Mewburn v Mowbrey Gil LLP, 2022 ABKB 810
Opinion
Court of King’s Bench of Alberta Citation: Mewburn v Mowbrey Gil LLP, 2022 ABKB 810 Date: 20221202 Docket: 1103 00745 Registry: Edmonton Between: Robert Mewburn, Charity Mewburn by her Legal Assignee, Robert Mewburn Plaintiff(s) - and - Mowbrey Gil LLP Defendant _______________________________________________________ Reasons for Decision of the Honourable Justice Robert A. Graesser _______________________________________________________ Table of Contents Introduction . 2 Overview of Evidence at Trial 3 Key evidence . 6
PFK 2008 Financial Statements . 11 FMC Statements . 15 FMC 2010 . 16 Differences between 2009 and 2010 FMC Statements . 17 Reconciling PFK statements with FMC Statements . 17 CICA Proceedings . 18 Bankruptcy Proceedings . 19 Securities Act Prosecution . 20 Admitted Facts . 20 CICA Standards . 20 Expert Evidence . 23 Justin Thoman . 23 Henrietta Wildeman . 25 Mowbrey Gil Response . 26 Robert Mewburn’s Position on the Case . 28 Mowbrey Gil Position on the Case . 29 Case law .. 30 Negligent Misrepresentation . 30 1. Duty of Care . 30 Proximity . 30 Relationship . 30 Undertaking . 30 2.
The Representation Must be Untrue, inaccurate or misleading; and . 30 3. The Representor Must Have Acted Negligently in Making the Misrepresentation . 30 Visionwall Narrative . 30 Visionwall Analysis . 30 Negligence of Gordon Hathorn . 30 Conclusions on Negligence . 30 Other Issues . 30 4. Reasonable reliance on PFK financial statements and representations from Gordon Hathorn 30 5.
The reliance must have been detrimental to the representee in the sense that damages resulted. 30 Defences . 30 Champerty and Maintenance . 30 Contributory Negligence . 30 Alternative Conclusion . 30 Damages . 30 Damages for loss of Investment 30 Enhanced Interest 30
Costs . 30 Conclusion . 30 Introduction [ 1 ] This decision results from a trial held in June 2022. Robert Mewburn (“Robert”) and his late sister, Charity Mewburn (“Charity”), were investors in an Edmonton investment firm Peers Kristiansen Foster Inc. (“PFK”) and its subsidiary Federal Mortgage Corporation (“FMC”). Their mother Elizabeth Mewburn was a friend of one of the daughters of HME Evans, a prominent Edmonton and one-time Edmonton mayor. HME Evans founded HME Evans & Company, Limited (“Evans Limited”) in 1911 as an investment firm.
Federated Mortgage Corporation (“FMC”) was formed in 1967 as an entity for mortgage lending. [ 2 ] After HME Evans’ death in 1967, Evans Limited was managed by Mr. Evans’ grandson Jeremy Jay Peers (“Mr. Peers”), as was FMC. In 1969, Mr. Peers took over control of Evans Limited, but only had a minority interest in it. [ 3 ] Peers Foster Kristiansen Inc. (“PFK”) was formed in 1994 and continued to control Evans Limited.
PFK acquired 49% of the shares in FMC and continued to control that company as well. [ 4 ] Elizabeth Mewburn and her holding company Miramichi Investments Ltd. (“Miramichi”) became an investor in PFK sometime in the early 1990s. Robert and Charity eventually became investors in PFK themselves. Elizabeth Mewburn died in 2005 and left her investments in PFK and a house in Victoria, BC to her children Robert and Charity.
Robert and Charity maintained their investments and the inherited investments with PFK and FMC until PFK and FMC went bankrupt in 2010. [ 5 ] Mowbrey Gil LLP (“Mowbrey Gil”) is a firm of Chartered Accountants (now Certified Professional Accountants) practicing in Edmonton. At all relevant times, they were the outside accountants for PFK and FMC and prepared annual financial statements for those corporations. Annual financial statements after 2005 were prepared on a “Review Engagement” basis. [ 6 ] Mowbrey Gil was also the accountant for Elizabeth, Robert and Charity, and their corporation Miramichi.
Mowbrey Gil prepared annual financial statements for Miramichi, also on a “Review Engagement” basis. Mowbrey Gil also provided tax and advisory services to Robert, Charity and Miramichi when Miramichi was sold to PFK in exchange for PFK shares in 2008. [ 7 ] This action was commenced by Robert and Charity in 2011. It was amended as a result of an order dated October 28, 2013, changing the proceedings to an intended class proceeding. The Amended Statement of Claim reflected Robert’s new status as Charity’s legal assignee as she had by then passed away.
It added a number of Plaintiffs and a number of new Defendants, including Mowbrey Gil. [ 8 ] Mowbrey Gil’s Statement of Defence filed March 21,2014 denies having a contractual relationship with the Mewburns. It states that all relevant services were performed for the exclusive use of PFK, their directors, taxation authorities and select financial institutions.
It denies that the Mewburns relied on any documentation created by them in assessing their financial risks concerning their investments. [ 9 ] Further, it denies that Mowbrey Gil owed the Mewburns a duty of care but alternatively states that they at all times met or exceeded the required standard of care. [ 10 ] Over the last 9 years, the Plaintiffs but for Robert in his own right and as Charity’s assignee have all dropped off, and the action has also been discontinued or settled against all defendants but Mowbrey Gil.
Overview of Evidence at Trial [ 11 ] The trial centred around Charity’s $1,000,000 investment in PFK or FMC in August 2009, the financial statements for PFK for the year ended November 30, 2008, Mowbrey Gil’s preparation of those financial statements, the relationship between the Mewburns and Mowbrey Gil, Robert’s relationship with his sister Charity, Robert’s understanding of these financial statements, and Robert’s discussion about them with Gordon Hathorn, the partner in Mowbrey Gil with whom the Mewburns dealt. [ 12 ] Very little in the evidence is conflicting.
This is not a trial where I have to make many fact findings or resolve competing testimony. Much of the evidence at trial was documentary, and there were no conflicts over authenticity. An Agreed Statement of Facts confirmed admissibility. Some evidence has been provided by Mowbrey Gil’s response to a Notice to Admit facts. Miramichi [ 13 ] In connection with the sale of the Mewburns’ interest in Miramichi to PFK, the Mewburns retained Mowbrey Gil to assist them. Mowbrey Gil’s communication of March 3, 2005 regarding the “reorganization of Miramichi” was directed to Robert.
A letter from Mowbrey Gil to Field LLP (the Mewburns’ solicitors regarding the transaction) dated May 18, 2005, describes the mechanics of the transaction and provides instructions to Field LLP with respect to the transaction. Mowbrey Gil provides valuations of the Miramichi shares ($640,000) as well as the PFK shares ($8,460,000). It describes the Mewburns’ shareholdings in Miramichi as well as PFK. As at May 31, 2004 the Mewburn family (including Elizabeth) owned 2,960,146.84 Class A common voting shares.
Those represented nearly 23% of the voting shares and approximately 15% of the total outstanding shares of PFK. [ 14 ] The result of the Miramichi share exchange was to have PFK own all of the Miramichi shares, and the Mewburns would
receive an additional 1,488,372 shares in PFK.
That would make them the owners of 31% of the Class A common voting shares and approximately 21% of the total outstanding shares in PFK. [ 15 ] The May 18, 2005, letter of instructions notes: “We confirm that we have discussed the application of the ITA (as described above); the alternatives available to Miramichi and the Mewburns, as well as the costs, risks, rewards, and benefits of the alternatives, coupled with the objectives of the re-organization with Robert Mewburn in his capacity as shareholder and director of Miramichi.” [ 16 ] That transaction was interrupted by Elizabeth’s death.
It was resurrected in 2008. On September 10, 2008, Mowbrey Gil instructed Robert and Charity’s solicitors MacPherson Leslie and Tyerman LLP to proceed with documenting the share exchange, which occurred effective June 1, 2008. The values for Miramichi and PFK had changed.
Miramichi was valued at $550,000 and PFK at $14,390,000. [ 17 ] As a result of that transaction, the Mewburns owned 14.39% of the Class A common voting shares, and approximately of all outstanding shares in PFK. [ 18 ] The September 10, 2008, letter states: Fair Market Value of Miramichi We have not provided nor made an attempt to determine the fair market value of the shares of Miramichi. Robert Mewburn provided the value of $550,000 discussed earlier in this letter to us.
Our office was not contracted by the parties involved in the transaction to provide an opinion on the value with respect to the Miramichi shares. As a result, we are relying on the judgment of the Mewburns that the value used in this letter is representative of the value of Miramichi at May 31, 2008. Fair Market PFK We have not provided nor made an attempt to determine the fair market value of the shares of PFK. Mr. David Lord of PFK provided the value of $14.39 million to us.
Our office was not contracted by the parties involved in the transaction to provide an opinion on the value with respect to the PFK shares. As a result, we are relying on the judgment of the Mewburns and Mr.
Lord that the value used in this letter is representative of the value of PFK at May 31, 2008. [ 19 ] The Mowbrey Gil letter of instructions dated September 10, 2008, also states (in identical wording to the May 18, 2005, letter to Field LLP): We confirm that we have discussed the application of the ITA (as described above); the alternatives available to Miramichi and the Mewburns, as well as the costs, risks, rewards, and benefits of the alternatives, coupled with the objectives of the re-organization with Robert Mewburn in his capacity as shareholder and director of Miramichi. [ 20 ] The share value for Miramichi was taken from its most current financial statements dated May 31, 2008, which were prepared by Mowbrey Gil.
PFK’s share value was provided to Mr. Hathorn by David Lord. PFK’s most recent financial statements were its 2007 Review Engagement statements for its year ended November 30, 2007. Mr. Hathorn’s evidence on questioning was that he simply used the number provided for PFK given to him by Mr.
Lord, without doing anything to check it or analyze it. [ 21 ] Based on the values used for the share exchange, Robert and Charity had nearly $3,500,000 in PFK shares once the transaction closed in the fall of 2008. [ 22 ] I recite the history of Miramichi for background and to describe the relationship between the Mewburns and Mowbrey Gil. No claim is advanced in this lawsuit for any loss incurred as a result of the share swap.
The consequence of the share swap was ultimately that the Mewburns ended up with more worthless PFK shares, instead of continuing to own Miramichi with its worthless PFK shares. [ 23 ] In 2009, after Robert and Charity sold their jointly owned house in Victoria, BC, Charity sent most of her share of the proceeds, $1,000,000, to PFK to be invested for her. Her funds were wire transferred to PFK on August 24, 2009. It appears from the evidence that she left the choice of investments entirely to Mr. Peers. [ 24 ] PFK and FMC assigned themselves into bankruptcy on December 9, 2010.
Due to the intertwinement of the businesses and assets of those corporations, the bankruptcy was eventually conducted by the Trustee PricewaterhouseCoopers Inc (“PWC”) as one estate. [ 25 ] Ultimately, almost nothing was recovered from the bankruptcy proceedings for unsecured creditors like the Mewburns and other investors and shareholders. Some secured creditors were not satisfied in full. [ 26 ] Robert and Charity did what they could to recover their lost investments, and in 2011 they commenced this action. Shortly after the litigation was commenced, Charity became ill.
She transferred her interest in the intended lawsuit to Robert by way of a Deed of Assignment dated March 9, 2012. In 2013, after Charity’s death, the lawsuit was expanded to include other investors commenced this action. The lawsuit eventually included claims against Metaform Venture Corporation (“Metaform”) arising from the fraudulent transfer of technology by Mr. Peers and his son Robert Peers to by Metaform. The investor group was able to attach a significant income stream from a Metaform licensee.
The income stream continues, and it has resulted in some mitigation of the Plaintiff’s losses. [ 27 ] Over the course of this lawsuit, all of the other Plaintiffs have discontinued the proceedings, leaving Robert as the sole Plaintiff advancing claims for his personal losses as well as those suffered by Charity that had been assigned to him. The lawsuit has now been discontinued against all Defendants but Mowbrey Gil.
[28] Mr. Peers and his son Robert Peers were prosecuted under the Alberta Securities Act in connection with their management ofPFK and FMC and the frauds they committed against investors including the Mewburns. Mr. Peers pled guilty to 11 counts and wassentenced to 3 ½ years’ imprisonment and was given a lifetime trading ban.
Two of the counts related to his dealings with Robert andCharity, and those dealings are described in the Agreed Statement of Facts used for the purpose of his guilty plea and sentencing. [29] In July 2014, the Discipline Tribunal of the Canadian Institute of Chartered Accountants (“CICA”) found both Mr. Hathornand Gregory Thomas Mowbrey guilty of unprofessional conduct in regard to their professional services regarding FMC’s unauditedReview Engagement financial statements for the year ended March 31, 2009.
The report from the Discipline Committee describes indetail the deficiencies in the financial statements related to the CICA standards [30] In this action, Robert claims that Mowbrey Gil was negligent in the preparation of the financial statements for PFK and FMC.This litigation focused on the PFK statements for the period ended November 30, 2008. [31] The financial statements for PFK were addressed to its shareholders.
Robert and Charity were substantial shareholders in PFK.Robert claims that as a result of his and Charity’s reliance on those financial statements, Charity invested the $1,000,000 proceeds ofsale with PFK in August 2009. In return for her wire transfer of the $1,000,000 she received a certificate from FMC evidencing herentitlements from that entity. [32] In addition to relying on the PFK financial statements, Robert claims that he and Charity relied on representations fromGordon Hathorn. Mr. Hathorn was a partner in Mowbrey Gil and was the partner in charge of the PFK and FMC accounts, as well as forthe Mewburns.
From those representations, Robert believed that the financial statements were reliable and that he and Charity could relyon them for further investment purposes. He also received comfort from Mr. Hathorn as to Mr. Peers’ “good track record”. [33] Robert says that but for Mowbrey Gil’s negligence in the preparation of the financial statements and the negligentrepresentations made to him by Mr. Hathorn, Charity would not have invested any further funds with Mr.
Peers and his corporations. [34] Mowbrey Gil denies any negligence on its part, and says that even if it were negligent, neither Robert nor Charity could relyon them because the relevant statements for PFK were Review Engagement Reports, and each contained the note: These non-consolidated financial statements, which have not been, and were not intended to be, prepared in accordance with Canadiangenerally accepted accounting principles, are solely for the information and use of the Directors of Peers Foster Kristiansen Inc, thefederal and provincial income tax authorities for income tax purposes, and the Alberta Treasury Branch, for the purpose of monitoring itsexisting loan agreement dated July 21, 2008.
The non-consolidated financial statements are not intended to be and should not be used byanyone other than the specified users or for any other purpose. [35] FMC’s financial statements addressed to FMC’s shareholders, also prepared on a Review Engagement basis, did not containthe above note, and simply stated that: Based on our review, nothing has come to our attention that causes us to believe that these financial statements are not, in all materialrespects, in accordance with Canadian generally accepted accounting principles. [36] Mowbrey Gil takes issue with the assignment of Charity’s claim to Robert.
They deny that Charity relied on the financialstatements as she would not have understood them at all even if she had read them. [37] Mowbrey Gil also claims that much of the losses claimed have already been recovered from third parties because of theattachment of the income stream from the technology. [38] Ultimately, this case turns largely on the two Supreme Court of Canada decisions regarding accountants’ liability for financialstatements, Hercules Managements Ltd. v.
Ernst & Young, (SCC), [1997] 2 S.C.R. 165 (“Hercules”) and Deloitte &Touche LLP v Livent Inc (Receiver of), 2017 SCC 63 (“Livent”), as well as on 168872 Ontario Inc v Maple Leaf Foods Inc, 2020 SCC35, Anns v Merton London Borough Council, [1978] A.C. 728, (“Anns”) and Cooper v Hobart, 2001 SCC 79 (“Cooper”) for recoveryof pure economic loss and negligent misrepresentation. Also key to this decision is the British Columbia Court of Appeal’s decision inKeith Plumbing and Heating Co v Newport City Club, 2000 BCCA 141. Key evidence [39] Despite the complexity of this case, there were few facts in dispute.
Counsel were able to agree on the admissibility of most ofthe relevant documents. There are Agreed Statements of Fact on key matters. The Defendant did not enter any third-party expert reportsdefending itself against the reports from the Plaintiff’s experts, although they disagreed with the conclusions in their reports and rely ontheir own expertise as testified to by Mr. Hathorn. [40] I do not intend to deal with any of the testimony or cross-examination at trial at length except where it is contested, pertains toa live issue, and needs resolution.
Similarly, I will only deal with documents in any detail except when there are issues relating to theiradmissibility or there is testimony on material aspects of them that needs resolution. [41] In general, the evidence satisfies me that Robert and Charity Mewburn had confidence in Jay Peers and trusted him withouthesitation until long after the $1,000,000 was invested by Charity in August 2009. [42] I am also satisfied that Robert and Charity trusted Mowbrey Gil in general and Mr.
Hathorn in particular to carry out requiredaccounting functions for them, as well as to provide them with professional advice when requested. [43] From the evidence, I am satisfied that neither Robert nor Charity had any concerns about the way Mr. Peers was managingtheir money. Robert testified that some time before the telephone call he had with Mr. Hathorn about Mr. Peers’ integrity in August
2009, he had some “niggling” concerns arising out of what he described as the financial meltdown in 2008 and the revelations about Bernie Madoff’s fraudulent dealings with his investors. He had those things in mind when he talked to Mr. Hathorn and got comfort from his discussion with Mr. Hathorn at the time.
The first inkling the Mewburns had of any trouble within PFK or FMC was when the anticipated monthly funds from PFK did not arrive in late 2010, well after Charity had invested the $1,000,000 with PFK in August 2009. [ 44 ] Responding to an inquiry on Robert’s expectations in what he describes as “stagflation” and concerns about potential decreases in is income, Mr. Peers emailed him on November 27, 2008: Things are fabulous for us these days. Certainly no thoughts of reductions in PFK returns.
We did see this coming and have positioned ourselves accordingly. [ 45 ] It appears from the evidence that Robert and Charity were receiving an annual return of 7% after tax from their investment in PFK. It is unclear how that was accomplished by PFK, as most of the Mewburns’ investment by that time was in PFK common voting shares. It would appear that the Mewburns were content with the results of Mr. Peers’ efforts and took no particular steps to ascertain where the funds were actually invested or where the returns actually came from. [ 46 ] Of note in the evidence is Mr.
Peers’ 2008 report to investors prepared for a November 9, 2008, meeting. It was sent to Robert by David Lord on December 3, 2008. The report states “the financial statements of the past year (and interim statements since the financial meltdown) continue to reflect the same solid returns as in previous years.” The Mewburns had not attended the 2008 PFK annual meeting.
Before the meeting, the PFK’s most recent financial statements had been sent to the shareholders. [ 47 ] It is clear that the “past year” referred to is 2007, as the 2008 financial statements were not completed until mid-2009. [ 48 ] The report deals with a number of PFK investments including Visionwall: Visionwall is coming into its own as energy efficiency and sound reduction become bigger issues for building owners. The Professional Building on 108 th Street and Jasper is just one of many exciting projects underway… [ 49 ] On June 8, 2009, about 2 months before Charity sent the $1,000,000 to PFK, Mr.
Peers emailed her offering various investment opportunities through him following her expressed interest in wanting to “avoid all the eggs in one basket”. [ 50 ] It can be seen from an email of July 28, 2009, from Robert to Mr. Peers that Robert was still unsure about making further investments with PFK after seeing its 2008 financial statements. [ 51 ] Hindsight is always helpful in interpreting what was really going on. It is obvious that by 2008 at the very latest, PFK was in serious financial trouble.
Few of its investments had been successful and the majority of its current investments were in subsidiaries or other related entities of which very little is known. [ 52 ] I have no hesitation in characterizing what was going on within PFK and FMC as a Ponzi scheme. Guaranteed investment returns to investors such as the Mewburns were not paid out of earnings or profits, but out of funds invested by new investors. The injection of new cash into PFK was critical to making its promised returns to the existing investors and keep its bank debt serviced.
And financial statements showing significant and increasing retained earnings in PFK were undoubtedly key to keeping existing investors and securing new ones. [ 53 ] During the 2005 to 2009 period, the Mewburns transitioned from living with their mother in her Victoria property, to living together in that property after their mother died, to selling that property and carrying on more separate lives. By mid-2009, Charity had purchased a house in Victoria, as had Robert. They were expecting more than $1,000,000 each from the sale of the Victoria property they had inherited from their mother.
Hence the full court press put on by Mr. Peers to attempt to persuade them to invest these funds in PFK or FMC. [ 54 ] The Mewburns’ previous investments in PFK and FMC had by then been converted into shares, including Mirimichi. Robert and Charity were receiving income on those shares at 7%. Robert was concerned about the state of the economy and wanted some comfort that a return at that level would continue as he was purchasing a home and planned on getting a mortgage financing for it. [ 55 ] In early 2009, Charity was looking to obtain mortgage financing for her new home in Victoria.
She had her share of the proceeds of the sale of the Victoria property and was uncertain as to what to do with them. Robert was concerned about his income on a go forward basis. [ 56 ] On March 5, 2009, Robert wrote David Lord, an internal accountant at PFK, asking him for the 2008 financials for PFK. [ 57 ] Mr. Lord responded to the email but sent Robert the PFK 2007 financial statements on March 5, 2009. The 2008 statements were not yet finalized. [ 58 ] Following an enquiry from Charity about getting the 2009 statements, Mr.
Peers emailed her on May 3, 2009, telling her that he would send her the PFK statements (for 2008) “as soon as they come from the auditors”, although the statements themselves are dated April 17 and could likely have been sent out immediately. [ 59 ] On June 8, 2009, Mr.
Peers wrote the Mewburns advising them of investment opportunities, noting “We have seemingly endless opportunities these days to make advantageous investments…If you were open to less standard investments the rate of return would be higher.” [ 60 ] He wrote again speaking of “the wonderful diversified business opportunities that are unfolding for us, or how an investment could be set up for you that would be risk free.”
[ 61 ] On July 27, Mr. Peers wrote to Charity again saying “we have two transactions pending for August 1 requiring cash (one being the closing for the lot purchase for his daughter Danielle). We also have a number of inflows on the way but the question is whether they will match or not. Is there a way that we could structure an investment that would work for you, we are keen to do so”. [ 62 ] Robert wrote Mr. Peers on July 28 looking for advice on investment strategies. In response to that, Mr. Peers contacted Mr.
Hathorn and asked him to contact Robert. [ 63 ] Robert described the sequence and his discussion with Mr. Hathorn. My notes of this are: A Yes, in reply to this letter to Jay, he sent me another two investment options, may have been that and his tone I detected as being overly aggressive, and for that reason, or because a broker I’d seen in Vancouver had cautioned me about my investments with Jay on the basis that the financial statements weren’t transparent, I think I called Gordon.
I had his cell phone number at the time, and I asked him if he had noticed any signs of impropriety by Jay Peers in his business dealings. This was in the context of Bernie Madoff. Gordon said “absolutely not, I’ve referred some of my clients to invest with Jay”. That’s all I recall, that’s the nut I took away and it was reassuring. [ 64 ] Mr. Hathorn testified about this telephone call in his direct evidence. Mr. Jaycock showed him a time recording for a one-hour telephone call between him and Robert on July 29, 2009. Mr. Hathorn testified (at pg 28 of the transcript): Q Okay.
Do you recall what was discussed in the call referenced in this memo? A I do, yes. Mr. Mewburn called Mr. Peers about the possibility of doing an audit on PFK and Mr. Peers called me to give Mr. Mewburn a call back to discuss this. So I did call Mr. Mewburn back and we discussed that, you know, the possibility of doing an audit for PFK and I explained to him that an audit doesn’t -- still doesn’t find fraud or error, and that of course the cost in the external accounting would rise greatly, and that it wouldn’t really provide any more assurance than the review engagement that we were currently doing.
And that is what the call was about. [ 65 ] Mr. Peers wrote Charity on August 5 describing a new “fund” he was planning to set up. He told her that he had spoken to Gordon Hathorn about providing a “scrutineer” service on investments for PFK investors in this fund, “and he has expressed a willingness to do so”. Mr. Hathorn testified at trial that he had never heard of anything like this from Mr. Peers. It is clear that Mr. Peers was attempting to exploit the Mewburns’ relationship with Mr. Peers to add confidence to his ventures. [ 66 ] Mr.
Peers asks Charity, “are you open to talking about investment issues while I am there (in Victoria)?” (Referring to a planned visit to Victoria). [ 67 ] On Monday, August 10, PFK’s David Lord sent Charity the PFK 2008 financial statements. Also sent was the “Report of the Director” that accompanied the 2008 statements. That was when Robert got the financial statements as well. He and Charity shared her email account when he was at the Victoria property. [ 68 ] In this report, Mr.
Peers says he is “extremely pleased with the progress we have made to date, and the prospects going forward exceed even my greatest expectations.” [ 69 ] Robert testified about what he did after he received the PFK financial statements on August 10. My notes of his testimony are as follows: Q: You received the statements? A: Yes Q: Did you review them? A: The statements were a real step up, much relates to the Visionwall dividend; this was very positive Q: Did you talk to Charity about the statements? A: I took my time with these statements in a manner I hadn’t before.
I sat down in quiet corner of my rented room and spent an hour or an hour and a half, satisfied myself that the Visionwall dividend was a cash dividend. That fact alone won me over. I told Cherry that I had read the statements and thought they were pretty good. I didn’t tell her the cash flow analysis. Q: Did you review the Mowbrey Gil opinion? A: This was the first time I had actually read them and thought about them; PFK had sought proxies for years 2006, 2007 and 2008. We always completed them and returned them. We took statements from PFK in the ordinary course done at their request for shareholder use.
We didn’t concern ourselves and read and thought the wording of the report was confusing. It is addressed to the shareholders, and it has a very positive opinion. I didn’t recognize as an audit opinion, but it sounded very positive. I didn’t notice the contradiction that it was not an audit. I did see the heading “Review Engagement”, and that was all right. The last paragraph was difficult to reconcile with our entitlement to receive these things, but then saw they addressed it to us and interpreted this form of wording that the shareholders are the primary users and left it at that.
I didn’t talk to Gordon or Jay or anyone else. I would also say in connection with this that the rollover had just occurred the previous year, in 2008. The documents from it were not finalized until 2009. The letter from Mowbrey Gil indicated a fair market value of PFK of $14 million. I knew from the first rollover attempt that Mowbrey Gil was involved in preparing financials for PFK. This time around I knew that as of March 3 Mowbrey Gil had been involved with PFK so I couldn’t understand how they could use that restricted report for the rollover purposes. That gave me confidence that I could use this.
Q: After speaking to Cherry about these, were there any further discussions with her about her investment in PFK?
A: No [ 70 ] On cross-examination, Robert was asked about what he did to research PFK at that time, and he responded that he had only looked at the financial statements and spoken to Mr. Hathorn. [ 71 ] Early on August 21, 2009, Mr. Peers emailed Charity giving her wire transfer details for PFK. Over the course of the day, Charity and Mr. Peers exchanged emails as Charity was having second thoughts. At 12:32 pm, Charity wrote Mr. Peers “I am not comfortable with this financial commitment, again. So I think I’ll give it a pause till I get some other information.” [ 72 ] The next email in the chain (Exhibit
part 7 document 47) appears to be at 7:30 am on August 22, Mr. Peers says “Here is an idea. If I can get you a document from the Canadian Western Bank that they will send you $1,000,000 whenever you ask for it…would that work?” [ 73 ] At 9:45 Charity replied, “In the event I go ahead, I would need to know they (Mr. Peers’ sons) have read and agree with you re my investment.” Later that day, she emails “Is there still a chance to invest in something with real estate…?” [ 74 ] At some time on August 24, 2009, Charity wired $1,000,000 in accordance with Mr. Peers’ instructions to her.
There is no evidence as to what transpired between Charity and Mr. Peers between August 22 and August 24 that allayed any of Charity’s concerns. [ 75 ] On August 31, Charity wrote Mr. Lord, “For my records, could you please be sure to send me some evidence that you received and how you dealt with my deposit of $1M?”. Mr. Lord replied that day on FMC letterhead “This is to confirm that we have received your cheque for $1,000,000 and have deposited it into your account with Federal Mortgage Corporation Ltd.” [ 76 ] Internal PFK records show that on August 21, 2009, Mr. Peers emailed Mr.
Lord “Mewburn wants to send $1,000,000 today. Wire to PFK account? [ 77 ] Mr. Lord responded, “I would have her send it to FMC…” to which Mr. Peers replied “and then transfer it to PFK to pay down the line of credit?” [ 78 ] Report 6 filed by PFK and FMC’s bankruptcy trustee shows that the Charity’s funds were immediately used to pay down FMC’s operating line which was then standing at $929,028.05. That allowed FMC to send $800,000 from its line of credit to Metaform Venture Corporation, one of PFK’s related companies. Metaform was owned by Mr. Peers and his son Robert.
It was managed by Robert Peers. [ 79 ] Robert testified that he was initially unaware that Charity had invested the $1,000,000 sale proceeds in PFK. He was still concerned about his own financial situation and on September 4, he wrote Mr. Hathorn asking for some advice. That advice was later provided. PFK 2008 Financial Statements [ 80 ] Mowbrey Gil had been the external accountants for PFK since at least 2004. In 2004 and 2005, Mowbrey Gil prepared Notice to Reader statements for PFK.
Those statements were accompanied by letters from Mowbrey Gil advising: We have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information. Readers are cautioned that these statements may not be appropriate for their purposes. [ 81 ] In 2006, Mowbrey Gil started preparing Review Engagement Reports for PFK and FMC. [ 82 ] Mr. Hathorn described the process used by Mowbrey Gil in preparing the statements. He testified about the CICA’s then standards for preparing Review Engagement Reports. In 2008 he had been a Chartered Accountant for some 27 years.
He had worked on the PFK account since 2004. He also did work for the Mewburns and in particular their holding company Miramichi over that period. [ 83 ] Mowbrey Gil sent a letter to PFK addressed to Mr. Peers on November 15, 2008. It outlined the terms of their engagement to review the non-consolidated financial statements for PFK for the year ended November 30, 2008. [ 84 ] The letter says: Unless unanticipated difficulties are encountered our report will be substantially in the following form: Review Engagement Report To the Shareholders of Peers Foster Kristiansen Inc.
We have reviewed the non-consolidated balance sheet of Peers Foster Kristiansen Inc as at November 30, 2008 and the non-consolidated statements of loss, retained earnings and cash flows for the year then ended. Our review was made in accordance with Canadian generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to us by the Company. A review does not constitute an audit and consequently we do not express an audit opinion on these non-consolidated financial statements.
Based on our review, nothing has come to our attention that causes us to believe that these non-consolidated financial statements are not, in all material respects, in accordance with Canadian generally accepted accounting principles.
[ 85 ] It is important to understand what the 2008 statements contained. The cover sheet describes them as unaudited. Page 1 is Mowbrey Gil’s report to the Shareholders dated April 17, 2009. It repeats that a review does not constitute an audit and states, “consequently we do not express an audit opinion on these non-consolidated financial statements” (yet the opinion the expressed was the typical positive audit opinion rather than the usual Review Engagement negative wording). [ 86 ] The 2008 Non-Consolidated balance sheet on page 2 shows total assets of $64,033.122, up from $41,925,042 in 2007.
An increase of over $22,000,000. [ 87 ] Liabilities were shown as $30,698,825, compared to $27,915,274 for 2007. An increase of approximately $2,800,000. [ 88 ] Shareholders’ equity is stated at $12,894,973 vs $6,371,695 in 2007. It had more than doubled. [ 89 ] Retained earnings as at November 30, 2008 were $20,439,324 as compared with only $7,683.073 at the end of 2007. That was an increase of nearly 270%. [ 90 ] Anyone reading that page of the report would very likely be impressed. [ 91 ] The next page is the Non-Consolidated Statement of Income.
It showed a whopping net income of $13,046,898 compared with the results of the previous year, which showed a loss of $274,510. [ 92 ] Most significant in the income column was “dividend income” of $12,500,000. Expenses had increased to $6,770,160 from $1,555,030 in 2007. One might be thinking, what an amazing turnaround in 2008. [ 93 ] The Non-Consolidated Statement of Cash Flows on page 5 shows that there was no cash in PFK at the beginning of the year. Indeed, cash was shown as ($14,012) and then $168,525 at the end of 2008.
The reader is left to draw their own conclusions about what cash or no cash in the bank means for the health of the company. [ 94 ] The Notes to the financial statements are an integral part of the statements. They are footnoted on the balance sheet in a number of places. [ 95 ] Note 2 states: These non-consolidated financial statements have been prepared by management in accordance with the significant accounting policies set out below. These non-consolidated financial statements materially differ from generally accepted accounting principles because they are not consolidated.
The Company’s investments have been recorded at cost. Earnings from the investments are recognized only to the extent that dividends are received or receivable. [ 96 ] Note 2 describes PFK’s accounting policies. The item “Revenue recognition” states: Interest income is recognized on an accrual basis. The Company records dividend income from Corporations in which it holds an equity investment on the date the dividend has been declared. All other income is recognized as it is earned. [ 97 ] Investments in joint ventures are accounted for: …using the proportionate consolidation method.
The Company’s pro-rata share of the assets, liabilities, revenues and expenses of the joint venture have been combined on a line by line basis with similar items of the Company. [ 98 ] Note 6 deals with Long Term Investments.
PFK is shown as having an investment of $10,780,000 in Visionwall Corporation. [ 99 ] This Note says: Under the terms of a conversion loan agreement with Visionwall Incorporated, a publicly traded company currently the subject of a cease trade order (“CTO”) the Company has converted the $780,000 note payable by Visionwall Inc into 1,519,049 Class “B” Multiple Voting Shares and 11, 377,923 Class “A” Subordinate Voting Shares of Visionwall Corporation (a subsidiary of Visionwall Incorporated) and has also converted the $10,000,000 note into 1000 Series “A” Preferred Shares of Visionwall Corporation. [ 100 ] It thus appears that PFK had converted $10,780,000 in notes owed to it by Visionwall Incorporated, which was still subject to a cease trade order, into shares of a subsidiary, Visionwall Corporation.
As a result, Visionwall Incorporated. no longer owed anything to PFK and PFK instead became a 49% shareholder in Visionwall Corporation (as set out in Note 7). [ 101 ] According to PFK’s 2007 financial statements, the Visionwall transaction took place on April 1, shortly before those financial statements were completed by Mowbrey Gil. [ 102 ] The 2007 financial statements describe PFK’s investments in Visionwall Corporation as follows: Under the terms of a conversion loan agreement with Visionwall Corporation, a publicly traded company currently the subject of a cease trade order (“CTO”), the Company has invested $780,000 in the form of a note payable, convertible to 13,000,000 Class A common shares of Visionwall Inc, and under the terms of an Asset Transfer Agreement a further $10,000,000 in the form of a note payable convertible to 1,000 V I preference shares of Visionwall Incorporated.
As of the financial statement preparation date, these notes payable had not been converted as a result of a delay in lifting the CTO in place on the shares of Visionwall Incorporated. See note 11 to these financial statements for additional information. [ 103 ] The switching of Visionwall “Corporation” for Visionwall “Inc” in some places appear to be typographical errors. [ 104 ] Note 11 in the 2007 statements has nothing to do with Visionwall, but Note 12 says:
Subsequent events On April 1, 2008, under the terms of the Conversion Loan and Asset Transfer Agreements with Visionwall Incorporated described in Note 4 (presumably Note 6 as Note 4 deals with Property and Equipment), the Company exercised its right to acquire convertible shares in the operating subsidiary, Visionwall Corporation. As a result, in satisfaction of the $780,000 Conversion Loan Agreement, the Company received 1,519,049 Class “B” Multiple Voting Shares and 11,337,923 Class “A” Subordinate Voting Shares of Visionwall Corporation.
In satisfaction of the $10,000,000 Asset Transfer Agreement the Company received 1,000 Series “A” Preferred Shares of Visionwall Corporation. On April 8, 2008 Visionwall Corporation paid a dividend to the Company of $12,500,000 on the Series “A” Preferred Shares. [ 105 ] It would not have been unreasonable for a shareholder in PFK to have been very encouraged on receiving the 2007 financial statements. The statements themselves showed a loss of $272,510 after net income of $7,311,853.
That net income was comprised mainly of a $7.3 million dividend from Thinkcorp Inc, another related entity to PFK, and which had only been declared but not paid. That dividend made the financial statements look much better as without it there would have been a loss of over $7.5 million. Even with that paper income, there was a small loss. However, the loss for 2007 would be more than offset by this huge $12,5000,000 dividend that had been paid by Visionwall Corporation.
This would undoubtedly be reflected in the current fiscal year (2008) results. [ 106 ] Shareholders receiving the 2008 statements would thus not be surprised by the massive positive change in PFK’s fortunes over the loss in 2007, as the $12,500,000 dividend would show up as income in the 2008 statements. [ 107 ] Note 7 in the 2008 statements describes related parties as being Vertigo Technology Inc, Visionwall Corporation, Titanwall Inc and Grayling Wireless USA. [ 108 ] The note describes $27,977,363 as being due from related parties. $11,030,130 is described as being owed from Visionwall Corporation. $1,166,124 is owed to a 51% owned subsidiary, HME Evans & Company Ltd.
The remaining nearly $16,000,000 is owed by companies partly owned by directors of PFK, including $5,078,203 owed by Metaform Venture Corporation. [ 109 ] The Note says “Advances to related companies are unsecured, non-interest bearing and have no set repayment terms. [ 110 ] PFK owed related companies $22,628,342 including $15,580,934 to FMC (described as a 49% subsidiary) and $5,157,009 to Thinkcorp Inc (described as a 49% owned subsidiary).
One wonders where these related companies got the funds to lend to PFK. [ 111 ] In any event, those debts, like the advances to related parties, were unsecured, non-interest bearing and had no set repayment terms. [ 112 ] Note 12 describes a contingent liability for a $1,000,000 line of credit for a “49% subsidiary”. The outstanding balance on that line of credit was $899,148 as at November 30, 2008. That must refer to FMC. [ 113 ] Note 15 describes “Financial Instruments” as “contractual rights to receive or deliver cash or other financial asset.
The Company’s financial instruments consist of accounts receivable, investments and loans and notes receivable which will result in future cash receipts…”. It also speaks of “credit risks”. The Note describes the Company’s policy of reviewing new customers’ credit history and regularly reviewing its customers’ credit performance.
It concludes, “the Company has a significant number of customers which minimizes concentration of credit risk”. [ 114 ] Under the heading “Fair Value” the Note says, “The fair value of the amounts due to/from related parties are less than carrying value, as the amounts are non-interest bearing. As the amounts have no terms of repayment, the fair value cannot be calculated with any degree of certainty.” [ 115 ]
Schedule 1, the Company’s Expenses, describes “interest on callable debt” of $2,015,172, up from $416,335 in 2007. Bad debts were $1,497,421, up from $22,400 in 2007. New expenses were Management fees of $799,192 and Rent went up from $87,494 to $267,811. FMC Statements [ 116 ] FMC’s year end is March 31, so the 2008 financial statements for FMC would be the ones considered by Mowbrey Gil for the November 30, 2008 PFK statements, to the extent the FMC statements were considered.
FMC’s statements were prepared by Mowbrey Gil, and Mowbrey Gil would certainly have had knowledge of this report and the working papers for these statements when it was working on PFK’s statements. FMC’s March 31, 2009 financial statements were not completed when the 2008 PFK statements were issued and Mowbrey Gil may have had no information on FMC’s 2009 year end before the 2008 PFK statements were completed. [ 117 ] The 2009 statements were also an unaudited Review Engagement Report.
The Report states that it was prepared in accordance with Canadian generally accepted accounting principles for review engagements. It was addressed to the Shareholder of FMC and contained no restrictions or limitations on use. The opinion given was: Based on our review, nothing has come to our attention that causes us to believe that these financial statements are not, in all material respects, in accordance with Canadian generally accepted accounting principles. [ 118 ] That was the typical negative opinion used for Review Engagement reports.
The attached balance sheet shows assets as including “notes receivable” of $553,385, a debenture of $200,000 (in Visionwall Inc), and “mortgages receivable” of $31,701,738. Liabilities are stated as $32,468,123. Overall, there is a deficit of $13,476.
[ 119 ] The statement of income shows income of $2,369,568 and expenses of that same amount. [ 120 ] Note 3 indicates the notes receivable are from various unrelated parties. [ 121 ] The debenture, described in Note 4, is from Visionwall Incorporated. It says “the debenture is a non-interest bearing and became due August 15, 2004. No interest has been received or accrued from August 15, 2004 until March 31, 2008. [ 122 ] A note payable of $821,909 is described in Note 7. It says the note payable “is due to a company controlled by one of the shareholders of Federal Mortgage Corporation Ltd.
It is non-interest bearing and has no specific terms of repayment.” [ 123 ] Note 8 says “callable debt (of $200,000) is owing to Visionwall Incorporated. The debt is secured by a $200,000 debenture from Visionwall Incorporated. The callable debt is non-interest bearing and has no specific terms of repayment.” The two entries appear to net each other out. [ 124 ] Note 9 indicates that the debentures payable are issued to unrelated parties. FMC 2010 [ 125 ] These statements were completed on July 15, 2010, and cover the period April 1, 2009 to March 31, 2010.
The opinion given by Mowbrey Gil was the same as with the 2009 statements. [ 126 ] The balance sheet has assets and liabilities identical to the previous year’s statements. The accumulated deficit remained at $13,478, recognizing share capital of $104. [ 127 ] The notes receivable have been reduced by $10,340. The Visionwall debenture of $200,000 has disappeared. [ 128 ] The note payable has been reduced from $572,318 to $1,100.
Debentures payable have increased by nearly $9,000,000 which likely includes “new money” like the $1,000,000 sent to PFK by Charity in August 2009. [ 129 ] Note 3 states that the note receivable of $543,045 is from a company that is 51% owned by one of the shareholders of FMC. That presumably is the same note receivable of $553,385 described in 2009 as “amounts due from various unrelated parties”. [ 130 ] Note 5 deals with mortgages receivable.
It says: Included in mortgages receivable are mortgages totaling $16,439,796 (2009 -$14,646,037) due from Peers Foster Kristiansen Inc. a 49% shareholder in the Company and from Canyon Ridge Joint Venture in which Peers Foster Kristiansen Inc. has a 50% interest, $8,134.965 (2009 - $5,713,625). [ 131 ] Note 6 relates to bank indebtedness. It describes a line of credit with Canadian Western Bank to a maximum of $680,000 (2009 $364,566) on which $662,659 has been drawn (2009 - $364,566). [ 132 ] An operating loan with HSBC for $1,000,000 is also described.
The Note says that $957,104 has been drawn against it. $977,378 was drawn against this loan as at March 31, 2009. [ 133 ] The Note states that FMC was in breach of its obligations under these credit facilities because it had not completed financial statements within 90 days from the FMC’s year-end. [ 134 ] Note 8 references the “callable debt” owed by Visionwall and states that it was “settled” on October 29, 2009. Differences between 2009 and 2010 FMC Statements [ 135 ] Something that leaps out is that in 2009, there was no mention of any of the mortgages being owed to FMC by related parties.
In fact, Note 5 in 2009 describes the mortgages as being “fully secured third party mortgages.” [ 136 ] As well, Note 3 in 2009 says that the notes receivable are due from “various unrelated parties”. [ 137 ] In 2010, however, a mortgage of $16,439,796 was owed to FMC by PFK and another mortgage of $6,134,965 was owed by the Canyon Ridge Joint Venture in which PFK had a 50% interest. Those mortgages were described in the Note as being up from $14,646,037 for PFK and $5,713,625 from Canyon Ridge in 2009. That clearly indicates that these were not new mortgages, but that they existed as at the 2009 year-end.
Those amounts, totaling $20,359,662 reflect nearly two-thirds of PFK’s assets as reported for year- end 2009. [ 138 ] The “Notes Receivable” in 2009 were from described as being due from unrelated parties. In 2010 they were described as being due from related parties. No explanation is given for this recharacterization. Reconciling PFK statements with FMC Statements [ 139 ] It is difficult to compare the statements because of the different year ends. The related party transactions described in Note 5 to FMC’s 2010 statements show that PFK owed FMC $22,563,761, up from $20,359,662 in 2009.
FMC’s fortunes were heavily dependent on PFK. [ 140 ] The 2008 PFK statements show a $49 investment in FMC. They describe a $15,580,934 mortgage loan by PFK, which is similar
to the amount described by FMC in its 2010 statements relating to the PFK mortgage. The Canyon Ridge Joint Venture in which PFK had a 50% interest reported in its own financial statements that it owed FMC $5,403,660 as at April 30, 2008. FMC reported in its March 31, 2008 statements that it was owed $8,134.965 by Canyon Ridge and that had reduced to $5,713,625 by March 31, 2009.
The statements of these entities seem to jibe. [ 141 ] Mowbrey Gil’s working papers include draft review engagement financial statements for the Canyon Ridge Joint Venture for the year ended April 30, 2008. [ 142 ] Those financial statements show “Member’s deficiency” of $575,245 as at April 30, 2008, up from $476,750 as at April 30, 2007. [ 143 ] The Balance Sheet shows debt of $5,403,660 to FMC, down from $6,345,186 on April 30, 2007. [ 144 ] The Statement of Loss shows a loss that year of $102,236 vs net income of $17,990 in 2007. CICA Proceedings [ 145 ] Mr Hathorn and Mr.
Mowbrey were disciplined by the CICA in relation to their work on FMC’s 2009 financial statements. Their findings regarding Mr. Hathorn are interesting in looking at how the CICA approached FMC’s unaudited notice to reader financial statements for 2009. They concluded that the engagement failed to comply with CICA Handbook assurance recommendations as set out in
section 5025 of the Standards for Assurance Engagements Other than Audits,
section 8100 of the General Review Standards, and
section 8200 of the Public Accountant’s Review of Financial Statements in a number of aspects, including because: • The assessment of the plausibility of identified related parties was deficient; • They failed to perform sufficient review procedures on the collectability of the mortgage receivables, including: o The ability of PFK to guarantee some $31 million in mortgages; and o Failing to question inconsistencies in PFK’s year-end working papers; • They only performed review procedures on receivables and not mortgage receivables; and • There was a lack of documentation in the engagement file, including: o No documented list of related parties; and o No explanation as to why related party balances in the working papers were not disclosed as such in the financial statements. [ 146 ] The Decision stated: As engagement partner he was associated with financial statements that he knew or should have known were false or misleading in that an Accounting Firm issued an unqualified review engagement report, although the financial statements were not compliant with generally accepted accounting principles, including: o The financial statements failed to disclose related party transactions and balances between FMC and PFK or FMC and companies related to PFK; o The financial statements did not accurately disclose the loans to PFK or its related companies; o The financial statements included disclosure that were inconsistent with the PFK financial statements for the year ended November 30, 2008; o The financial statements failed to identify non-current assets; o The financial statements failed to disclose economic dependence of FMC on PFK; and o The financial statements failed to disclose the valuation policy, significant terms and conditions, credit and interest risks, and fair value of financial instruments.” Bankruptcy Proceedings [ 147 ] PFK and FMC were assigned into bankruptcy on December 9, 2010.
PwC issued a number of reports during the bankruptcy proceedings. Report 6 filed February 1, 2016 (the “Report”) was put in evidence for this trial. [ 148 ] Because the finances of PFK and FMC were so intertwined, the bankruptcy proceedings were consolidated. [ 149 ] The Report noted that FMC had raised some $42.5 million to the date of the bankruptcy by way of debentures to individuals.
Despite representations to the contrary, none of the debenture holders had secured claims (page 6). [ 150 ] PwC noted on page 8 that “there was no documentary evidence to prove advances on what had been recorded by PFK and FMC as secured loans receivable, mortgages remained on the books and records of FMC which had long since been paid out, intercompany advances were not properly authorized or documented or secure, and many transactions were convoluted to the point of being virtually
impossible to understand and enforce.” [ 151 ] In connection with the demand loan due from Grayling Wireless/ClearCalm Inc and intercompany loans receivable due from Metaform Venture “Group”, Titanwall, and Tower Farms, the only evidence of those was in the PFK’s pre-bankruptcy financial statements.
PwC’s investigation led them to conclude that none of these companies had any assets, so no steps were taken to try to pursue them (pg 11). [ 152 ] As for Visionwall, Thinkcorp, Grayling Wireless and Metaform Venture Corporation shares, PwC’s investigation concluded that these investments were worthless and there was no realizable value in the shares of these companies. The Report notes that Visionwall had made an assignment in bankruptcy in 2011 (pg 12). [ 153 ] As for PFK’s investment in the Canyon Ridge Joint Venture, some recovery on the mortgage to FMC was made.
Nothing was recovered on the intercompany loans payable by PFK to FMC were recovered ($8,901,112). PwC recovered $527,507 of $13,247,2167 in related party mortgages, and $2,158,767 of $13,520,404 in mortgages and loans receivable, which included Canyon Ridge) (page 13). Of that latter amount, it appears that $1,445,545 was recovered by the Trustee from Canyon Ridge land sales. [ 154 ] Ultimately, the PFK shareholders and unsecured creditors and the FMC debenture holders and other unsecured creditors realized almost nothing.
On his roughly $1.75 million investment Robert received a dividend of $2,658.44 and on her roughly $2.75 million dollar investment, Charity received a dividend of $26,620.77. Securities Act Prosecution [ 155 ] As discussed above, Jay Peers and his son Robert were prosecuted for their roles in the failure of PFK. Mr. Peers pled guilty, and an Agreed Statement of Facts was submitted to Provincial Court for sentencing purposes. That Agreed Statement of Facts is one of the documents in evidence in this case.
Some of the background facts in this decision come from or have been confirmed by the Agreed Statement of Facts. [ 156 ] Most notably, Mr. Peers admitted that: …that the undisclosed use of investor funds to pay down a chronically overdrawn account, to transfer funds to companies in which he and his sons acted as owners/operators in the absence of mutual contractual obligations, and to pay returns to existing investors all constituted a fraud on investors contrary to s 93(
b) of the ( Securities) Act . Admitted Facts [ 157 ] Mowbrey Gil’s Reply to Notice to Admit Facts made a number of admissions, including that the Agreed Statement of Facts in the prosecution against the Peers could be admitted as facts in this case. It also admitted a number of technical matters such as ownership and control of various corporate entities. Various admissions were made about investors and investments in PFK and FMC by the Mewburns and others. CICA Standards [ 158 ] The CICA Assurance Recommendations were put in evidence by agreement.
Section 8200 dated December 2005 is titled “public accountant’s review of financial statements” and are recommendations for Review Engagements.
Section 8100 dated June 2005 is titled “general review standards” and are further recommendations for Review Engagements. [ 159 ] Sections 8203.25-28 state: MANAGEMENT REPRESENTATIONS .25 Procedures performed by the public accountant to determine the plausibility of the entity's financial statements include malting enquiries of and having discussions with management. Management's representations obtained as a result of these procedures are a primary means by which the public accountant gathers information regarding important matters to support the conclusion expressed in his or her report.
In addition to verbal representations, management's representations include listings, schedules and other documents provided by management.
The public accountant documents these representations by summarizing the discussions with management and by retaining copies of listings, schedules and other documents provided by management in the working papers. .26 The public accountant evaluates the plausibility of management's representations by applying his or her knowledge of the entity's business and industry, whether gained as part of the current engagement or as part of previous engagements with the same entity or other similar entities.
If the public accountant has previously been engaged as the entity's auditor, in evaluating the plausibility of management's representations, the public accountant will also apply his or her knowledge of the entity's business, industry and internal control gained as part of previous audit engagements. .27 ► If the public accountant doubts the plausibility of a representation made by management, the public accountant should perform sufficient additional or more extensive procedures so as to resolve such doubt or to confirm that a reservation is required in his or her review engagement report. [AUG. 2005]
.28 If the public accountant doubts the plausibility of management's representation, the public accountant performs additional procedures to resolve his or her doubt. Such procedures may be similar to procedures carried out in an audit, but will not result in the review engagement being converted to an audit. If further procedures result in the public accountant concluding that management's representation is implausible, the public accountant re-evaluates the plausibility of management's representations received in other aspects of the engagement.
The public accountant would refer to GENERAL REVIEW STANDARDS, paragraphs 8100.32-.40, to determine the appropriate reporting standards and actions when the procedures performed to resolve the public accountant's doubt of management 's representation result in the public accountant concluding that a reservation is required in his or her review engagement report.
Paragraphs 8100.32-.40 state: Reservations in the review engagement report .32 The term "reservation in the review engagement report " is used when the public accountant: (a)expresses negative assurance with a qualification with respect to a departure from appropriate criteria or with respect to an inability to complete the review; (b)expresses an adverse statement that the information is not presented in accordance with appropriate criteria; or (c)is unable to express any assurance on the information because of an inability to complete the review. .33 When changes have been made in the application of generally accepted accounting principles or other appropriate criteria and such changes are not adequately disclosed in the information being reported on, this would represent a departure from appropriate criteria and the public accountant would express a reservation. .34 A reservation should be expressed in the review engagement report when the public accountant: (a)is unable to complete the review because there is a lack of information or because it is impractical to obtain satisfactory information, and is thus unable to decide whether some or all of the information being reported on is plausible within the framework of appropriate criteria; (b)concludes that there is a departure from the appropriate criteria; or (c)concludes that any significant
interpretations of provisions of an agreement or regulation referred to in the report are not appropriate or reasonable. [JAN.1989*] .35 In deciding which type of reservation (paragraph 8100.32) is appropriate, the public accountant needs to consider, in addition to materiality: (a)the degree to which the matter impairs the usefulness of the information; (b)the extent to which the effects of the matter on the information can be determined; (c)the extent to which the effects on the information can be related to specific items; and (d)whether the information is or may be misleading even when read in conjunction with the review engagement report. .36 When a reservation is required, the review engagement report would be qualified unless the public accountant concludes: (a)that departures from the appropriate criteria render the information misleading or virtually useless even when read in conjunction with the report, in which case an adverse report would be provided; or (b)in circumstances when the public accountant is unable to complete the review, that the limitation in scope is such that the effect on the information of possible departures from the appropriate criteria could be so pervasive or significant that there is no basis for expressing any assurance on the information, in which case a denial of assurance would be provided. .37 When the public accountant concludes that a reservation in the review engagement report is necessary, the report should draw attention to the reservation as follows: (a)the reservation paragraph should immediately precede the negative assurance paragraph; (b)the negative assurance paragraph should include: wording appropriate for the type of reservation; and
a reference to the reservation paragraph; and (c)in addition, when the reservation results from an inability to complete the review, the scope paragraph should contain a reference to the reservation paragraph. [JAN. 1989 *] .38 The reservation paragraph needs to be worded so that it does not imply that the public accountant has verified the matter giving rise to the reservation or determined that the information, in any other respects, is in accordance with the appropriate criteria. .39 When a reservation is expressed in the review engagement report, the public accountant should: (a)include all reservations known to him or her as a result of the review; (b)describe the reasons for each reservation; and (c)indicate how and, when readily determinable, the extent to which the information being reported on is affected by a departure from the appropriate criteria.
If the effects are not readily determinable, the public accountant is not obliged to determine them but should indicate in the review engagement report that the effects have not been determined . [JAN. 1989 *] .40 If the client will not accept the review engagement report containing the reservation, the public accountant would refuse to be further associated with the engagement. In these circumstances, the public accountant would: (a)write to the client advising why the engagement cannot be continued; and (b)consider whether it is appropriate to continue the relationship with the client.
Expert Evidence [ 160 ] Expert evidence from two experts was adduced on behalf of the Mewburns. Justin Thoman, a certified forensic accountant and chartered accountant (CA) was qualified to give expert opinion evidence in the areas of forensic accounting and financial analysis. His reports of July 29, 2020, June 15, 2021, and May 6, 2022, were admitted in evidence and he testified at the trial. [ 161 ] A report from Henrietta Wildeman, a chartered professional accountant (CPA) prepared a report as a chartered professional accountant with an expertise in financial statement preparation and compliance.
Her report was entered in evidence by way of agreement on Ms. Wildeman’s qualifications. She did not testify at trial and was not cross-examined. Her report was admitted into evidence by Mr. Jaycock on the basis that it could be used as part of the evidence in the trial, with no admission on the part of the Defendant that her opinions were valid. Justin Thoman [ 162 ] Mr. Thoman’s report of July 29, 2020, contains a
summary of his findings. He states at page 5: …I found that there were issues with the financial statement reporting as well as indicators of financial and solvency issues requiring additional analysis and/or disclosure in the financial statements”. [ 163 ] I will summarize those for the purposes of my analysis. 1. FMC’s financial statements describe its investments as “secured interest-bearing mortgages to third parties”. In reality, more than half of FMC’s investments were advances to PFK which were unsecured and non-interest bearing.
In its 2008 and 2009 March 31year end reports the FMC loans to PFK were not disclosed as related third-party transactions. 2. PFK used its funds, funds from shareholders and funds borrowed from FMC to make investments and loans in mainly related entities. FMC’s financial statements showed it had raised approximately $62 million, of which $40 million had been invested in related companies that were related to Mr. Peers and his sons Robert and Marc. 3.
Many of these investments were to companies that had little or no operations, little or no revenue and insufficient assets to support the amounts PFK was recording as assets in its financial statements. 4. Mowbrey Gil was the external accountant for many of these related entities and had this information available to them. PFK’s investments in entities Mowbrey Gil acted for were by November 2009 $18.8 million and were supported by only $1.8 million in assets as shown by their financial statements. 5.
PFK’s retained earnings were largely the result of two significant dividends reported in the financial statements for 2006 ($7.3 million) and 2008 ($12.5 million). These dividends were declared by Visionwall Inc and never paid. (NOTE: as discussed elsewhere in this decision, the $7.3 million dividend shown in 2006 that was never paid had been declared by Thinkcorp Inc, not Visionwall Inc. Mr Thoman was in error in concluding that the 2006 dividend had anything to do with Visionwall. Nothing turns on this.) 6.
Because PFK had virtually no income during this period, any investment returns paid to PFK’s shareholders and investors would
have come from other investors. 7. Mowbrey Gil’s review engagement reports on PFK provided the highest level of assurance on financial statements that an accountant can provide: an audit opinion. However, this was done in spite of the fact that Mowbrey Gil did not complete audit procedures. [ 164 ] Mr.
Thoman’s supplemental report of June 15, 2021, dealt with the $12,500,000 dividend from Visionwall Corporation declared April 30, 2008. [ 165 ] In his supplemental opinion, either Mowbrey Gil and PFK intentionally ignored the dividend in connection with the sale of the Mewburn’s Miramichi shares to PFK, or the dividend receivable by PFK was considered by them in the Miramichi sale but was treated as if it had no value by them. [ 166 ] Mr. Thoman’s letter of May 6, 2022, offers opinions on the Visionwall Incorporated consolidated financial statements for December 31, 2008 and June 30, 2009.
These statements were attached to the affidavit of Gregory Clarahan, a director and officer of Visionwall Inc and Visionwall Corporation, sworn August 10, 2009, in Visionwall’s CCAA proceedings. The financial statements were unaudited, internally prepared and had no prior year comparables. [ 167 ] Mr. Clarahan observed that these financial statements (which showed a $25,367,835 deficit) show a lack of cash, liabilities far exceeding assets, and a significant accumulated deficit. Mr. Thoman stated that it was not apparent from these statements how a dividend of $12.5 million could have actually been paid to PFK.
Henrietta Wildeman [ 168 ] Ms. Wildeman focused her analysis on the 2008 PFK statements. She summarized her conclusions starting at page 10 of her report. Those conclusions were: 1. The form of the report used was non-standard language and not governed by the published standards of practice. It was framed as a positive assurance and therefore implied more procedures were performed on it than would have been on a Review Engagement. The form of report was misleading to users of the financial statements. 2.
To the extent Review Engagement procedures (from the CPA Canada Handbook) ought to have been followed, further investigations and procedures should have been conducted or qualifications to a standard “negative assurance report” should have been given. [ 169 ] She notes that from her review, of the $64,033,122 in reported assets, $54,218,458 ought to have triggered further review on the basis of plausibility.
There is nothing to show this was ever done by Mowbrey Gil. [ 170 ] She observes that to the extent that trends in PFK’s business could be analyzed, they raise the question as to why the value of certain investments were not impaired by their failure to produce returns. [ 171 ] She was of the opinion that the financial statements incorporated a number of material errors in the financial statement disclosures and presentation that should have led to a qualified or adverse review engagement report. [ 172 ] Her final opinion was: 1.
Mowbrey Gil did not perform sufficient review procedures to support the issuance of an unqualified review engagement report; 2. Insufficient work was done on the evaluation of assets, in particular the investments in shares and related party advances; 3. There were other disclosure deficiencies that were not identified including missing disclosures regarding guarantees and other related party transactions, and the statement of cash flows did not exclude material non-cash items; 3. There were thus material errors in the financial statement disclosures; and 4.
Mowbrey Gil should not have expressed a positive assurance or issued an unqualified report as it did in accordance with the applicable principles and standards in place at the time. Mowbrey Gil Response [ 173 ] No independent expert evidence was called on behalf of Mowbrey Gil. Mr. Hathorn gave his opinions on the Thoman and Wildeman’s reports in his testimony. Mr. Hathorn was understandably defensive about these two reports, as well as with the CICA discipline proceedings brought against him. [ 174 ] The key points made by Mr. Hathorn in his defence related to several things: 1.
The final paragraph in the opinion letter included with the financial statements is clear that no one other than the directors, Canada Revenue Agency and PFK’s bank, the Alberta Treasury Branch, could use the financial statements for any purpose: These non-consolidated financial statements, which have not been, and were not intended to be, prepared in accordance with Canadian generally accepted accounting principles, are solely for the information and use of the Directors of Peers Foster Kristiansen Inc, the federal and provincial income tax authorities for income tax purposes, and the Alberta Treasury Branch, for the purpose of monitoring its existing loan agreement dated July 21, 2008.
The non-consolidated financial statements are not intended to be and should not be used by
anyone other than the specified users or for any other purpose. 2. That statement should have been adequately clear to Mr. Mewburn that he could not rely on the statements for any purposes, without more. 3. No plausibility analysis regarding the statements prepared internally by PFK or any of the information given to Mowbrey Gil was required because these statements were not prepared in accordance with Canadian generally accepted accounting principles; and 4.
Non-GAAP financial statements require no warnings to readers other than that the statements are Non-GAAP. [ 175 ] His specific testimony on the consequence of reviews being done on a Non-GAAP basis was: At page 54, lines 18- 40 Q Okay, well let’s have a look at -- I want you to look in particular to Exhibit 4, which is the handbook standards 8200. Do you have that? A I do. Q Okay. I’d like to refer you in particular to paragraph 23 under general review procedures. A Okay. Q So paragraph 23 outlines, as it says, general review procedures and includes subparagraph (
g) which says advising other public accountants, if any, who have reviewed or audited the financial statements of significant components of the reporting enterprise of the intention to rely on their reports, reading such reports, and communicating with them concerning any matters arising therefrom. Would you agree that that is a correct statement of the general review procedures in this standard? A If you are following GAP yes, if you are not following GAP, no. Q Okay.
So you – if you are not following GAP there is no obligation to inquire of other -- other accountants or review their statements, is that what I understand your evidence to be? A Yes, if you are not following GAP you don’t have to carry that out. Q And PFK never followed GAP; is that correct? A Not that I am aware of, no. And in my questioning at para 98, lines 17-24: Q Mr. Hathorn, I think I just have one question and it’s just so that I make sure that I have understood one aspect of your evidence correctly. When Mr.
Belzil was asking you about some issues relating to plausibility, I understood your answer to be that the plausibility assessment wasn’t required because these were not GAP statements. A Correct. Q Do I have that right? A (INDISCERNIBLE) yes you do. [ 176 ] Richard Gil, a partner in Mowbrey Gil, also testified. His views on their responsibilities for Review Engagement reports substantially mirrored that of Mr. Hathorn. It should be noted that neither Mr. Hathorn nor Mr. Gil were not qualified as experts on professional standards for Review Engagement reports.
They did have considerable experience in the field, so I was prepared to listen to their opinions on
interpretations of their professional responsibilities. [ 177 ] Mr. Gil testified in chief that their procedures for this Review Engagement differed from other review engagements because the PFK statements were non-consolidated, Non-GAAP, investments were valued at cost, and the revenue recognition note was different. He specifically referenced
section 81.08 of the CICA’s General Review Standards. [ 178 ] He testified that it was “unfortunate” that the positive assurance language was used, but he understood why it was used based on his understanding that the statements would only be used for income tax purposes and by the directors. [ 179 ] Mr. Gil was asked about his “concerns” with Ms. Wildeman’s report and he expressed two major concerns. Firstly, he felt that Ms. Wildeman had applied generally accepted accounting principles to Non-GAAP statements. That had the effect of introducing fair market value principles, GAAP value tests and temporary impairment issues.
[ 180 ] Essentially, GAAP principles were applied throughout Ms. Wildeman’s report and that was wrong because these were Non- GAAP statements. [ 181 ] Secondly, Mr. Gil disagreed that Mowbrey Gil had issued an “unqualified report” when they had included Note 2. That note made it clear that dividends would be recorded as income when they were declared and not when they were paid. He did say, however, that because of Note 2, they should have used negative assurance language rather than the positive opinion in the report. [ 182 ] For Mr.
Gil, however, no shortcomings in the report were relevant because the users of the report were strictly limited by the disclaimer wording. Referring to the disclaimer, he said, “how could you read it otherwise?” [ 183 ] Mr. Gil was of the view that the General Review Standards
section 8100 did not apply to their work on this review. He did agree it was important that shareholders know that they could not rely on the report but was confident that their disclaimer did just that. [ 184 ] Mr. Gil was questioned about other issues in the General Review Standards. He said that “asset impairment” is a GAAP concept. Asset impairment, fair presentation, missing or incomplete third-party disclosure, and non-cash transactions were all GAAP concepts that had no relevance to the basis on which Mowbrey Gil was preparing the 2008 statements. [ 185 ] He felt that Ms.
Wildeman was incorrectly applying audit standards to their Review Engagement Report and their work on it. Robert Mewburn’s Position on the Case [ 186 ] Mr. Belzil for Mr. Mewburn argues that the Plaintiff has established its cause of action against Mowbrey Gil for negligent misrepresentation in regard to the PFK 2008 financial statements. Mr. Belzil submits that the evidence establishes that Mowbrey Gil were negligent in the preparation of the financial statement and that Mr. Hathorn was negligent in the advice given to him during their telephone conversation on July 29, 2009. Mr. Mewburn’s reliance on the fin
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