|'RISK' - Nowak v. Fox, Mr. Fox and Mr. Folk subscribed for shares through Mr. Nowak, with which they hoped to make a ten-fold profit.|
IN THE SUPREME COURT OF BRITISH COLUMBIA
Bradley Fox and Adam Folk
Before: The Honourable Mr. Justice Grauer
On appeal from the Provincial Court of British Columbia, Civil Division, from the Order of the Honourable Judge Bagnall pronounced November 14, 2011, Docket 09 27734, Vancouver Registry
Reasons for Judgment
 There is nothing quite so attractive as the lure of easy money. Mr. Nowak promoted a development-stage company in which he was involved, RIF America Inc. He was hired by the principal of the company, Maynard Dokken, to raise funds for development, and was paid well for his efforts. He hoped to make a lot more. Mr. Fox and Mr. Folk subscribed for shares through Mr. Nowak, with which they hoped to make a ten-fold profit.
 The company never made it, however, and Mr. Fox, Mr. Folk and the other investors lost their investments. Mr. Fox lost $11,000, while Mr. Folk lost $2,000. They sued Mr. Nowak in the Provincial Court, Civil Division, alleging:
Mr. Nowak encouraged Mr. Fox and Mr. Folk to invest as much money as possible under the pretense that we were purchasing shares at $.10 and $.25 in RIF America, and that the stock would be going public by December 2007 Mr. Fox and Mr. Folk were not completely naïve as there was a strong understanding of the prevalent risks. We are [asserting] in this suit that the entire company is fraudulent, and there was no real intention of taking this company public.
 They claimed, in short, that the concept was not simply a poor investment, but rather constituted a fraudulent scheme designed to bilk investors for the financial benefit of Mr. Nowak, his colleague in the sales force, Alex Bridges, and Mr. Dokken. The trial judge agreed, finding herself satisfied on all of the evidence "that it is more likely than not that Mr. Nowak defrauded the Claimants."
 Mr. Nowak appeals from that finding. After careful consideration, I have concluded that the evidence led at the trial was not capable of supporting the finding of fraud. Accordingly, for the following reasons, the appeal is allowed, and the claim is dismissed.
OUTLINE OF FACTS
 At the material time, Mr. Nowak and Mr. Folk were 24 years old. Mr. Bridges was younger. The record does not disclose Mr. Fox's age, but it is clear that none of them was particularly experienced in matters of business, finance and securities.
 Mr. Nowak was introduced to Maynard Dokken through a mutual acquaintance who knew that Mr. Nowak was looking for an opportunity to gain business experience. Mr. Dokken, who appeared to be an experienced businessman, took Mr. Nowak under his wing, along with another young man, Alex Bridges.
 Mr. Dokken described to them an exciting business opportunity that had arisen from progress in a patent application made by Mr. Dokken some years before. Mr. Dokken proposed to license the patent to RIF America, such licence forming RIF's core business asset. He proposed that Mr. Nowak and Mr. Bridges come on board as equal shareholders with him, and take on the task of raising money to fund RIF's development. For this purpose, he provided them with a Business Plan, an Intellectual Property Valuation Report, and subscription agreements for investors.
 Given the nature of the investment, only "friends and family" and accredited investors could invest at that stage. Mr. Nowak did not need a securities licence to raise funds in this way. Accredited investors were persons with an annual income in excess of $200,000, or net financial assets in excess of $1 million. The initial offering was at $.10 a share, with the second offering at $.25 a share.
 Mr. Fox signed seven subscription agreements, each time certifying that he was either an accredited investor or a close personal friend. He dealt at least part of the time with Mr. Bridges. Mr. Folk signed one subscription agreement, certifying that he was a close personal friend of Mr. Nowak. On the evidence, Mr. Folk had known Mr. Nowak since Grade 8, but the closeness of their relationship was questionable. In an e-mail sent after things went sideways, Mr. Folk said this:
Nate, on a personal level, I’ve known you for a long time. Not very well but enough to trust you and believe what you were saying to me was what you yourself actually believed.
 Mr. Folk introduced a friend to Mr. Nowak, who also invested, and who induced his brother and mother to invest as well. In an e-mail introduced into evidence at the trial, that friend said this:
I was led to believe that the company was going public in a short few months from the date I invested which was October 2007. Nathan [Mr. Nowak] stated that they just needed a little bit more money to pay for the lawyers and then the company would go public. This was the rhetoric for over a year. I was never promised anything, but told that my shares could be worth anything from $1.00 to $2.00 when they went public which was supposed to be either December or January of 2008. These were never promises but were the expectations stated by Nathan that were a big part of what led me to invest.
 Mr. Nowak successfully raised $500,000. He was given the title of vice president and made director of sales. He testified that he had great hopes for this business, including the hope of earning in excess of $1 million when it went public. That never happened, of course, but he was paid about $150,000 for expenses and salary over a period of about 18 months.
 Share certificates were not issued, and the date for going public was postponed more than once. Investors understandably became concerned. When Mr. Folk complained, Mr. Nowak presented him with a Rescission Agreement that would entitle Mr. Folk to get his money back. Mr. Folk signed the agreement on November 28, 2008, after which Mr. Nowak requested the return of the share subscription documentation.
 The return of Mr. Folk's money never materialized. To Mr. Folk's repeated queries and demands, Mr. Nowak’s responses included::
And finally, in response to a suggestion from Mr. Folk that he had fraudulently misrepresented himself and his intentions, Mr. Nowak responded:
 According to Mr. Nowak, the penny finally dropped when he learned in 2009 from the American patent attorney advising the company, Dr. Butcher of Seattle, that Mr. Dokken had paid himself licence fees of $500,000 out of the funds that had been raised from the investors. Mr. Nowak had understood that the funds were to be used only for development to the public offering stage, including the payment of salaries, securities lawyers, patent attorneys and so on, and that Mr. Dokken would take his licence fees only from profits eventually earned by the company. Until then, Mr. Nowak testified, he believed that riches for him and the investors were just around the corner if they could only get through the consequences of the late 2008 crash in capital markets.
 The issues raised by the appellant concern the trial judge's findings of fact. The standard of review in relation to such findings is palpable and overriding error. I should not depart from the judge's findings unless I am able to characterize them as "clearly wrong", "unreasonable" or "unsupported by the evidence": H.L. v. Canada (Attorney General), 2005 SCC 25,  1 S.C.R. 401 at paras. 55-56; see also Smithers Parts Ltd. v. Hudson, 2009 BCSC 1645 at paras. 26-27.
 Although the trial judge did not articulate the legal test for fraudulent misrepresentation, I have no doubt that she? was well aware of it. Her Honour identified the issue as being whether, at the time that Mr. Nowak obtained the investments from Mr. Fox and Mr. Folk, he knew that the scheme he was promoting was fraudulent. If so, then he would be liable in fraud to those to whom he represented the scheme as being otherwise. If not–if, to paraphrase Mr. Folk, what Mr. Nowak was saying to him was what he truly believed–then Mr. Nowak might have been guilty of naïveté and gullibility, but not fraud. And it is fraud that was alleged.
 But that issue assumed another: was the investment in fact a fraudulent scheme from the start? In short, was the representation false as the test requires? No finding in that regard was articulated, but it is safe to assume that the learned judge found as much when she concluded that Mr. Nowak defrauded the claimants.
 The learned judge also correctly identified the standard of proof, being a balance of probabilities: see F.H. v. McDougall, 2008 SCC 53,  3 S.C.R. 41. But as that case cautions us, it is necessary to scrutinize the evidence with care in order to determine whether the standard is met.
 In her reasons for judgment, the trial judge made the following findings, to which I add some observations:
a) It was clear that Mr. Nowak encouraged his investors to misrepresent their circumstances when filling out their subscription agreements, and to place themselves in either the "accredited investor" category or the category referred to as "family and friends". [It was equally clear that Mr. Folk and Mr. Fox were happy to misrepresent their circumstances in order to take advantage of the opportunity available to persons who fit those categories.]
b) Mr. Nowak is not and was not licensed to sell securities. [No license was required to sell the securities that Mr. Nowak was offering to ‘friends and family’.]
c) The salary paid to Mr. Nowak was very generous for a person of his age and lack of training or business experience, which he must have realized at the time. [Few and far between are persons who consider themselves overpaid.]
d) It was clear that Mr. Nowak was being paid directly from the monies advanced by investors in the company and that he must have been aware of this at the time. [It was equally clear that there was no other source of funds; the funds being raised were to cover the expenses of proceeding through the development stage, including raising capital. For persons who raise capital to be paid for their services out of the capital raised is hardly unusual or underhanded. Many charities operate on that principle.]
e) Mr. Nowak presented no documentation respecting the monies he was paid by the company.
f) Mr. Nowak agreed that fraud occurred, but characterized himself as another victim of the fraud. [That is not quite correct. When Mr. Folk cross-examined Mr. Nowak, the following exchange took place in the context of Mr. Nowak's discovery in 2009 that Mr. Dokken had paid himself a licensing fee of $500,000:
Q Would I be correct in saying that you at this point feel that fraud was committed in this company?
A At what point?
Q At this point currently today, presently would you say that fraud was committed in this company?
A I think that when we spoke about -- we talked about a license agreement, we spoke about these things but I did not commit any fraud -- in this company.]
To counsel's objection to the question, the court responded that the witness has answered it in any event. The subject was not pursued further.]
g) After Mr. Folk signed the Rescission Agreement, he returned all of the documents relating to his purchase of the shares to Mr. Nowak at Mr. Nowak's request.
h) Mr. Nowak’s e-mail exchange with Mr. Folk approximately a year after Mr. Nowak's impugned conduct [reviewed above] could safely be characterized as "a series of lies and stalling tactics".
i) Mr. Dokken converted to his own use the majority of the monies advanced to the company by investors as payment for shares through Mr. Nowak and Mr. Bridges. [This was based on the evidence of Mr. Nowak, who testified that he learned of Mr. Dokken's payments to himself from discussions in 2009 with Dr. Butcher of Seattle. It was not only third-hand, but did not relate to the material time.]
j) On all of the evidence, it is more likely than not that Mr. Nowak defrauded Mr. Folk and Mr. Fox.
 In this case, there was no direct evidence that the concept put forward to investors in 2007 was a fraudulent scheme. There was no evidence of any intention on the part of Mr. Dokken or Mr. Nowak or anyone else that the company would never be taken public, or that its assets were a mirage, or that they set it up merely as a vehicle for plundering money from unwary investors. How then, one might ask, could Mr. Nowak be found to have known of a fraudulent scheme, when there was no evidence that such a scheme existed?
 In presenting their case, the claimants relied on the transcript of an interview of Mr. Nowak conducted on July 12, 2010, by Mr. D Martin, an investigator with the British Columbia Securities Commission. They maintained that it was from this evidence that they learned that the scheme had been a fraudulent one, and offered it as proof of such.
 I am advised that this transcript was entered into evidence for the truth of its contents. I have reviewed it. Nothing that Mr. Nowak said in that interview is capable of establishing that the company was a fraudulent scheme from the outset. Mr. Nowak continued to maintain throughout that he was an enthusiastic believer in the project, at least until everything went sideways and he learned in 2009 that Mr. Dokken had not in fact used the funds for development as he understood would be the case. This evidence, of course, was what Mr. Nowak said Dr. Butcher had told him about what Mr. Dokken had done after the funds were raised. It had nothing to do with the events of 2007.
 The judge seemed to place considerable weight on Mr. Nowak's request for the return of the share purchase documents from Mr. Folk after Mr. Folk signed the rescission agreement. She commented that she could imagine no innocent motive for this request, describing it as "another indication to the Court that he knew that the scheme he was involved in was fraudulent."
 Regrettably, Mr. Nowak was never asked why he did that, and was given no opportunity to suggest a motive other than consciousness of fraud. His side of that exchange was never elicited. It was certainly never put to him that he did it because he knew the scheme he was involved in was fraudulent. In fact, he consistently denied that it was fraudulent. Moreover, given that he had sold shares to 20 investors, it is not easy to see how requesting the return of papers from one of them would indicate knowledge of fraud.
 The judge also referred to Mr. Nowak having been promoted and paid beyond his expertise or experience, and discussed his after-the-fact conduct in stalling Mr. Folk with what she described as "a series of lies and stalling tactics". Her Honour commented that although this exchange took place approximately a year and more after the impugned conduct, "the comments he made do assist to a small degree in assessing his awareness of the nature of the scheme he was promoting in late 2007."
 The appellant argues that the judge erred in applying her findings concerning Mr. Nowak's actions in 2008 and 2009 to what was in his mind in 2007. The respondents submit that the so-called "downstream conduct" was just a different stage of the same transaction, and that on the evidence as a whole, the judge was entitled to conclude that Mr. Nowak must have known that the scheme was dishonest at every stage of the transaction.
 What the judge did, of course, was to rely on inferences from the evidence. Looking at Mr. Nowak's conduct in late 2008 and 2009, and the overall picture of what occurred, she inferred that when Mr. Nowak solicited investments from the respondents in 2007, he knew that the scheme was a fraudulent one. What is missing from the judgment is an explanation of how the judge came to the conclusion that the scheme had in fact been a fraudulent one from the start. The only evidence from which such an inference could conceivably have been drawn was the evidence concerning what Mr. Dokken did, all of which was third-hand and did not relate to the material time.
 The judge was certainly entitled to draw inferences from the evidence. But those inferences have to be reasonably supported by the evidence. In my opinion, they were not, and the result was a palpable and overriding error.
 No consideration was given, for instance, to the undisputed fact of the financial catastrophe that occurred in the fall of 2008 and dried up investment capital. Mr. Nowak testified both at trial and to the BC Securities Commission investigator that this had a substantial impact on the company's efforts to raise sufficient funds to proceed to development. Mr. Nowak described the situation in late 2008 and early 2009 as one of panic as he tried his best to keep things going, but without any real opportunity to control what was happening. It was in this context of chaos, he explained, that he communicated with Mr. Folk about the Rescission Agreement––always trying to get him his money but having no control over the accounts.
 Given this significant intervening event between the share offering in 2007 and the collapse of the dream in 2009, it was in my view unreasonable for the judge to infer from Mr. Nowak's conduct in the later period that the scheme was fraudulent in 2007 and that Mr. Nowak knew it. His conduct was at least equally consistent with an honest belief in 2007, given what occurred after, as it was with an intention to deceive. In these circumstances, given the absence of any direct evidence of fraud, the absence of any evidence that contradicted Mr. Nowak, and the weakness of the evidence about what Mr. Dokken did subsequently, I conclude that properly scrutinized, the evidence simply was not capable of supporting the trial judge's conclusion that Mr. Nowak had defrauded the claimants.
 I appreciate that the claimants were terribly upset by what happened to them. But as they conceded during the trial, they were aware of the risk of investing in a development-stage project, and Mr. Nowak never promised or guaranteed that their investment would reach the heights of $1-$2 per share, or any heights. Mr. Folk stated that "...at no point did I feel like I was being pressured into an investment". Mr. Fox testified that he had brought with him a more experienced investor to assist him in evaluating the investment. This person apparently recommended against the investment. Mr. Fox made it nevertheless.
 In these circumstances, as the claimants acknowledged in the way in which they framed their claim, they could only recover from Mr. Nowak (as opposed to the company or Mr. Dokken) on the basis of fraud on his part. That is a difficult hurdle, and properly so. The evidence in this case fell well short of reasonably supporting such a conclusion concerning Mr. Nowak.
 It follows that the appeal must be allowed, and the claim dismissed. This is not the sort of situation in which it would be appropriate to order a new trial. The monies paid into court by the appellant shall be paid out to his solicitor, in trust.
 Costs follow the event.