Earnout Trends: Tax Considerations in Reverse Earnouts

By | Canadian M&A Law | September 29, 2014
Earnout Trends: Tax Considerations in Reverse Earnouts

One of the most difficult questions to come up at the negotiating table is also one of the most fundamental: “What is it worth?” To bridge the almost inevitable vendor-purchaser valuation gap, parties to an M&A transaction will often agree to tie part of the purchase price to some measure of post-closing business success.

Agencies Finalize Changes to Supplementary Leverage Ratio Requirements

Agencies Finalize Changes to Supplementary Leverage Ratio Requirements

On September 3, 2014, the US banking agencies (the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Comptroller of the Currency) issued a final rule adjusting the calculation of the supplementary leverage ratio in order to conform to recently adopted recommendations of the Basel Committee of the Bank for International Settlements, which issues standards for bank supervision.

Imprisonment for Ponzi Schemes: How Long is Long Enough?

By | Canadian Fraud Law | September 23, 2014

Under section 380.1(1) and (1.1) of the Criminal Code, courts are required to consider the following non-exhaustive list of factors as being aggravating circumstances in the context of fraud.

  • significant magnitude, complexity, duration or degree of planning of the fraud;
  • an actual or potential adverse effect on the Canadian economy or financial system, or on investor confidence;
  • large numbers of victims, particularly if the fraud had a significant impact due to the victims’ personal circumstances;
  • failure to comply with applicable professional standards;
  • concealment or destruction of documents related to the fraud; and
  • whether the total value of fraud exceeds one million dollars.

Usually an individual’s good reputation in the community is an important mitigating factor in sentencing, but not so for sentencing on a fraud conviction. Rather, an individual’s reputation for trustworthiness and good character is viewed neutrally, if not unfavourably, as fraudsters typically make use of their reputation to persuade victims to part with their money.

Many of these aggravating factors were considered by Justice Corrick in a recent July 2014 decision in R. v. Lewis. The accused, Mr. Lewis, was found to have defrauded investors of over $7.5 million between 2004 and 2011. The Court highlighted a number of aggravating factors. First, the Court noted that the scheme was a “large scale sophisticated fraud that was perpetrated over several years.” Second, the Court found that Mr. Lewis had breached the trust of his investors and that he “used any and all means to develop a rapport with his victims to extract their money.” Third, the Court noted that Mr. Lewis’ crimes were driven by pure greed and had had a devastating effect on his investors. Finally, the Court emphasized that Mr. Lewis did not appear to acknowledge his wrongdoing or to show remorse, which increased his risk of re-offending. With these considerations in mind, the Court sentenced Mr. Lewis to seven years imprisonment.

Canadian courts have typically handed down sentences of between six and eight years imprisonment for those convicted of perpetrating Ponzi or other investment schemes. In one of the largest investment schemes in Saskatchewan’s history, the primary architect of the scheme, who had defrauded investors of approximately $16.7 million over the course of four years, was sentenced to seven years imprisonment. You can read more about the R. v. Fast case in our earlier blog post.

It is important to recognize that, for any fraud perpetrated before September 2004, the maximum penalty that can be ordered is ten years imprisonment. Generally, our judges were awarding on the high-end of the sentencing range for those found to have run Ponzi schemes. For fraud perpetrated after 2004, the penalty has been increased to 14 years imprisonment and we therefore expect to see higher sentences in the future.

* The author wishes to thank Jennifer Bernardo, Student-at-Law, for her assistance.

Three Thoughts On Global Regulators’ Update to G20 On Derivatives Cross-Border Implementation

Three Thoughts On Global Regulators’ Update to G20 On Derivatives Cross-Border Implementation

On September 10, 2014 the Over-the-Counter (OTC) Derivatives Regulators Group (ODRG), consisting of derivatives market regulators from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland, and the United States (CFTC and SEC) released a report to the G20 that provided an update on the resolution of key cross-border derivatives reform implementation issues.