Canada: Better Late Than Early - What Is "Just, Convenient And Equitable" Among Innocent Investors In Fraudulent Investment Schemes


Defrauded investors in an investment scheme rarely recover all of the funds that they have invested, and the question of the amount to which each investor is entitled is complicated when the investments are comingled. In Ontario, the courts have determined that the fairest way to distribute the remaining funds of innocent investors caught in a fraudulent investment scheme is by using the lowest intermediate balance rule ("LIBR"). The lowest intermediate balance can be difficult to calculate, and thus the LIBR method is only used when it is practically possible to apply. The LIBR method protects later investors in a fund by preventing them from sharing the burden of losses incurred prior to such investor's investment and allocates subsequent losses amongst all investors. When it is impossible or extremely difficult to calculate the lowest intermediate balance, the pro-rata method is appropriate.

Legal Background and Greyhawk

Until recently, the law in Ontario respecting the entitlement of defrauded investors to commingled funds in the event of a shortfall appeared unsettled. This was the result of two ostensibly divergent cases: Ontario (Securities Commission) v. Greymac Credit Corp 1986 CarswellOnt 158 (Ont. C.A.) ("Greymac") and Law Society of Upper Canada v. Toronto Dominion Bank [1999] 3 S.C.R. xiii (S.C.C.) ("Law Society"). A 2013 Ontario Court of Appeal decision affirming the decision of Justice Morawetz in Boughner v. Greyhawk Equity Partners Limited Partnership (Millennium), 2012 CarswellOnt 10466 (Ont. S.C.J.) [Commercial List] (affirmed 2013 CarswellOnt 510 (Ont. C.A.)) ("Greyhawk") clarified the law and explained that the foregoing cases may be read together and are not contradictory.

Greyhawk arose in the context of a fraudulently operated investment vehicle that misled investors with false financial statements. When the fraud was discovered the remaining funds, which had been comingled in the Greyhawk Fund's bank accounts, were vastly less than the invested total. The court was charged with determining the correct method of distributing the remaining funds.

The Methods of Distribution of Remaining Funds

Pro Rata

Under the pro rata method, each investor is entitled to an amount equal to the total amount that they invested in the fund, divided by the total amount invested by all investors in the fund. Thus, if an investor invested 20% of the total funds, they would receive 20% of the remaining funds.


Last in, first out ("LIFO") is the simplest method to calculate. This method provides that the last investor recovers all of such investor's investment, followed by the next to last and so on, until there are no funds remaining.


The LIBR method, which is also known as the "fund unit allocation method" or, confusingly, the "pro rata on the basis of tracing method", provides for investors to receive a payout based on the performance of the fund during the time period in which each investor's money was invested. This method limits the amount that a claimant can recover to a maximum of the lowest balance in a fund that is subsequent and attributable to such claimant's investment, though investors frequently receive less than this amount. In order to apply the LIBR method, the lowest balance of each investor at the time the funds are comingled with a subsequent investor are added together and each investor receives their pro rata share of the remaining balance based on the total at the time of the commingling.

The Difference Between the Methods

In Greyhawk, Justice Morawetz provided a fact pattern to illustrate the differences between the three methods: Investor A invests $100 in a fund, following which the value of the fund decreases to $50. Investor B then invests $100 and the fund subsequently decreases to $120.

Under the pro rata method, Investor A would be entitled to $60 (50% of the remaining funds) while Investor B would also be entitled to $60 (50% of the remaining funds). As each invested half of the total money invested in the fund, each is entitled to half of the remaining funds. Under the LIFO method, Investor A would receive $20 (16.66% of the remaining funds) after Investor B was fully repaid its investment of $100 (83.33% of the remaining funds).

Under the LIBR method, the percentage amounts are calculated from the point at which the funds were comingled: at that time a total of $150. Investor A would be entitled to a maximum of $50, but would only receive $40 (50/150*120, being 33.33% of the remaining funds) while Investor B would be entitled to a maximum of $100, but would only receive $80 (100/150*120, being 66.66% of the remaining funds). To expand on this example, if Investor C subsequently invested $80, bringing the total of the fund to $200, and the fund then dropped to $50, Investor A would be entitled to a maximum of $40 (the amount to which Investor A was entitled in the previous calculation), but would only receive $10 (40/200*50, being 20% of the remaining funds), Investor B would be entitled to a maximum of $80 but would only receive $20 (80/200*50, being 40% of the remaining funds) and Investor C would be entitled to a maximum of $80, but would only receive $20 (80/200*50, being 40% of the remaining funds). As noted above, the percentage amounts are calculated based on the value of the fund at the time at which the funds were comingled.

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.

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Christopher G. Graham
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