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Lawsuits ensnare Toronto firm in Ponzi case

|Written By Michael McKiernan

A Toronto law firm is fending off two lawsuits from investors in a suspected Ponzi scheme who say it should have told them their money was at risk.

Aylesworth LLP represented notorious Toronto businessman Robert Mander - who left investors with more than $40 million in losses - during an Ontario Securities Commission investigation into his business in 2009.

Mander committed suicide in March as the roof began to cave in on his scheme with RCMP and OSC investigations underway and investors launching a flurry of lawsuits.

Separate actions filed by        investors Peter Sbaraglia and Davide Amato, who both claim they also retained Aylesworth, allege the firm breached its fiduciary duty to them.

Peter Welsh, an affiliated counsel at Aylesworth who refers business to the firm, is also listed as a defendant in both lawsuits. Sbaraglia is seeking $15 million in damages, while Amato wants $14 million. None of the allegations have been proven in court.

In an interview with Law Times, Welsh says he had no knowledge of the Ponzi scheme and only helped Sbaraglia and Amato with the structure of the companies they had set up to funnel investments to Mander.

“I update the minute book, file bylaws and resolutions of the directors, issue shares, and charge $800, inclusive of disbursements, and now I’m in a lawsuit for $29 million,” Welsh says.

In his statement of claim filed on May 5, Sbaraglia, a former dentist, says he was convinced to invest as a result of Mander’s promises to deliver returns of 25 per cent. He agreed to set up a company with Mander, C.O. Capital Growth, to solicit investments.

They would then split the profits. Sbaraglia claims he raised $20 million and that he and his wife both gave up their dental practices “in the belief that they were making substantial returns.”

Amato, another former dentist, describes in a statement of claim filed on Sept. 20 how he set up his own company, S.A. Capital Growth Corp., to generate money to invest with Mander.

According to the lawsuit, Mander introduced him to Welsh and Aylesworth, a move Amato says Mander used to lend legitimacy to his scheme. He also says the law firm and lawyer should have warned him his dealings with Mander exposed him to “significant and unusual financial and legal risks.”

Both Sbaraglia and Amato claim Welsh and Aylesworth knew about the financial difficulties Mander was facing since as early as 2007 and allege the information was withheld from them.

Welsh says he now believes Mander was running a Ponzi scheme, a conclusion he came to only from reading about the case. He notes there was no way for him to know the details of the scheme as he never advised Mander on investment activities.

Welsh also claims he only found out about Mander’s financial difficulties when Sbaraglia’s wife told him she was owed money in January.

“It’s hard, if not well nigh impossible, to advise people about something you know nothing about,” Welsh says. “I know what sort of money Robert Mander said he was making in the marketplace.

I never saw financial statements or tax returns or tax accounts. If a client of mine says to me they earn $100,000 a year, do I ask them for a statement from their accountant to verify it?

It doesn’t happen. Everyone may think I should have been the protector doing investigations into the credibility of any one of these people, but it’s not my job. It’s never been my job.”

According to Welsh, when the two men first came to his office in 2008, they had problems with their business names. The periods hadn’t been recorded properly when they were registered, so it looked as though the businesses didn’t exist when people performed searches on them. “That’s how mundane it was,” Welsh says.

By that stage, Welsh says they already had pre-existing relationships with Mander. In his defence to Sbaraglia’s claim, Welsh says he couldn’t have reasonably relied on him for “information respecting the investing acumen and trustworthiness of Mander.”

Aylesworth also pleaded ignorance in a statement of defence to the Sbaraglia claim filed on July 19.

“Mander made explicit representations that he was a person of substantial net worth,” the firm says in its defence.

It was in June 2009 when Sbaraglia says he got the first signs something was amiss as the OSC began investigating C.O. Capital Growth. That’s when Mander suggested he and Sbaraglia hire Michael Miller and Julia Dublin, both lawyers at Aylesworth, according to the statement of claim.

That placed the firm in “a hopeless conflict of interest” between Mander and Sbaraglia, he alleges in his lawsuit.

Sbaraglia also says in his statement of claim that Miller and Dublin assured him his investments were fully secure and that he “should have no worries” about his business dealings with Mander.

As well, a statutory declaration drawn up by the lawyers in which Mander swore that six properties were being held in trust to repay loans was done with a “view to keeping Mander and his business operating” when in fact counsel should have known it was security for nothing, according to the claim.

But in its statement of defence, Aylesworth says Sbaraglia and Mander retained the firm jointly with the aim of heading off charges against them under the Securities Act.  

“Aylesworth, and in particular Dublin, had concerns about whether it would appear to the OSC investigators that Sbaraglia and Mander were involved in some sort of Ponzi scheme,” the firm says in its statement of defence, which notes Sbaraglia repeatedly advised that he was aware of Mander’s business affairs and had no concerns about them.

Aylesworth goes on to claim in its statement of defence that Sbaraglia presented himself as a sophisticated investor with a wealth of experience in the field.

In Amato’s lawsuit, he says Dublin’s concerns should have been made known to him.

He claims that in June 2009, in advance of her appearance before OSC investigators, Dublin was asked to determine whether the dealings of his company were within the law. According to his statement of claim, Amato is alleging she should have told him about the investigation and says she denied the existence of her relationship with him before the OSC.

Although Aylesworth hasn’t yet filed its defence in that matter, firm counsel Peter Wardle tells Law Times it’s planning to have parts of Amato’s claim struck. “The firm’s position is that Amato was never a client of Aylesworth,” Wardle says.

Amato couldn’t be reached for comment by press time. His lawyer Alan Merskey, a partner at Ogilvy Renault LLP, says he can’t comment on the case.

  • What a can of worms

    Don Desaulniers
    After reading this article, I am so thankful that I am now retired and was lucky enough never to get retained by a client from hell, and smart enough to stay small time and never try to do legal work for the high rollers of the world.
    The facts seem so complicated, especially from the vantage point of Peter Welsh, that future law school classes may be studying this case at some point in the near future. I must admit to having a lot of sympathy for Mr. Welsh. His line, about charging $800.00 to do simple corporate work and now being a defendant in a 29 million dollar lawsuit, would make the great outline of a book.
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