Canada: The Fairness Of Tracing: Ontario Court Of Appeal Considers Methods Of Distributing Remaining Funds To Victims Of A Ponzi Scheme

Last Updated: February 26 2013
Article by Melissa Atkin

Most Read Contributor in Canada, September 2018

In Boughner v. Greyhawk, the Ontario Court of Appeal recently considered different methods for determining how to fairly distribute comingled funds remaining from a collapsed Ponzi scheme. The Court affirmed the decision of the lower court which held that, where practical, remaining funds should be allocated according to the lowest intermediate balance rule, whereby funds were to be distributed pro rata on the basis of tracing, which precluded early investors from unfairly benefitting from the contributions of later investors.


Over the course of more than a decade, two dozen investors were duped into believing that the Greyhawk Fund was a large, highly profitable investment vehicle. In early 2011, it was discovered that the Greyhawk Fund had been operating on the basis of forged statements that had hidden a consistently negative fund performance.

Following the discovery of the fraud and the appointment of a receiver, a significant shortfall of over US $3.5 million was discovered. The receiver wished to distribute the funds, but there was disagreement among the remaining investors as to the appropriate allocation method of the following three identified by the receiver:

  1. Pro rata allocation, based on the size of each investor's contributions to the Greyhawk Fund;
  2. Fund unit allocation, based on what each investor's unit value in Greyhawk ought to have been in light of actual fund performance, also referred to as pro rata on the basis of tracing, known as the Lowest Intermediate Balance Rule ("LIBR");
  3. Last in, first out ("LIFO"), based on the chronological order of contributions.

The receiver took no position on which distribution method was appropriate and requested directions from the court as to how to distribute the remaining funds. The investors, Jack Waldock and the Waldock Group ("Waldock") and Richard Gibson ("Gibson") agreed that the leading authorities required the court to apply a distribution method that is most just, convenient and equitable to the parties in question, but disagreed as to which of the approaches met these criteria. Neither party was in support of the LIFO method, in which the last investors in the fund would be the first to receive distributions of the remaining funds.

Waldock, the Greyhawk Fund's first investor, took the position that the case law is in favour of a pro rata allocation where comingled funds have been fraudulently misappropriated and the account is in a shortfall position. Waldock's counsel argued that pro rata allocation is the more just and equitable method, because, unlike LIBR, it does not rely on "happenstance" and the timing of investments to prioritize certain investors over others and, in any event, LIBR would be overly complex and unworkable in these circumstances.

Gibson, a late investor, was of the view that LIBR was the more just, convenient and equitable approach because, while it incorporated pro rata calculations, but the monies were to be distributed pro rata based on the relative value of an investor's contributions at the time the funds were comingled rather than pro rata on the basis of the original contribution. In Gibson's view, the pro rata allocation supported by Waldock would allow Waldock to throw his losses on to later investors, and there was no equitable reason why Waldock should benefit from Gibson's investment.

The issue before Justice Morawetz was therefore whether to endorse Waldock's position and distribute pro rata on the basis of investors' original contributions to the fund or on the basis of fund performance during the period of each investor's investment, the approach supported by Gibson. Justice Morawetz used the following example to demonstrate the difference between the two methods advocated by the parties:

A invests $100 in a fund. The value of the fund then declines to $50. B invests $100, bringing the balance in the fund to $150. The value of the fund then declines to $120.

In this fact pattern, if LIBR were applied, A could not claim more than $50, because that is the lowest balance in the fund prior to B's investment. In other words, the initial decline in the value of the fund from $100 to $50 is borne entirely by A. When B contributes $100, her investment constitutes 2/3 of the $150 in the fund. As a result, when the fund declines to $120, 2/3 of the decline is borne by B, while 1/3 is borne by A. Therefore, of the $120 remaining in the fund, A can claim $40 while B can claim $80.

If, on the other hand, the funds were distributed pro rata based on original contributions, as Waldock maintains should occur in the present case, both A and B would receive $60, since both invested an equal amount: $100.

The receiver determined that if the funds were distributed using the pro rata method, Waldock would receive $694,856, and Gibson would receive $216,196. If the funds were distributed using fund allocation, Waldock would receive $139,130, and Gibson will receive $958,662. The method applied would therefore have significant financial consequences for the parties.

After reviewing the arguments put forth by both parties and conducting a careful analysis of the authorities, Justice Morawetz held that as a general rule, the LIBR method, or pro rata sharing based on tracing, was the preferable approach to resolving competing claims to mingled trust funds, unless it was "practically impossible to do so." The pro rata allocation method endorsed by Waldock was an exception to the general rule, to be used where LIBR was not economically feasible, such as in cases involving significant numbers of beneficiaries and transactions.

In this case, Justice Morawetz found that the receiver was able to determine a practicable method of allocating the funds on the basis of LIBR calculations. It was clear that by the time of Gibson's initial investment, earlier investors had already lost over 88% of their investment value. Justice Morawetz directed that the remaining funds be distributed proportionately based on the LIBR method.

The Appeal

Waldock appealed the decision, arguing that Justice Morawetz erred in finding that LIBR should be applied unless it was practically impossible to do so. The Court of Appeal dismissed the appeal. The Court agreed with Justice Morawetz's analysis of the relevant authorities and held that the preferred allocation method in these types of cases is the LIBR method. While LIBR will not be appropriate in some cases that are manifestly more complicated, it is not appropriate to use the pro rata method where contributions to a fund are traceable.

Waldock also argued that Justice Morawetz erred by equating the receiver's fund unit allocation calculations with the tracing necessary to properly apply a LIBR calculation. In the Court's view, this was a factual issue, and the record indicated that the receiver's calculations sought to recalculate the history of investors' contributions using the actual values of the contributions at the time of comingling. The Court held that Justice Morawetz made no palpable or overriding error with respect to his findings in this regard.

Potential Significance

While the Greyhawk decision confirms that the distribution of commingled funds to the victims of a fraudulent investment scheme should be done in accordance with the LIBR method unless LIBR is not practically possible, the decision does not clarify when circumstances will be found to be "manifestly more complicated and more difficult to apply", rendering LIBR unworkable. Given that the Court declined to clearly delineate when pro rata allocation will be more appropriate, the issue of where on the spectrum does it become too complicated to apply the LIBR method will likely be dealt with in subsequent cases.

Case Information

Boughner v. Greyhawk Equity Partners Limited Partnership (Millenium), 2013 ONCA 26 (CanLII)

Date: January 18, 2013

Court File No: C55900

To view original article, please click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions