BC (Securities Commission) v. Bossteam E-Commerce Inc.

2017 BCSC 787 BC (Securities Commission) v. Bossteam E-Commerce Inc. IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: BC (Securities Commission) v. Bossteam E-Commerce Inc., 2017 BCSC 787 Date: 20170407 Docket: S171007 Registry: Vancouver In the Matter of Section 152 of the Securities Act, R.S.B.C. 1996, c. 418 Between: British Columbia Securities Commission Petitioner And Bossteam E-Commerce Inc., Yan Zhu also known as Rachel Zhu, Guan Qiang Zhang, and Zhi Yu Zhang Respondents Before: The Honourable Madam Justice Gropper Oral Reasons for Judgment In Chambers Counsel for the Petitioner: W. Roberts Counsel for Bossteam E-Commerce Inc.: J.R. Shewfelt Counsel for CIBC: A. Sabur Counsel for Attorney General of Canada: L. Chun Place and Date of Hearing: Vancouver, B.C. April 7, 2017 Place and Date of Judgment: Vancouver, B.C. April 7, 2017 Introduction [1] This is a petition by the British Columbia Securities Commission seeking the following orders: first, a receivership order appointing Grant Thornton Ltd. as receiver and trustee of the receivership funds and second, a claims process order setting out the process by which the receiver will distribute the receivership funds to investors and other legitimate creditors. [2] All of the respondents have been served with notice of this petition. [3] Sections 151 and 152 of the Securities Act, RSBC 1996 c. 418 (the Act) provide for the appointment of a receiver. Specifically, s. 152(1) provides that if any of the circumstances referred to in s. 151(1) exist, the commission may apply to the Supreme Court for the appointment of a receiver for all or any part of the property of the person. The reference to s. 151(1) includes where the Commissioner makes an order to freeze property. On that application the court may appoint the receiver if the court is satisfied that the appointment is in the best interests of: (a) that person's creditors; (b) persons, any of whose property is in the possession or under control of that person; or (c) the security holders of or subscribers to that person. [4] Section 152(4) provides the authority to the receiver. (4) A receiver, receiver manager or trustee appointed under this section (a) is the receiver, receiver manager or trustee of all or any part of the property belonging to the person or held by the person on behalf of or in trust for any other person Background The Decision of the Securities Commission [5] The background of this petition is contained within a decision of the Securities Commission, 2014 BCSECCOM 325. The Commission found that Bossteam E-Commerce Inc., Yan Zhu, also known as Rachel Zhu, and Guan Qiang Zhang, also Zhi Yu Zhang, contravened the Act by committing fraud and illegally distributing securities. [6] The directing minds of Bossteam were Ms. Zhu and Mr. Zhang. Bossteam described itself on its websites and documents and in presentations as an online advertising business. The primary part of the business was its website with platforms, including one where advertisers could post links to their own web pages as advertising to be viewed by others. [7] Bossteam raised approximately $14 million from more than 14,000 investors through the sale of securities, including shares, consumer credits, or ad packages. [8] At paras. 171 to 173, the Commission found: 171 Overall the evidence leads to the following conclusions: · While hundreds of local and international businesses appeared to be advertising on Youadworld, most of those ads were associated with Bossteam's administrative accounts, were not authorized by those businesses and Bossteam received no payment for them. · Ads associated with member accounts were largely not paid ads but postings by members of miscellaneous webpages and some free ads giving the false impression that members were paying Bossteam to advertise. · While a few members of Bossteam may have advertised their businesses on the Youadworld website, most members were not paying to advertise but were paying for ad packages to obtain the right to purchase Shares or consumer credits or to earn a return by clicking on ads. · Bossteam generated little actual advertising revenue. 172 We find the respondents created a number of false impressions (the prohibited acts) in support of their scheme to offer and sell ad packages, Shares and consumer credits based on Bossteam being an online advertising business with fast growing advertising revenues, when Bossteam had little actual advertising revenue. 173 The prohibited acts caused deprivation. The purchasers of Bossteam securities paid over $14 million for ad packages, Shares and consumer credits. They risked losing all they paid because Bossteam had few paying advertisers and little advertising revenue. [9] The Commission found that the respondents contravened s. 57(b) of the Act by engaging in conduct relating to securities that they knew perpetuated a fraud on those who had purchased the securities. [10] The Commission ordered that Zhu and Zhang each pay an administrative penalty of $14 million and that Bossteam, Zhu and Zhang disgorge $14 million. [11] The Commission issued various freeze orders and liens against properties that are held in the names of the respondents and others. The Petition [12] In support of the petition, the petitioner filed the affidavit of Sammy Wu, a senior investigator in the enforcement division of the Commission. Mr. Wu determined the names of the account holders and the approximate balance of each of the accounts held by various financial institutions. The petitioner holds $122,810 CAD held in its counsel's trust account. [13] Mr. Wu deposes that he reviewed the bank statements and related accounts at the following financial institutions: Account Number Account Holder(s) Approx. Balances CIBC Accounts xxx Bossteam CAD $146,930 xxx Bossteam USD $9,015,438 HSBC Accounts xxx Bossteam CAD $146,302 xxx Bossteam USD $402,681 BMO Account xxx Guan Zhang and Zhi Zhang USD $118,600 Scotiabank Account xxx Bossteam USD $189,180 Total USD $9,725,899 CAD $293,233 (collectively, the "Frozen Funds") [14] The petitioner seeks the appointment of a receiver to distribute those funds to investors and other legitimate creditors. [15] Mr. Wu deposes that based on his review of the bank account records and interviews with some Bossteam investors, he believes that the funds that are subject to the freeze order represents funds received from the investors in Bossteam. His belief is based upon: first, Bossteam had little or no revenue from actual advertising; second, the individual deposits in the bank accounts are in the same amounts or multiples of the amounts which Bossteam charged investors for ad packages; third, he received information from several investors about specific deposits and by cross-referencing these deposits to the bank statements for Bossteam and Zhang he was able to confirm that those specific funds received from investors were deposited into these accounts; and, fourth, the deposits to the Bank of Montreal account indicate the deposits were made in cash deposits and the amounts were consistent with that of multiple ad packages. [16] Mr. Wu also deposes that based on his investigations, he believes that it would be exceedingly difficult and expensive to conduct a full forensic tracing of the frozen funds to determine the sources of all the funds, in particular: a) Bossteam received at least $14 million from in excess of 14,000 investors; b) Each investor invested in relatively small amounts, that is less than $5,000; and c) Investments were made by a variety of means, including money orders, cheques, and cash. Some of the funds were deposited by way of bulk deposits; that is, multiple investors would combine their funds and make a single deposit. And there is no record available to show the identity of the individual investor and that Bossteam and Zhu and Zhang did not provide reliable records of amounts received or returned to the individual investors. Issue [17] The only issue in dispute is raised by the respondent Miller Thomson who acted as counsel for Bossteam, Zhu and Zhang at the hearing before the Commission and is therefore a judgment creditor of Bossteam in the amount of $86,977.49. The judgment debt is for professional legal fees, taxes and disbursements billed in relation to its representation of Bossteam in proceedings before the Commission. [18] It asserts that the receivership order gives priority to investor claims over those of other creditors. Postion of the Parties Miller Thompson [19] There are two bases for Miller Thomson's objection. First, it argues that constructive trust is a remedy and the petitioner has not demonstrated that there is a cause of action which gives rise to liability. Second, it asks what role is left for the receiver to distribute to the other creditors after distribution to the investors. [20] Miller Thomson says that it has not been proven that there was no advertising revenue generated by the respondents. It says that there was a real business. The Commission found evidence of fraud, which must be considered in the context of civil fraud. In that regard, Miller Thomson refers to the decision of Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, where the Court referred to the requirements to demonstrate the tort of civil fraud at para. 21: From this jurisprudential history, I summarize the following four elements of the tort of civil fraud: (1) a false representation made by the defendant; (2) some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness); (3) the false representation caused the plaintiff to act; and (4) the plaintiff's actions resulted in a loss. [21] In this case, Miller Thomson says that there is no evidence that a false statement made by the respondents actually induced any of the investors to make the investment. It says that there was no evidence before the Commission of an investor saying that he or she had relied on false impressions provided by the respondents so there is no factual context for such evidence to exist. It argues that this is an individualistic issue that must be determined in respect of each investor. [22] Miller Thomson points out that there are circumstances where some investors may have received a return on their investment. [23] Finally, Miller Thompson asserts that a constructive trust in this circumstance would be unjust because it arbitrarily prejudices the rights of intervening creditors The Petitioner [24] The petitioner points out that the Commission explicitly found that the respondents had acted fraudulently, having found that there was no legitimate underlying business and it was the fraud that caused the deprivation. The decision has been filed in this court and therefore is enforceable as a court order [25] The petitioner asserts that a constructive trust is an equitable concept and it is not dependent on the existence of a tort. A tort requires a proof of loss. A constructive trust can be imposed even where there is no loss. It is not necessary for the petitioner to have to prove a tort. It is a remedy for situations that are not remediable or where the common law has no remedy. [26] In response to the particular position that some investors may have actually received a return on their investment, the petitioner points out that the proposed claim process requires investors to disclose any returns on their investment. Decision [27] I find that Bruno Appliance is not directly applicable to the facts at hand. Here, the Commission found that the respondents acted fraudulently in breach of the Act. It is unnecessary to consider the elements of the tort of civil fraud. That approach essentially requires me to judicially review the Commission's decision. That is not the matter before me. [28] Soulos v. Korkontzilas, [1997] 2 S.C.S. 217 (S.C.), relied upon by both the petitioner and Miller Thompson, provides the appropriate direction in this case. [29] There are two types of constructive trusts: a substantive constructive trust and a remedial constructive trust. [30] In a substantive constructive trust, the acts of the parties in relation to some property are such that those acts are later declared by the court to have given rise to a substantive constructive trust or to have done so at the time when the acts of the parties brought the trust into being. [31] In a remedial constructive trust the acts of the parties are such that the wrong is done by one of them to another and while no substantive trust relationship is then and there brought into being by those acts, nevertheless, a remedy is required in relation to property. There the remedy in the form of a declaration, which when the order is made creates a constructive trust by one of the parties in favour of the other party: Atlas Cabinets and Furniture Ltd. v. National Trust Co., [1990] 68 D.L.R. (4th) 161 (B.C.C.A.). [32] Here, the petitioner says that there is both a substantive constructive trust and a remedial constructive trust and, indeed, it is unnecessary for me to make the distinction in order to reach a conclusion in this matter. [33] In Soulos, the Court describes constructive trusts (at para. 43): in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation. While cases often involve both a wrongful act and unjust enrichment, constructive trusts may be imposed on either ground: where there is a wrongful act but no unjust enrichment and corresponding deprivation; or where there is an unconscionable unjust enrichment in the absence of a wrongful act ... [34] At paragraph 45 the Court outlines the conditions where the courts of equity have imposed a constructive trust for wrongful conduct (paraphrased in the petitioner's submission): (1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands; (2) There must be a nexus or link between the assets in the hands of the defendants and a breach of its equitable obligation to the plaintiff; (3) The plaintiff must show a legitimate reason for seeking any proprietary remedy; and (4) There must be no factors that would render imposition of a constructive trust unjust in all of the circumstances. [35] I am satisfied that those conditions are met here. The respondents, Bossteam, Zhu and Zhang, were under a legal and equitable obligation to use investment funds for the purpose for which the investors intended. They misrepresented the purpose for which they were going to use the funds and defrauded the investors in the process. On that basis, the respondents have been unjustly enriched to the detriment of the investors. [36] In respect of the second condition, the nexus or link, I am satisfied based on the affidavit provided by Sammy Wu that the frozen funds and those in the petitioner's counsel's trust account represent an actual propriety link between what left the investors' hands and that which went into respondents' accounts. [37] In respect of the third condition, the legitimate reason for seeking the proprietary remedy, I agree with the petitioner that the investors have a legitimate reason for seeking a proprietary remedy; that the defrauded investors who placed their funds in the hands of Bossteam on the basis of what the investors thought was a mutual understanding. It is important to hold the respondents to a high level of trust and prevent them from retaining the monetary benefits which in good conscience they should not be permitted to retain. I also agree with the petitioner that a constructive trust will provide a more meaningful form of relief than an equivalent award of damages. [38] The fourth factor is whether the imposition of a constructive trust would be unjust in the circumstances; I find that it is not. There will be priority granted to the investors over that of the creditors, in particular, Miller Thomson. However, it was the fraud on the investors that caused the monies to be collected by the respondents and then required the Commission to investigate and to determine whether fraud existed. The respondents retained Miller Thomson to provide legal services to them for their appearance before the Commission. The hearing before the Commission was only necessary because Bossteam defrauded the investors and did not keep records of their investments. [39] I agree with the petitioner that it is not unjust in all the circumstances of the case to grant priority to the claims of the investors before that of the other creditors. [40] The distribution method and the terms of the orders sought by the petitioner are not in dispute on the basis of my determination that the constructive trust provisions be included in the order. "Gropper J."