R. v. Agensys International Inc.

R. v. Agensys International Inc. Collection Decisions of the Court of Appeal Date 2004-06-28 Docket numbers C38981, M30925 Judges Rosenberg, Marc; Gillese, Eileen E.; Armstrong, Robert Patrick Subject Criminal Decision Content DATE: 20040628 DOCKET: C38981, M30925 COURT OF APPEAL FOR ONTARIO ROSENBERG, GILLESE and ARMSTRONG JJ.A. BETWEEN: HER MAJESTY THE QUEEN Respondent - and - AGENSYS INTERNATIONAL INC., LARRY GAMBLE and DAVID MORLEY Appellants Scott K. Fenton for the appellants Bradley Reitz and Brian Puddington for the respondent HEARD: May 10, 2004 On appeal from the judgment of Justice Edward F. Then of the Superior Court of Justice dated September 27, 2002. GILLESE J.A.: [1] Revenue Canada obtained search warrants for business and residential premises in which the appellants had privacy interests. The appellants applied to have the search warrants quashed. Justice Then dismissed the application. The appellants appeal from that dismissal. [2] The respondent moves to have the appeal quashed on the basis that it is moot. All of the seized items were returned to the parties from whom they were seized in 1998 and no charges were laid as a consequence of the investigation and seizures. As a result, the respondent argues, the appellants no longer require any remedy, the dispute is over and the appeal is moot. [3] For the reasons that follow, I would dismiss both the motion to quash and the appeal. Background in Brief [4] The appellants were the subjects of a Revenue Canada investigation into alleged offences under the Income Tax Act and the Criminal Code, including the offences of claiming fraudulent limited partnership losses and deductions, and selling fraudulent losses to investors. [5] The investors incurred losses through investments in several limited partnerships formed between 1992 and 1995. The limited partnerships had acquired territorial rights to computer software known as the "Agensys software" from Agensys Corporation, a company incorporated in the Turks and Caicos. In 1996, the corporate appellant acquired the rights to the software from the various limited partnerships. The Agensys software was described as "an automated tool used to support information management". [6] The theory of the Revenue Canada investigators was that the limited partnership losses were illegitimate because the software was worthless. In furtherance of the investigation, Mark Duncan, a Revenue Canada officer with the Special Investigations Unit, swore an Information to Obtain. [7] In the Information to Obtain, Mr. Duncan referred to three sources of information concerning the value of the Agensys software. First, in June 1993, R. J. Pritchard & Associates made an evaluation of the fair market value of the software in Canada as of May 31, 1993, concluding that it was approximately $14,875,000.00. The Pritchard valuation projected software sales for the years 1993 to 2001 of a total of $53,773,000 - this too was shown in the Information to Obtain. [8] Second, Mr. Duncan referred to a sales projection from a member of the Agensys management group that was given to Fred Traer, a Revenue Canada officer with the Tax Avoidance section, during a meeting on May 16, 1995. This projection was that software sales for the years 1994 to 1998 would total $193,030,000.00. [9] Third, Mr. Duncan provided a chronological summary of meetings held, and correspondence obtained, by Revenue Canada concerning the valuation of the software. The chronology showed that on March 18, 1996, the Tax Avoidance section of Revenue Canada received a letter from Murray Games of the Revenue Canada Valuations section. The letter outlined the information that Mr. Games had received from an outside consultant, Gondos & Associates ("Gondos"). Revenue Canada had hired Gondos in February 1995 to value the software. The Gondos information included Gondo's opinion that the software, as of June 30, 1993, had no value and the following six points: i) little or no material or effort appears to have been laid out to develop or market the product. All the information, demonstrations, applications and documentation that now exist appears to have been built or assembled for the benefit of the Revenue Canada review, which was conducted some three years after the date of valuation; ii) the partnership did not provide evidence that they had access or ownership of the source code; iii) the partnership did not have a team of employees capable of supporting, maintaining, updating, developing or marketing the product; iv) the product that was demonstrated in 1996 was a DOS version only, that even at those dates was not fully implemented and for which significant parts did not exist; v) the partnership had not developed any internal expertise vis-à-vis the product and even today relies on external consultants. In short, there was no continuity within the partnership to reflect the knowledge, technical expertise and marketing skills necessary to successfully sell this product; vi) there were not any sales, and to date there still have not been any sales of the software. [10] Mr. Traer of the Tax Avoidance section, in turn, provided Mr. Duncan with the Gondos information set out above. [11] The Information to Obtain clearly outlined the means by which Mr. Duncan came to know the Gondos valuation of the software. [12] In the Information to Obtain, Mr. Duncan swore this, when referring to the Gondos information: "[I]n trying to determine the nature and value of the software acquired, the department received a valuation report that the asset's value on June 30, 1993 based on the information seen was nil"[emphasis added]. This was the only reference to a valuation report in the Information to Obtain. Elsewhere in the document, the Gondos information is referred to as statements or observations made by Gondos. [13] On cross-examination, Mr. Duncan admitted that the term "valuation report" was incorrect and that "valuation conclusion" would have been a better term to have used. [14] On October 7 and November 17, 1997, warrants were issued to search: the business premises of the corporate appellant and associated limited partnerships; the residences of the appellants Larry Gamble and David Morely[1]; and the law offices of Fasken Campbell Godfrey. Pursuant to the warrants, investigators seized a large quantity of documents and computerized data. [15] Approximately six months after the warrants were executed, the appellants[2] filed a court application in which they sought an order in the nature of certiorari quashing the warrants and a declaration that their s. 8 Charter rights had been violated. [16] The record before the applications judge included: the Information to Obtain; transcripts of the cross-examinations of Mr. Duncan on the Information to Obtain; affidavits by the applicants; transcripts of the cross-examinations of the applicants on their affidavits; and other materials pertinent to the value of the software and its commercial viability. [17] The applications judge concluded that, in terming the letter containing the Gondos information a "valuation report", Mr. Duncan had misrepresented the nature of the document relied upon. However, he also concluded that the misrepresentation did not amount to deliberate deception. And, at para. 20 of his reasons, he found that there was no misrepresentation of the content of the Gondos information itself and that the warrant "would have been issued on this document alone in light of the information it conveys." [18] After dealing with the other matters raised by the appellants, he dismissed the application. [19] The appellants claim that the applications judge erred in finding that there was some evidence before the issuing judge upon which the latter could have issued the warrants. They submit that the record demonstrated that (1) the issuing judge was misled by false, materially misleading and deliberately deceptive statements in the Information to Obtain and (2) the affiant improperly relied on hearsay evidence when swearing the Information to Obtain and, without the hearsay evidence, probable cause for the issuance of the warrants would not have been established. The Motion to Quash [20] An appeal is moot if a decision by the court will not resolve a live controversy affecting, or potentially affecting, the rights of the parties. See Borowski v. Canada (Attorney General), [1989] 1 S.C.R. 342 at 353. [21] The appellants have no further interest in these proceedings as the Revenue Canada investigation is closed, all documents have been returned and no charges have been laid. In the circumstances, I agree that the appeal is moot. [22] As a general rule, a court will not hear a moot appeal. However, once it is found that an appeal is moot, the court must determine whether it should exercise its discretion to hear the case. The party seeking to have the appeal determined on its merits bears the onus of convincing the court to make an exception to the general rule: see Payne v. Wilson (2002), 162 O.A.C. 48 at 52. [23] A court may exercise its discretion in favour of hearing a moot appeal where the concerns underlying the general rule are outweighed by the interests served by a determination of the merits of the appeal. Three concerns underlie the general rule. First, mootness can diminish the adversarial process crucial to the operation of the litigation process. Second, judicial resources are limited and should normally be reserved for the determination of real disputes having real consequences for the parties. Third, there is a concern that in deciding moot appeals, the courts may step outside the boundaries of their proper adjudicative role and intrude upon the role of the legislature: see Payne at p. 52 and Borowski at pp. 358-63. [24] A consideration of these factors leads me to conclude that it is in the interests of justice to hear the appeal. [25] The first concern does not arise here - there is an appropriate adversarial context. Despite the cessation of a live controversy, the parties have vigorously and fully argued the issues. [26] The second concern, which relates to judicial economy, is diluted in the circumstances of this case. The appellants filed their motion seeking to quash the search warrants on April 24, 1998. In the fall of 1998, Revenue Canada investigators closed their investigation and returned all the seized items to the parties from whom they were seized. The parties continued to vigorously contest their positions with interlocutory matters proceeding to cross-examination on both sides. Final argument on the application was made on July 7, 2000, with each party filing written submissions and authorities. The applications judge issued his decision with reasons on September 27, 2002. The appellants filed a notice of appeal on October 24, 2002. On June 2, 2003, the appellants filed multiple copies of a six-volume set of appeal books and transcripts and on September 15, 2003, the appellants filed their factum. In December 2003, the respondent raised the issue of mootness for the first time. No reasons were offered as to why the mootness issue was raised for the first time on appeal or why the Crown chose to vigorously contest the issues throughout the proceedings before the applications judge. [27] As the cases demonstrate, concerns about mootness are normally triggered when there is a material change in the legal or factual substratum of the case between the time of the decision and the time of the appeal from the decision. See, for example, Borowski, supra, and Southam Inc. v. Canada (1990), 55 C.C.C. (3d) 428 (Ont. C.A.). Here there was no change in the factual or legal substratum of the case between the date of the decision and the time of the appeal. Moreover, the effect of acceding to the mootness motion at this point would be to insulate a favourable ruling from appellate review. [28] The third concern - that the court would step beyond its judicial function of resolving disputes - does not arise in the circumstances of this case. [29] For these reasons, in my view, the court should exercise its discretion and hear the appeal. The Appeal The Standard of Review [30] The applicable standard of appellate review is clear. The court is to show the usual deference for findings of fact and it ought not to interfere absent an error of law, a misapprehension of the evidence or a failure to consider relevant evidence: see R. v. Grant (1998), 132 C.C.C. (3d) 531 at 540 (Ont. C.A.). No error of law [31] The applications judge thoroughly canvassed the relevant law and legal principles. He quoted the following passage in R. v. Garofoli, [1990] 2 S.C.R. 1421 at 1452, in which the Supreme Court of Canada established the process by which a reviewing judge was to consider the decision of the authorizing judge to grant a search warrant: The reviewing judge does not substitute his or her view for that of the authorizing judge. If, based on the record which was before the authorizing judge as amplified on the review, the reviewing judge concludes that the authorizing judge could have granted the authorization, then he or she should not interfere. In this process, the existence of fraud, non-disclosure, misleading evidence and new evidence are relevant, but, rather than being a prerequisite to review, their sole impact is to determine whether there continues to be any basis for the decision of the authorizing judge. [32] The applications judge noted that, as the reviewing judge, he had to expunge any misleading and erroneous information and then make a determination as to whether there was sufficient reliable information remaining that could support the warrant. He referred to R. v. Monroe (1997), 8 C.R. (5th) 324 (B.C.C.A.) in support of this point of law. See also R. v. Bisson (1994), 94 C.C.C. (3d) 94 at 95-96 where the Supreme Court of Canada stated that errors in the information presented to the authorizing judge, whether inadvertent or even fraudulent, are factors to be considered in the review process but do not, by themselves, lead to automatic vitiation of the search warrant. [33] The penultimate paragraph in the applications judge's reasons for decision is a clear enunciation of the correct legal principles. In that paragraph, he stated: As the reviewing judge my function is to determine whether there is any basis remaining, after disregarding the allegations that are false and taking into consideration the facts found to have been omitted by the informant, upon which the issuing judge would be satisfied that a search warrant should be issued. In my view, the issuing judge in this case could be satisfied that the search warrants should be issued. The alleged errors [34] The appellants concede that the applications judge correctly articulated the governing legal principles but argue that he erred in their application. The primary errors alleged are: (1) a failure to conclude that the main allegation in the Information to Obtain - the allegation that a valuation report showed the software was of no value - was a deliberate and substantial deception sufficient to vitiate the warrants; and, (2) a failure to find that Mr. Duncan's approach to the drafting of the Information to Obtain was fatally flawed. More specifically, the appellants submit that Mr. Duncan's reliance on multiple layers of hearsay and his systematic failure to make inquiries from primary sources to verify the accuracy of the hearsay information amounted to a breach of his duty to provide full, frank and fair disclosure and caused the Information to Obtain to be fatally flawed. [35] I do not agree with either submission. The alleged deception [36] The applications judge found that while Mr. Duncan had misrepresented the nature of the document that he relied upon, the misrepresentation did not constitute deliberate deception. As a finding of fact, this determination is entitled to deference and is fully justified on the record. [37] The applications judge also found that, although the characterization of the medium by which the Gondos information was conveyed to Mr. Duncan was misleading, there was nothing misleading about the content of the information that was conveyed to the issuing judge. The Gondos information does state that the software had no value and gives reasons for that assessment. [38] In light of these findings, the applications judge properly rejected the submission that because the Gondos information was misrepresented as a valuation report, the entire content of the Gondos information should be excised. As the Supreme Court of Canada stated in R. v. Araujo (2000), 149 C.C.C. (3d) 449 at 474, "[E]rroneous information is properly excised…and the remaining information then assessed in the totality of the circumstances." The applications judge properly excised the term "valuation report" from the Information to Obtain but left in the content of the Gondos information and justifiably concluded that the warrant could have been issued on the basis of that information alone. [39] In a similar vein, the appellants assert that there were other defects in Mr. Duncan's affidavit that, either singly or in combination with the "valuation report" misrepresentation, ought to have led the applications judge to find that the warrants ought not to have been issued. These are: the statement that the Agensys partnership and Agensys Corporation were dealing at non-arms-length; the failure to disclose positive consulting reports on the value of the software; and, the characterization of the corporate appellant's failure to provide Gondos with the source code. [40] I need not deal with these contentions in light of the applications judge's findings that there was no deception or attempt to mislead in the Information to Obtain and his determination that the warrant would have been issued on the basis of the Gondos information alone. Suffice to say that I see no error in the applications judge's reasons or determinations in respect of any of these contentions. On the contrary, the reasons show a full appreciation of the appellants' arguments on each of these alleged defects, the relevant evidence and the applicable legal principles. Reliance on hearsay [41] The applications judge considered the legal obligations of a deponent of an Information to Obtain in light of the principles summarized by the Supreme Court of Canada in Araujo, supra. Although Araujo dealt with the legal standard that an affiant supporting a wiretap application must meet, the applications judge held that the principles were equally applicable to a determination of the legal sufficiency of the Information to Obtain. In my view, he was correct to do so. [42] In both instances, in my view, the deponent is obliged to make full, fair and frank disclosure of the material facts so that the issuing judge is able to make a judicial assessment of whether the facts rise to the standard required to meet the test for issuance of the warrant. See Araujo at pp. 469-70 in relation to the disclosure obligation for search warrant deponents. [43] In Araujo at p. 470, Lebel J. writing for the court, stated Finally, while there is no legal requirement for it, those gathering affidavit material should give consideration to obtaining affidavits directly from those with the best first-hand knowledge of the facts set out therein, like the police officers carrying on the criminal investigation or handling the informers. This would strengthen the material by making it more reliable." I note that the Information to Obtain in this case was made several years before the decision in Araujo. In the future, a deponent for an Information to Obtain should bear in mind the words of LeBel J. about the desirability of presenting first-hand information in the Information to Obtain. However, although the deponent of an Information to Obtain should consider obtaining information directly from those with first-hand knowledge of the facts, it is not a legal requirement that the deponent do so. Like search warrant applicants, such deponents are entitled to rely upon hearsay. Again like search warrant applicants, where hearsay is relied upon, it must be presented in a way that allows the issuing judge to make his or her own determination about the reliability and trustworthiness of the sources of information. The Information to Obtain should never attempt to trick its readers. It should set out the facts truthfully, fully and plainly: see Araujo at p.470. [44] It is important that an affiant properly source all of the information relied upon. In this case, Mr. Duncan adequately sourced all of the information he relied upon with the exception of the information from the outside consultants, Gondos & Associates. There was no information before the issuing judge or the reviewing judge as to the education, training or qualifications of the outside consultants. Given the significance of the information provided by the outside consultants and relied upon in the Information to Obtain, this omission is serious. Where, as here, the hearsay information being relied upon is based upon highly technical matters, adequately sourcing the information requires the provision of sufficient information on the credentials of the expert that the issuing judge can satisfy him or herself that the expert was qualified to make the determinations in question. [45] While the Information to Obtain is deficient in this regard, in my view that deficiency is not sufficient to warrant quashing the search warrants for three reasons. First, as an omission and in the absence of information that Gondos & Associates was not qualified to offer the opinions it did, it cannot be seen to be a deliberate deception. Second, it was open to the issuing judge to assume that Revenue Canada had hired competent outside experts given that its express purpose for hiring the consultants was that "Revenue Canada's Valuation's section did not have the required expertise". Third, the chronology of events listed in para. 6 of the Information to Obtain shows that Revenue Canada, in the person of Fred Traer, was closely involved in the Gondos review of Agensys. It was open to the issuing judge to find by implication that Mr. Traer's involvement and supervision of Gondos & Associates provided a sufficient degree of confidence in the reliability of the findings made by Gondos & Associates. [46] In the Information to Obtain, Mr. Duncan also relied on the hearsay comments of Joe Albanese, an investor, given to Mirko Komienovich, an officer with the Tax Avoidance section of Revenue Canada. Mr. Duncan corroborated Mr. Albanese's statements about his investments by reviewing his tax returns. He also confirmed, with Mr. Komienovich, the information he had received with respect to Mr. Albanese before swearing the Information to Obtain. [47] In support of their application to quash the warrant, the appellants filed an affidavit of Mr. Albanese that contradicted the accuracy of the statements attributed to Mr. Albanese by Mr. Komienovich. As the applications judge noted, this contradiction in statements illustrates the pitfalls of not relying on first-hand information. However, the applications judge also found that there was no evidence that Mr. Duncan was acting in bad faith when he put such information to the issuing judge, nor was there a deliberate attempt to mislead the issuing judge. [48] In the circumstances of this case, where Mr. Duncan was relying upon information given to him by other Revenue Canada employees, in my view there was no obligation on Mr. Duncan to independently verify the accuracy of that information. The instant case is readily distinguishable from R. v. Debot (1989), 52 C.C.C. (3d) 193 (S.C.C.) and R. v. Hosie (1996), 107 C.C.C. (3d) 385 (Ont. C.A.), two cases concerning the sufficiency of evidence relied upon by the police that came from a confidential source. In such situations, as the courts pointed out, the source of the information is unproven: it is not known what the informer's source of knowledge is, how current the information is or how the informer obtained the information. Such information requires verification: see Debot at p. 281 and Hosie at pp. 391-92. [49] In the case at bar, the sources of information relied on by Mr. Duncan were within Revenue Canada itself or emanated from an outside consultant that had been hired by Revenue Canada to perform a valuation. There was no "tip" from an unknown informer and the consultant's sources of knowledge and information were known and disclosed. Even if the statements attributed to Mr. Albanese could be seen to be akin to a "tip", his identity was known and steps had been taken to confirm the information attributed to him. Conclusion [50] Accordingly, I would dismiss both the motion to quash and the appeal. RELEASED: June 28, 2004 ("M.R.") "E. E. Gillese J.A." "I agree M. Rosenberg J.A." "I agree Robert P. Armstrong J.A." [1] The residences of Gary McCann and Paul Mighton were also included in the search warrants. [2] Mr. Gamble, Mr. Morely, Mr. McCann and Mr. Mighton were all applicants before Justice Then. Of these four, only Mr. Gamble and Mr. Morely appeal the dismissal of the application.