstances. [ 2 ] The Morgans are also subject to restitution orders in excess of $17 million.

The Plaintiffs in this action are listed as victims of the Morgans ’ fraudulent activity and have been granted restitution orders in their favour. Richard Meyer has had restitution in the sum of $500,000.00 ordered. Boris Dwornik has a restitution order in his favour in the sum of $100,000.00 [ 3 ] There is no doubt that the Morgans and their corporate creation, Morgan European Holdings APS (MEH), engaged in a wide-spread pattern of fraudulent activity that deprived a number of individuals of sizable sums of money. The Morgans ran a variation of a Ponzi scheme known as a “ prime bank ” investment con.

Expert evidence was given at this trial in relation to how these schemes work. [ 4 ] Mr. Dent, the expert called on behalf of the Plaintiffs, a forensic accountant who was qualified as an expert witness in the area of prime bank instrument schemes, holds a number of professional designations including a C.A. and that of a Certified Fraud Examiner. He adopted the definition of a “ prime bank ” instrument scheme offered by the Securities & Exchange Commission of the United States of America.

The definition adopted is as follows: Prime bank programs often claim investors ’ funds will be used to purchase and trade “ prime bank ” financial instruments on clandestine overseas markets in order to generate huge returns in which the investor will share. However, neither these instruments, nor the markets on which they allegedly trade, exist. [ 5 ] His evidence established that these scams possess common characteristics. They include: (

a) promises of astronomical profits with no real risk to the investor; (

b) investors are told that the investment utilizes the issuing and trading of prime bank financial instruments on international markets involving well-respected international institutions such as the World Bank, the International Monetary Fund, the US Federal Reserve, and others who issue or guarantee or endorse these instruments; (

c) investors are told that they are among the privileged few who are entitled to pool their money to invest in these secret programs that are reserved for top financiers; (

d) because the opportunity is restricted in this fashion, the investor cannot investigate or make any inquiries in relation to the investment and has to execute a non-disclosure agreement; (

e) investors are told that the investment is so secret that regulators and banks will deny the existence and validity of this type of investment program; (

f) investors are told that the financial instruments that are employed in this scheme are so technical and complex that they are far beyond the ordinary investors understanding, experience or business acumen and therefore no meaningful details can be provided to the investor about the investment and how such huge profits are realized; (

g) the program refers to official sounding financial terms and instruments, such as prime bank notes, prime bank guarantees,

standby letters of credit, bills of exchange, certificates of deposit, or zero coupon books. Some of these instruments really do exist in the financial market, but others do not; (

h) quite simply, the investor is told that any money that they invest will be held in trust in order to back the phenomenal type of trading that will guarantee extremely high profits at no risk to them. They are told that the principle is never put at risk as it is only used to guarantee a sure thing. In essence, they are asked to trust without question the representations that are made by those soliciting the investment. They are told that they have been chosen above others for this marvellous opportunity and that they should not question their good fortune. (

i) those involved in recruiting investors to the scheme fill the role of legitimizers to prospective investors. Their familiarity with the investors and the information they provide lends authenticity to the scheme; (

j) rollover provisions can be part of the investment scheme and they are designed to keep the investors money in the hands of the scammers and to delay the need to repay any funds. [ 6 ] Those soliciting investments rely upon the greed of the investor to override his or her common sense. Their ability to reason succumbs to their desire to make a fabulous return at no risk to them. The Plaintiffs in this case, invested money with MEH and lost it all. [ 7 ] Mr.

Meyer sold a business that he had been instrumental in developing through his industry and hard work and was looking for a place to invest some of the sale proceeds. He had $500,000.00 that he was prepared to invest. He did so. He lost it. [ 8 ] Mr. Dwornik did not have similar assets. He had access to $30,000.00 cash. In order to invest $100,000.00 in MEH, he borrowed an additional $70,000.00. He lost his entire investment. In order to repay the money that he borrowed to take advantage of this “ cannot miss ” opportunity, he had to sell his home. Mr.

Dwornik and his wife have been devastated by the foolish investment they made. [ 9 ] No doubt, the Morgans are the true villains in this drama. They set up MEH. They, in conjunction with recruiters they paid to find investors, convinced a number of individuals across North America to invest in MEH. Their sales approach was simple. They convinced investors that John Morgan had a special arrangement with one of the top banks in the world. This bank only dealt with the 50 leading global financial institutions.

Money that was invested with MEH would be pooled with other funds that would back or guarantee certificates that were traded between these financial institutions. This was finance on such an involved level that even sophisticated investors did not have the requisite knowledge or experience to understand how profits were generated. [ 10 ] Mr. Morgan and his associates convinced the investors that all they needed to know was that their principle was never at risk. Any funds that they were to invest would be held in an escrow account at a lawyer ’ s office in Denmark. The funds would never leave this account.

Enormous profits that would be generated could be reinvested in the scheme. Investors were told that they could reclaim the original investment at any time. [ 11 ] The length of the investment was short. Investors were told that they could expect to generate a profit of 200 percent within four months. The attractiveness of this investment was enhanced by the claim that the principle was never put at risk. Although John Morgan could not explain how the profits were generated, he referred to financial instruments in his conversations with the investors that appeared to have the air of legitimacy about them.

After having made fraudulent representations to potential investors and after having received their money, John Morgan did not invest it. He appropriated the funds for his use. [ 12 ] Some funds were returned to investors. This is a characteristic possessed by most Ponzi schemes. In order to deflect the attention of the authorities because of complaints made by investors, some funds were returned in order to forestall enquiries. [ 13 ] The Morgans did not approach all of the investors on their own to solicit funds. They relied upon other individuals to do this.

The Morgans had group leaders and their associates identify individuals who might be interested in investing in MEH. It is alleged that Mr. Bayne was such an individual. After having ascertained the initial interest of the investor and having prepared them for the final sales pitch, the investors would be put in touch with Mr. Morgan through a conference call. He would talk to the individual investors

over the telephone. Mr. Bayne was present for these conversations and he assisted Mr. Morgan in answering the inquiries made by investors. [ 14 ] Once the investor decided to provide funds to MEH, the funds were wired to Denmark to the office of Eli Heckscher, an attorney practising in that jurisdiction. Mr. Bayne facilitated the transfer of these funds. Once they went to Denmark they were gone forever. [ 15 ] It is alleged by the Plaintiffs that the Defendants were instrumental in convincing them to invest in MEH and that they performed an additional function for the Morgans.

It is alleged that the information they provided to the Plaintiffs and the way in which they conducted themselves legitimized the authenticity of the investment scheme being run by the Morgans. Furthermore, the Plaintiffs claim that for a significant period of time after they invested their money, the Defendants managed their account with MEH and actively stalled the Plaintiffs in their endeavour to discover what was happening with their money and any efforts to retrieve it. [ 16 ] The Plaintiffs allege that Mr. Bayne ’ s role was more significant than Mr. Culham ’ s.

The action against him is based upon their characterization of his role as a group leader. In this role, it is claimed that he solicited their funds as a front person for John Morgan and prepared them for the final sales pitch. The action is brought against Mr. Culham on the basis that he assisted Mr. Bayne in his endeavours to promote the fraudulent scheme to the Plaintiffs. The law suit is based upon the dual allegations of a civil conspiracy to unlawfully trade in fictitious securities and negligent misrepresentation. [ 17 ] Mr. Bayne and Mr.

Culham do not deny the extent and nature of the wrongdoing of John Morgan. They acknowledge it in full. They claim that they have been deceived to the same extent as the investors. They claim that they had no knowledge of the machinations of the Morgans. They claim that they believed that this was a viable investment opportunity that should have generated the returns promised without risking any investors ’ money.

There is no suggestion that they were involved in the transfer of funds from the escrow account but it is claimed that they are liable to the Plaintiffs for promoting the authenticity and viability of the investment scheme proposed by MEH. [ 18 ] Before setting out the facts that have been proven by the parties during the trial, it is necessary to comment upon the inherent credibility of the six ordinary witnesses called. Mr. Meyer, Mr. Dwornik and his wife testified for the Plaintiffs. Mr. Bayne, Mr. Culham and Mr. Gamble testified for the Defendants.

The three ordinary witnesses who testified for the Plaintiffs did so in a candid fashion. Although embarrassed by their actions in investing in MEH, they had clear recollections of the dealings they had with Mr. Bayne and Mr. Culham. This was a significant event in their lives and their memory of the events that led to their decision to invest remains clear. Their evidence was logical and delivered in a forthright and honest fashion. They did not embellish or attempt to place themselves in a better light than they deserved.

Their evidence in relation to their dealings with the Defendants is accepted without hesitation. [ 19 ] Mr. Bayne and Mr. Culham came to court with a prepared script that was read into the record.. They claimed that they had been deceived by Mr. Morgan because they believed in the legitimacy of his investment plan. Consequently, they claim that they cannot be held liable for being victimized by this man in the same fashion as the Plaintiffs. Their position collapsed when they were subject to cross examination and asked to explain documents that they had either created or dealt with in some fashion.

They could not answer any meaningful questions about the investment program that they were asking people to join. [ 20 ] They came to court to attempt to legitimize their actions after they discovered the extent of the Plaintiffs ’ case. Mr. Bayne introduced Exhibit 23 in this trial. He pointed to this document and asked the court to accept that this type of document convinced him that the scheme promoted by MEH was plausible. Unfortunately, this document was never provided to Mr. Bayne by Mr. Morgan prior to Mr. Bayne ’ s involvement with MEH.

It was a document that he obtained long afterward. [ 21 ] This is an example of Mr. Bayne ’ s attempt to sell a viable position to the court. He attempted to rely upon his charm, affability and perceived sales ability to convince the court that he was deceived in the same fashion as the Plaintiffs. His credibility suffers for a number of reasons. [ 22 ] Mr. Bayne did not satisfactorily address any of the allegations made against him. Other than offering a blanket denial of wrongdoing, his testimony was comprised of evidence of a very general fashion that had nothing to do with his dealings with Mr.

Meyer or the Dworniks. He gave general evidence in relation to the workings of the European marketplace and how trades can be made and

traced on the German stock market. Although interesting, it was not responsive to the allegations made by the Plaintiffs. [ 23 ] Mr. Bayne had difficulty in explaining what services one of his companies, Nexus Financial Consulting Group, performed. When pressed, the best he could come up with was that he was attempting to “ partner up ” early-stage technologies from the Orient with others in his network. Lack of specificity and baffle gab characterized portions of Mr. Bayne ’ s evidence. [ 24 ] He could not explain how the MEH program worked.

He held himself out to be a sophisticated financial advisor who ran successful companies. He took no steps to inquire about the validity of MEH ’ s program but blindly accepted what John Morgan told him. When pressed in cross examination why he could not find these things out, he claimed that John Morgan told him that this investment scheme was so secretive that he could not reveal the information to Mr. Bayne. [ 25 ] Mr. Bayne was very coy when he was asked what he expected to receive for compensation. He indicated that he hoped to obtain some compensation after the profits had been realized by the investors.

Documentary evidence led at the trial proved that he received $100,000.00 from a company controlled by John Morgan shortly after the Plaintiffs chose to invest in MEH. [ 26 ] Mr. Bayne claimed that some investors made money and pointed to three exhibits to support his claim. Exhibits 24, 25 and 26 indicate that three investors regained some or all of their initial investment. None of them made a profit. Mr. Bayne maintained this position even though he called one of these investors, Mr. Gamble, as a witness. Mr.

Gamble testified that not only did he fail to make a profit but he had a very difficult time in recovering his initial investment of $100,000.00 that was to be held in the escrow account. [ 27 ] Mr. Bayne claimed that he did not become suspicious about the fraudulent nature of MEH until July of 2009 when the American Securities Commission released information that alerted him to the fraudulent nature of Mr. Morgan ’ s creation. This claim is astounding having regard to the fact that as early as 2007 individuals in Edmonton who had knowledge of MEH were making suggestions about its fraudulent nature to Mr. Bayne.

Complaints came from investors recruited by Mr. Bayne and by an individual who was working out of his office who had knowledge of the investment scheme. [ 28 ] Mr. Bayne ’ s credibility is further diminished by the fact that he ran afoul of the Alberta Securities Commission and was found guilty of inappropriate activity in July of 2007 but did not reveal this to any investors. [ 29 ] Even though the American Securities Commission linked John Morgan and MEH to fraudulent activity in June of 2009, Mr.

Bayne testified that this did not create any concern in his mind for the security of the funds of any individuals who had invested through him. The reason that he claimed that he was not concerned is that the information circulated by the American Securities Commission did not specifically deal with an operation centered in Denmark. It spoke of Florida and Europe. Mr. Bayne claimed to be comfortable with his conclusion even though the Plaintiffs and other investors had been complaining to Mr. Bayne about the security of their investments since the fall of 2007. It is interesting to note that when Mr.

Bayne was apprised of this circular from the American Securities Commission, his reaction was to contact Marian Morgan for instructions how he should respond to this information being circulated to investors. [ 30 ] When pressed for answers on cross examination about matters that should have been clear in his mind, Mr. Bayne had a stock answer. It was “ I don ’ t remember. ” This answer was given on many occasions during his cross examination. [ 31 ] Mr.

Bayne ’ s credibility was further eroded by the manner in which he behaved during the Summer of 2009 when he attempted to absolve himself of any blameworthiness in relation to the investment scheme. In return for investors signing a waiver acknowledging that Mr. Bayne was not complicit in convincing them to invest, he promised to assist them in acquiring their initial investment. [ 32 ] For these and other obvious reasons, Mr. Bayne was not a credible witness. He avoided direct questions. He attempted to portray himself as a victim. He continued to maintain the con throughout the trial.

Where his evidence conflicts with that of the Plaintiffs, theirs is accepted without hesitation. [ 33 ] Mr. Culham ’ s role in this endeavour was secondary to that of Mr. Bayne. He assisted Mr. Bayne and acted upon his

instructions. He had no dealings with the Dworniks and his involvement with Mr. Meyer was preparatory. He adopted the same position as Mr. Bayne at the trial. He put his position before the court through his prepared statement and it mirrored Mr. Bayne ’ s position. His testimony did not reveal the problems with credibility possessed by Mr. Bayne, but his blind adoption of the position advanced by Mr. Bayne in almost identical terminology affects the reliability of his evidence to a very considerable fashion.

Where his evidence conflicts with that of the Plaintiffs, theirs is accepted without hesitation. [ 34 ] Having made those comments in relation to the inherent credibility of the evidence led by the parties, the following facts can be found in good conscience. Mr. Meyer ’ s evidence is accepted as it was given. He was an unsophisticated investor who had money to invest after having sold his business prior to meeting Mr. Bayne or Mr. Culham. [ 35 ] In the Spring of 2007, he met Mr. Culham at a golf tournament. They played in the same foursome. Mr. Culham ascertained that Mr.

Meyer had money to invest and he suggested that he could be of some assistance to him. They arranged to met at Mr. Meyer ’ s farm at a later date. [ 36 ] Mr. Culham went to Mr. Meyer ’ s residence. He indicated to him that he had access to an investment opportunity that would offer a spectacular return in the area of 200 percent. Mr. Meyer was interested. On June 21, 2007, he met Mr. Bayne for the first time. [ 37 ] He met Mr. Bayne at his office in the Sun Life Building in Edmonton, Alberta. He was introduced by Mr. Culham who had a key to the office and let Mr. Meyer in. Mr. Culham touted Mr.

Bayne as one of the smartest businessmen in the city who was well connected in the financial community. At that time, Mr. Bayne promoted the basic investment scheme to Mr. Meyer. He indicated to him that this would be a high-return but low-risk investment. He could expect to make close to 200 percent on his investment. The investment would not be at risk as it would be held in an escrow account and would be pooled with other funds in order to back complicated transactions between leading banks in Europe. This initial pitch interested Mr. Meyer. He wanted to discuss it further with Mr. Morgan, the person who Mr.

Bayne claimed was well connected to a top international bank. [ 38 ] Consequently, on June 25, 2007, Mr. Bayne arranged a telephone conference call with Mr. Morgan. Mr. Culham, Mr. Bayne and Mr. Meyer met in Mr. Bayne ’ s office and contacted Mr. Morgan by telephone. Mr. Morgan reiterated the low-risk and high-return nature of the investment. He implied that Mr. Meyer was lucky to have been chosen by Mr. Culham and Mr. Bayne to invest in this proposal as membership was restricted and he should be grateful to his benefactors. [ 39 ] At this meeting, it was emphasized that Mr.

Morgan had a special status with the World Trade Bank which allowed access to the investment scheme. The World Trade Bank does not exist. [ 40 ] This opportunity seemed to be too good to be true to Mr. Meyer. He took certain steps to investigate its viability. When he asked a vice president of the Canadian Imperial Bank of Commerce about this scheme, he was told that she had never heard of it. This response was consistent with the claims of Mr. Morgan and Mr. Bayne that this was a secret opportunity known to few and certainly not within the knowledge of the normal banking community. [ 41 ] Mr.

Meyer did take a couple of other steps to determine the legitimacy of his investment. He googled the name of the lawyer whose escrow account would be used. He appeared to be a lawyer in good standing in Denmark. He made certain inquiries in relation to Mr. Bayne ’ s and Mr. Culham ’ s reputations. He was informed by people acquainted with them that they appeared to be honourable and had good reputations within their circle of friends. He did nothing more. Mr. Meyer concedes that his judgment was impaired by the prospects of this marvellous investment opportunity. [ 42 ] He accepted what he was told by Mr.

Bayne, Mr. Culham and Mr. Morgan at face value. All of the representations that were made to him were verbal. He received no documents and extremely little information as to how profits would be generated. Mr. Meyer made the decision to invest in the scheme and signed a contract committing $500,000.00 to MEH on June 27, 2007. He provided the money. It was sent to Eli Heckscher, the Danish lawyer. [ 43 ] It is interesting to note that during the period that Mr. Bayne and Mr. Culham were making these representations to Mr.

Meyer, three individuals who had invested money in MEH were having difficulty getting their original investment back. Exhibit 24

indicates that Allan Gamble received his $100,000.00 principle on March 15, 2007. Exhibit 24 reveals that Mary Zadkovich received $80,000.00 of a $100,000.00 investment on May 1, 2007. Exhibit 26 reveals that Mr. Culham received $100,000.00 of a $100,000.00 investment in July of 2007. None of these individuals made a profit. It appears as if Ms. Zadkovich may have lost $20,000.00. [ 44 ] Mr. Gamble and Mr. Culham are related to the Defendant, Lloyd Culham. Ms. Zadkovich was a friend of Mr. Bayne ’ s and was involved with him in recruiting investors for MEH. Mr. Bayne and Mr.

Culham would have known about the difficulties these three investors had in securing the return of their initial investment. [ 45 ] Nevertheless, during the latter part of the month of June of 2007, they represented to Mr. Meyer without hesitation the viability of his guaranteed investment with MEH. [ 46 ] After Mr. Meyer ’ s investment was secured, Mr. Bayne and Mr. Culham continued to manage his account. They communicated with him by email and met with him in Mr. Bayne ’ s office.

They continued to inform him that his investment was doing well and wondered what he was going to do with the profits. [ 47 ] The initial investment was for a period of four months. Towards the end of the month of September of 2007, Mr. Meyer was led to believe that he had a total of $1.5 million coming to him. He had the original $500,000.00 investment plus a profit of $1 million. Mr. Culham suggested to Mr. Meyer that he reinvest this sum with MEH and allow the investment to grow. Mr. Meyer was prepared to leave $1,300,000.00 invested but wanted $200,000.00 of his initial investment for other purposes.

Consequently, he signed a rollover agreement in Mr. Bayne ’ s office to do this. The rollover agreement was signed on October 1, 2007. Mr. Meyer fully expected to receive $200,000.00 from the escrow account leaving $300,000.00 of his initial investment and his $1 million profit there for reinvestment. [ 48 ] His expectations were not realized. He did not see a cent of this money. He made requests for it. He was told that there were some problems that were minor and that he should be patient. Mr. Meyer indicated that after November of 2007, Mr. Bayne and Mr.

Culham were much less attentive to him and his investment than they had been in the past. [ 49 ] During the latter part of the month of September and the early part of October of 2007, Mr. Bayne and Mr. Culham would have known that the integrity of MEH was being questioned by investors and by Mr. Moerman, an individual working in Mr. Bayne ’ s office who had access to some of these investment files. In an email dated September 18, 2007, Mr. Bayne addressed the accusation that the MEH investment was a scam. During the first two days of the month of October, he communicated with Mr.

Moerman by email in relation to this matter. Mr. Moerman had informed Mr. Bayne in no uncertain terms that he believed that any investment with Morgan was a fraud and that Mr. Bayne should extricate himself from any involvement. In a passionate plea, Mr. Moerman asks Mr. Bayne to do the right thing. [ 50 ] Mr. Bayne responded that this was a legitimate investment and indeed a large New York law firm had been retained to investigate the matter and found it to be so satisfactory that the firm had recommended that some of their clients participate in the investment. Of course, at the trial, Mr.

Bayne could not provide the name of the law firm in New York or any information that may have been forwarded to him from it. His email to Mr. Moerman was clearly an attempt to deflect any criticism and embarrassing questions about MEH. [ 51 ] At the time that Mr. Meyer invested and at the time that he was convinced to keep his funds invested, both Mr. Culham and Mr. Bayne would have been aware of the very visible warning signs that there was something wrong with this investment. They ignored the warning signs and actively sought Mr. Meyer ’ s involvement and encouraged his continued participation.

They did not just provide him with information and allow him to make the decision for himself as they claimed and their protective document, entitled “ Request for Information ” suggests. The fact that Mr. Meyer and the Dworniks were required to sign such a form to indicate that they were not being influenced by Mr. Bayne to make the decision to invest in MEH is a further sign of the inherent dodginess of the investment scheme. [ 52 ] In any event, the information that they provided to Mr. Meyer was patently false. As Mr. Dent testified and Mr.

Bayne acknowledged on the witness stand, there is no single financial instrument existing in the marketplace that can give the returns promised by MEH with no risk. High returns come with investments that carry high risk. That is the reality of the marketplace. Mr. Bayne could not provide Mr. Meyer with any information in relation to the proposed investments because Mr. Morgan had no intention of using funds that were sent to him for investment purposes.

[ 53 ] Like Mr. Meyer, the Dworniks were unsophisticated investors. They did not have substantial assets. They had to borrow money in order to invest in MEH. They first heard of this investment opportunity from a woman who attended their church. They were recruited by her. They were interested in purchasing a residence and when they heard of the possibility of making a great return with no risk, they were interested. The church member, Mary Zadkovich, put them in touch with Mr. Bayne. They had a conversation with him on the telephone. The Dworniks and Ms. Zadkovich were in Ontario. Mr.

Bayne was in Edmonton. [ 54 ] The first contact with Ms. Zadkovich took place in February of 2007. Conversations with her and Mr. Bayne continued into March. On March 29, 2007, Boris Dwornik entered into a contract with MEH to invest $100,000.00. This was after the Dworniks had been groomed by Mr. Bayne to invest with MEH. The approach that he took with the Dworniks was similar to his dealings with Mr. Meyer. All of the positive attributes in relation to this investment that were mentioned to Mr. Meyer were mentioned to the Dworniks. Eventually, the Dworniks talked to Mr. Morgan and Mr.

Bayne before they signed the contract with MEH. As they had extolled the positive aspects of the investments to Mr. Meyer, they did so to the Dworniks. [ 55 ] The Dworniks ’ money was sent to Eli Heckscher ’ s escrow account. It was the last the Dworniks saw of this money. Mr. Bayne held himself out to be a group leader with MEH and emphasized to the Dworniks that he was in a position to ensure that they could become involved in this opportunity. As with Mr. Meyer, it was emphasized that only a select few individuals were chosen for this opportunity and it was because of Mr.

Morgan ’ s connection to the World Trade Bank that they could all profit. [ 56 ] Prior to talking to Mr. Bayne on the telephone, the Dworniks knew nothing of his background. Still, they trusted him because of his connection to a member of their congregation. The fact that Mr. Bayne was a member of the same church and his father a minister of it brought them comfort. They trusted this man who appeared to them to be working closely with Mr. Morgan. As with Mr. Meyer, all of the information the Dworniks received from Mr. Bayne and Mr. Morgan was verbal. [ 57 ] Mr.

Bayne was the individual who confirmed with the Dworniks that the money had arrived in the escrow account in Denmark and he was the individual who convinced the Dworniks to keep their initial investment and profits earned in the account for reinvestment on two occasions. In June and September of 2007, Mr. Dwornik instructed Mr. Bayne to reinvest his money with the exception of $100,000.00 that he desired to have returned to him so that he could pay back the money he borrowed for the initial investment. [ 58 ] Like Mr. Meyer, Mr. Dwornik made some cursory inquiries in relation to the legitimacy of Mr.

Bayne and Eli Heckscher. He did internet searches in relation to the Danish lawyer and to Mr. Bayne ’ s company, Arcadia Investments. This nominal inquiry revealed that Mr. Heckscher appeared to be a lawyer in good standing in Denmark and that Mr. Bayne appeared to head and operate an investment firm in Edmonton. No further checks were made as the Dworniks felt they could trust a church member whose father was a minister. [ 59 ] The period in which Mr. Bayne was dealing with the Dworniks is similar to the time in which he dealt with Mr. Meyer.

All of the information that he had in relation to concerns being raised about MEH by others was possessed by him when he dealt with the Dworniks. It is significant that at the time that Mr. Bayne and Mr. Culham dealt with Mr. Meyer and Mr. Bayne dealt with the Dworniks that neither of them was registered with the Alberta Securities Commission to trade in securities in this province. In fact, Mr. Bayne had been involved in a hearing before the Alberta Securities Commission alleging wrongdoing on his part.

On June 30, 2007, the Commission issued a written decision finding him in contravention of section 75(1) (a), section 92(3) (b)(

i) and section 92(3)(

c) of the Securities Act , S.A. 1981, c. S-6.1. Sanctions were imposed upon Mr. Bayne by the Alberta Securities Commission in a written decision issued January 25, 2008. Mr. Bayne kept the difficulties he was having with the Alberta Securities Commission from Mr. Meyer and the Dworniks. [ 60 ] There was no evidence led at this trial that suggested Mr. Culham had any dealings with the Dworniks. They only became aware of his existence late in the day when his name appeared on a document prepared either by or for Mr. Bayne looking for protection against a finding of liability in relation to his activities.

Consequently, there can be no successful law suit brought by them against him. [ 61 ] The Defendants ’ actions in relation to the Plaintiffs can be summarized in the following fashion. Mr. Bayne and Mr. Culham actively sought investors for MEH. They took no steps to investigate this secretive investment scheme that they were promoting. They attempted to give themselves protection from criticism or liability by having potential investors sign a “ Request for Information ” form that absolved them from any responsibility. After they convinced Mr. Meyer to invest in MEH, they managed his file and oversaw the

completion of the roll-over agreement. Mr. Culham had no dealings with the Dworniks, but Mr. Bayne ’ s involvement with them was substantial. He recruited them to the MEH investment scheme and managed their file. [ 62 ] Neither Mr. Bayne nor Mr. Culham had enough faith in the scheme to invest in this golden opportunity themselves. At the time that Mr. Meyer and the Dworniks were being recruited, there were significant warning signals evident to Mr. Bayne and Mr. Culham that would have alerted them to real concerns about the legitimacy of MEH. These same types of warning signals were present at the time that Mr.

Meyer and the Dworniks were encouraged to sign the roll-over agreements. Although alerted to these concerns, Mr. Bayne and Mr. Culham did nothing to investigate them. They continued to promote the viability of MEH and were willfully blind to any concerns brought to their attention. Mr. Bayne appeared to engage in a coverup after Mr. Moerman brought his concerns to the attention of Mr. Bayne. [ 63 ] Neither Mr. Bayne nor Mr. Culham were registered with the regulating body required by the Securities Act of this province.

They were clearly asking people to invest sizable sums of money in what appeared to be securities without being licensed to do so. From these facts can liability be attached to either Defendant? [ 64 ] The Plaintiffs argue that Mr. Bayne and Mr. Culham entered into an agreement to conduct trades in securities in breach of the Securities Act of this province. They submit that this is an unlawful act and this conduct is actionable under the tort of conspiracy. [ 65 ] The Securities Act passed by the legislature of Alberta is designed to prevent the illegal trade in securities.

Section 75 of the Securities Act prohibits a person or company from trading in a security if the trader has not been registered with the executive director of the Commission. Registration is required to engage in this type of conduct. Section 110(1) of the Act prohibits the distribution of a security if no prospectus has been filed with the Commission. [ 66 ] These requirements are designed to give protection to potential investors.

The registration requirement is intended to ensure that those who are licensed to trade with or on behalf of the public are honest individuals who are properly qualified to carry out this task. Registration carries with it the need to meet standardized proficiency requirements. Those registered to carry out this function are required to fulfill a protective role in relation to purchasers of securities. Only securities that are suitable for any purchaser should be offered to them. [ 67 ] The filing of a prospectus gives further protection to any potential investor.

It informs them in relation to the nature of the investment and the risks inherent in making it. It provides prospective investors and their advisors with the information they need to enable them to make an informed decision in relation to the viability of the potential investment. [ 68 ] Failure to comply with either of these requirements circumvents the purpose of the Securities Act . Neither Mr. Bayne nor Mr. Culham were registered to allow them to trade in securities and neither had filed any prospectus in relation to this security. [ 69 ] The investment contracts promoted by Mr. Bayne and Mr.

Culham are trades in securities.

Section 1(ggg) (xiv) of the Securities Act reads: (ggg) “ security ” includes . . . (xiv) any investment contract; [ 70 ] The fact that the Morgan scheme was fraudulent does not change the nature of the proposed investment contract. These fictitious securities arrangements are still caught by the Securities Act . In Re Sabourin , 32 O.S.C.B. 2707 , The Ontario Securities Commission held at para. 47:

47 For the reasons that follow, we find that the investment schemes were a sham and had no basis in reality. Nonetheless, we haveno doubt the investment schemes entered into by the investors who testified before us were “investment contracts,” and were therefore“securities.” We find that the Respondents, other than Keaveney, solicited investments from investors, ostensibly for purposes ofinvesting for high returns at no or limited risk.

In our view, having represented and sold the investment schemes on this basis, theRespondents cannot now argue that the investment schemes had no basis in reality (because the funds were misappropriated for otherpurposes) and therefore did not constitute a security. [71] In Sabourin, the Ontario Securities Commission adopted the approach mandated by the Supreme Court of Canada in PacificCoast Coin Exchange of Canada v. Ontario Securities Commission (1977), (SCC), 80 D.L.R. (3d) 529. The SupremeCourt of Canada held that the term “investment contract” should be given a flexible

interpretation that is broad enough to include “thecountless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” There can be nodoubt that Mr. Bayne and Mr. Culham were trading in securities. [72] Do Mr. Bayne and Mr. Culham qualify for an exemption from the registration requirement and prospectus requirements ofthe Securities Act? In certain circumstances the protections afforded by the statutory requirements are deemed unnecessary.

Individualswho qualify as “accredited investors” are presumed to be sufficiently sophisticated to make important investment decisions on their ownand do not need the assistance of a registered trader or information provided by a prospectus. [73] The Defendants in this case cannot rely upon this exemption. The evidence established that neither Mr. Meyer nor Mr.Dwornik were accredited investors. There knowledge in relation to trading in securities was minimal. They lacked sophistication andexperience in this area. They were neophytes.

They were the type of investors that would require the assistance of a broker or financialadvisor to assist them in their investment plans. [74] Any individual attempting to rely on an exemption in trading in securities must have made a reasonable effort to take stepsthat were reasonable in the circumstances to ensure that the exemption was available to them at the time of the trading of the security.(see Re Euston Capital Corp., [2007] A.B.A.S.C. 75 (Alberta Securities Commission)). Mr. Bayne and Mr. Culham took no such steps. [75] There is a further impediment to either Mr. Bayne or Mr.

Culham relying upon the accredited investor exemption. Before anindividual can claim this exemption, they must file a report of the trade with the Alberta Securities Commission or other localjurisdiction within ten (10) days of the trade. The Alberta Securities Commission has adopted national instrument 45-106.

Section 6.1mandates this prerequisite. For all these reasons, the accredited investor exemption defence is not available to the Defendants. [76] It is clear that Mr. Bayne and Mr. Culham engaged in acts in furtherance of a trade in securities. They engaged in a course ofconduct that caused Mr. Meyer and Mr. Dwornik to behave in a certain fashion.

The Defendants directed their activities towards thePlaintiffs in order to encourage them to invest in MEH and were successful in doing so. [77] The acts performed by the Defendants included meeting with the individual investors and providing them with informationabout the proposed investment, grooming the investors for the final sales pitch from John Morgan, providing the investors withagreements to execute and continuing to manage the files of the Defendants. [78] Their conduct is clearly caught by s. 1(jjj) of the Alberta Securities Act which defines trade in the following fashion: (jjj) “trade” includes (

i) any sale or disposition of a security for valuable consideration . . . . . . (vi) any act, advertisement, solicitation, conduct or negotiation made directly or indirectly in furtherance of anything referred to in

subclauses (

i) to (v); [79] Both Mr. Bayne and Mr. Culham engaged in acts that were prohibited by the Securities Act. They blatantly breachedestablished statutory requirements and engaged in unlawful conduct. [80] The tort of civil conspiracy is open to the Plaintiffs if they can show an agreement between the Defendants to do an unlawfulact. The Canadian law of torts acknowledges two types of actionable conspiracy. The first is a conspiracy to injure. The second is aconspiracy by unlawful means (see Canada Cement LaFarge Ltd. v.

British Columbia Lightweight Aggregate Ltd., (SCC), [1983] 1 S.C.R. 452 (SCC) at pages 471 - 472). In the case advanced by the Plaintiffs, there is not an allegation of a conspiracy toinjure but one of a conspiracy by unlawful means. [81] Where this type of conspiracy is alleged, the Plaintiffs must show that the Defendants should have known that injury to thePlaintiff would ensue. [82] To prove a conspiracy by unlawful means, the following components must be proven to the civil standard of proof. Anagreement to act must be shown to exist between the Defendants.

Carrying out acts contemplated by the agreement must be proven.Here, it has been established that the Defendants engaged in a concerted plan to market the MEH program. [83] Secondly, it has been established that they engaged in unlawful conduct in doing so by violating the Securities Act. Thirdly,the Plaintiffs have established that the actions of the Defendants were directed towards them and they should have known that there wasa likelihood that injury to the Plaintiffs would result. Lastly, the Plaintiffs have established that they suffered real injury as a result of theactivities of the Plaintiffs.

Having proven these four factors, the Plaintiffs have proven their case against the Defendants by establishingtheir liability based upon the tort of conspiracy. [84] The Plaintiffs also allege that the Defendants are liable because of the negligent misrepresentations that were made as theMEH program was being touted. In Queen v. Cognos Inc., (SCC), [1993] 1 S.C.R. 87 (SCC) at page 110, JusticeIacobucci set out the required elements for a successful negligent misrepresentation claim.

He stated: The decisions of this Court ... suggest five general requirements: (1) there must be a duty of care based on a “special relationship”between the representor and the representee; (2) the representation in question must be untrue, inaccurate, or misleading; (3) therepresentor must have acted negligently in making said misrepresentations; (4) the representee must have relied, in a reasonable manner,on said negligent misrepresentations; and (5) the reliance must hae been detrimental to the representee in the sense that damagesresulted. [85] The Plaintiffs have established that there was a duty of care based on a special relationship between the Defendants and them.The Defendants were attempting to recruit the Plaintiffs to invest sizable sums of money in the MEH program.

They held themselves outas individuals who had the key to this opportunity and actively sought the participation of the Plaintiffs. [86] The representations made by the Defendants to the Plaintiffs in relation to the validity of the MEH investment werecompletely false. [87] The Defendants acted negligently in making these representations. They took no steps to ascertain the legitimacy of the MEHscheme.

Even when presented with evidence that would have caused any reasonable individual to doubt its legitimacy, the Defendantscontinued to tout the value of keeping the Plaintiffs funds in this investment. [88] Absent the misrepresentations made to them by the Defendants, the Plaintiffs would not have invested funds in MEH. Theirreliance upon the representations of the Defendants was total. This reliance was detrimental to the Plaintiffs in that each one lost their

entire investment. [89] As indicated earlier, Mr. Culham had no dealings with the Dworniks. He was not involved in soliciting their funds forinvestment. His dealings were restricted entirely to the investment contemplated by Mr. Meyer. His liability cannot be established oneither aspect of the law suit in relation to the Dworniks but is established in both manners in relation to Mr. Meyer’s investment. [90] Mr. Bayne’s liability is established in relation to both Plaintiffs in the two ways in which the law suit has been advanced. [91] Consequently, Mr. Meyer is entitled to judgment against Mr. Bayne and Mr.

Culham in the sum of $500,000.00 US. Thevalue of the American dollar is to be determined as of the date he provided the funds for investment. Boris Dwornik is entitled tojudgment in the sum of $100,000.00 US against Mr. Bayne only. The value of the American dollar is to be determined at the time heinvested the funds with MEH. Both Plaintiffs are entitled to the correct calculated prejudgment interest. [92] In their Statement of Claim, the Plaintiffs sought punitive damages against the Defendants.

Punitive damages are awardedonly in exceptional cases where the conduct of the Defendant has been malicious, oppressive and high handed. It is conduct that offendsthe Court’s sense of decency. Punitive damages can only be awarded where the misconduct represents a marked departure from ordinarystandards of decent behaviour. Their purpose is to punish this type of conduct. Punitive damages are awarded in addition to anycompensation that the Plaintiffs may be entitled to (see Hill v. Church of Scientology of Toronto, (SCC), [1995] 126 D.L.R. (4th) 129 S.C.C. and Whiten v.

Pilot Insurance Company, [2002] 209 D.L.R. (4th) S.C.C.) [93] These Defendants completely ignored the licensing requirements imposed upon them by the Securities Act of this provincewhen they agreed to promote the MEH investment scheme to friends and acquaintances. They took no steps to ensure the legitimacy ofthe investment they were promoting. When provided with solid information that would have raised concerns in the mind of anyreasonable individual, they chose to ignore it.

Rather than embarking upon a course of action that might have improved the position ofthe investors, they chose to attempt to ignore the warning signs and took active steps to absolve themselves of any wrongdoing. This isthe type of conduct that attracts punitive damages. [94] Mr. Bayne’s involvement was much greater than Mr. Culham’s. Mr. Meyer is entitled to punitive damages in the sum of$25,000.00 from Mr. Bayne and $10,000.00 in punitive damages from Mr. Culham. Mr. Dwornik is entitled to punitive damages in thesum of $15,000.00 from Mr.

Bayne. [95] In their Statement of Claim, the Plaintiffs claimed a number of other remedies. A great number of them could not or shouldnot be granted based upon the evidence that was presented at the trial. If the Plaintiffs wish to advance any argument in relation to otherremedies, they are entitled to do so. [96] The Plaintiffs sought costs on a solicitor- and-own-client basis. The manner in which the defence was conducted by theDefendants on their own behalf does not warrant such a costs order. The Plaintiffs are entitled to ordinary costs.

Heard on the 24th day of September, 2012 to the 28th day of September, 2012. Dated at the City of Edmonton, Alberta this 31st day of October, .

Sterling Sanderman J.C.Q.B.A. Appearances: G. James Thorlakson, Miller Thomson LLP for the Plaintiffs Defendants on their own behalf